Annual Report and Accounts 2010

In 2010 the economies of Central and Eastern Europe (‘CEE’), along with the rest of Europe, began to recover from the turmoil of the financial and economic crisis of the previous year. Following several quarters of contraction, modest GDP growth returned to most European economies although some peripheral countries continued to struggle with public debt imbalances. The key driver of growth in the Eurozone and CEE region was a rebound in industrial exports on the back of strong growth in Germany.

NWR’s main customers are blue chip organisations in the Czech Republic and neighbouring countries including Austria, Germany, Poland and Slovakia. They are primarily based in the industrial belt of eastern Czech Republic and Poland where a concentration of heavy industry is located. The industries in the region have a strong interdependence, with coal miners supplying the steel mills who in turn supply the automotive, construction and manufacturing industries. As a result of the economic recovery, demand in all of these sectors experienced renewed growth during 2010. For instance vehicle production in the Czech Republic grew by 9 per cent during the year while general steel consumption in Europe returned to positive growth.

Our close proximity and excellent logistic links to our customers underpin long-term relationships. This in combination with the long distances to deep-water ports, gives us a competitive advantage over seaborne imports, which incur higher transportation costs.

In the neighbouring Silesian state-owned Polish mines, total production has been declining steadily since the 1980s. Poland is subsequently struggling to meet its own domestic demand, which is evidenced by the fact that the country became a net importer of coal in 2008. Further afield, increasing volumes of coal are being imported to the region from Ukraine, Russia as well as seaborne to plug the missing production, but logistical constraints and high transportation costs will keep these imports limited.

The health of the coking coal market will always be closely aligned to that of the steel industry, which moves very much in line with GDP growth. In recent years the steel industry in NWR’s markets has experienced increasing demand, particularly with the rapid development of the Eastern European economies.

NWR’s coking coal customers are predominantly the major steel producers in the region (including ArcelorMittal, US Steel, and voestalpine) where production levels rose by 28 per cent during 2010 on the back of recovering GDP growth, after having dropped 27 per cent during 2009 as a result of the economic crisis.

Coking coal demand in the region during the year has subsequently followed the rise in steel production levels, leading to stronger demand in 2010 compared to 2009 but still short of the pre-crisis levels.

The demand for thermal coal largely depends on the demand for electricity and heating energy as well as the supply and demand of other energy sources. Poland, for instance, generates over 90 per cent of its electricity from hard coal.

The thermal coal market in Central Europe is relatively static as it is not economically viable to transport the coal long distances. A well-established thermal energy infrastructure in the region ensures a steady and reliable customer base for NWR’s thermal coal and with limited alternative domestic fuels available, coal will continue to make up a significant portion of the region’s energy mix.

The major customers for our thermal coal are large energy companies operating in the region such as ČEZ, Dalkia and Verbund.