View from City Road: More horrors to haunt the sale of British Coal

Just when you thought it was safe to switch the Davy lamp back on, along comes British Coal with another set of horrors. The political furore that followed last October's announcement of 31 pit closures and 30,000 job losses may have died down, but the corporation has not lost its capacity to spring nasty surprises.

Yesterday it was at it again. As if a bottom line loss of pounds 588m, after taking pounds 1bn in exceptional costs on board, was not enough, Neil Clarke, British Coal's chairman, admits that the market for coal may be even bleaker than he and his fellow managers thought last autumn.

Despite remarkable strides in productivity, there is a fast-dwindling market for coal. Sales to the generators are now only 40 million tonnes a year - half the level of a few years ago - and drop to 30 million tonnes next spring.

British Coal must fight for what meagre - and probably short-term - extra tonnages may be available with private mining companies, cheaper and cleaner foreign coal and the 'dash for gas'.

PowerGen believes the scenario may be even worse, and that within a few years large coal-fired plants will be squeezed by gas-fired stations and nuclear power out of the 'base load' market, leaving them to provide electricity for peak demand and severely denting the economics of coal-fired plant. That, taken with the European Commission's continued drive for cuts in emissions of carbon dioxide and acid emissions, make the prospects for coal more unattractive still.

Now PowerGen may not be the most objective observer of this particular tragedy since it has a vested interest in talking down coal prices. But it does have a point and one the Government will soon have to confront, supposing it goes ahead with the privatisation of British Coal.

Despite being trumpeted by ministers past as the 'ultimate' privatisation, the present incumbent, Timothy Eggar, has failed to put the case for selling coal very persuasively. It will not raise substantial sums for the Exchequer and it is becoming increasingly difficult to see how private operation will improve materially on the levels of productivity and efficiency now being achieved under state ownership.

Despite last year's bottom line loss, British Coal increased its operating profits by pounds 123m to pounds 545m. The driving force behind the increase is a relentless downward pressure on costs. Productivity increased last year alone by 17 per cent, and in real terms colliery costs have fallen by around 40 per cent since the mid-1980s. Of course, anything can be sold at a price and there is no doubt that some of the 19 core mines left on British Coal's books can be as profitable as any overseas. The question is whether British Coal can get there before the electricity market dictates that the mines close irrevocably.