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RAG AG

RAG AG

Rellinghauserstrasse 1-11
Postfach 103262
45128 Essen
Germany
Telephone: (0201) 177 01
Fax: (0201) 177 34 75
Web site: http://www.rag.de

Private Company
Incorporated: 1968
Employees: 87,500
Sales: EUR 13 billion ($13.62 billion) (2002)
NAIC: 212111 Bituminous Coal and Lignite Surface Mining; 212112 Bituminous Coal Underground Mining; 213113 Support Activities for Coal Mining

RAG AG, formerly known as Ruhrkohle AG, is the largest coal-producing company in Germany. The conglomerate has a plethora of holdings focused mainly on domestic and international coal mining, chemicals, and real estate. Its largest subsidiaries include Deutsche Steinkohle AG, which oversees its domestic coal and coking mining activities; RAG Coal International AG, its international mining arm; Rütgers AG, which is responsible for its chemicals and plastics operations; and RAG Immobilien, the company's real estate and construction concern. Prompted by deterioration and changes in Germany's coal mining and energy sectors, RAG was forced to implement significant restructuring efforts during the 1990s and into the new century. During 2003, the company was in the process of acquiring a majority stake in Degussa AG, the world's largest specialty chemicals manufacturer.

Origins

Ruhrkohle's foundation came about in several stages. It was brought into being on November 27, 1968, by 19 companies in the Ruhr area, which held the largest coal resources in Germany. This foundation was provisional; since the Grundvertrag (Articles of Association) had not yet been signed. This contract was concluded on July 18, 1969; the parties to it were the Federal Republic of Germany, that is, the federal government; 23 mining companies, which had declared their willingness to enter into the treaty; and the company Ruhrkohle AG itself.

The foundation of the company had come about mainly as a result of political pressure but on a private basis. Not all of the 26 independently operating, privately structured companies in the Ruhr coal field were willing to submit to this massive exertion of political influence. Ruhrkohle's commercial structure was without parallel in Germany. Although the company was run according to the principles of private enterprise, it was dependent on support from the state from its beginnings. This support was given mainly in the form of subsidies but also through laws protecting German coal interests in some sectors.

The evolution of Ruhrkohle AG should be understood in the context of the development of West Germany's energy policy after the end of World War II. In the years immediately after the war, German coal was a highly sought-after commodity. In the years of hunger before the currency reform in 1948, minersor Kumpel, as they were knownreceived special grocery rations to enable them to carry out their heavy work. They were also given special advantages in looking for accommodation in the towns of the Ruhr area, which had suffered great destruction during the war. The largest of these towns were Essen, Duisburg, Bochum, and Dortmund. The byword of those years was coal production at any price.

The market economy of the 1950s and early 1960s, with liberalized external trade, was introduced by Professor Ludwig Erhard against strong opposition, and formed the basis of the German "economic miracle." At this time an idea was aired which had prevailed in many economic circles in the years immediately after 1945, particularly among the unions and the Social Democratic Partythat the basic industries of coal and steel should be nationalized.

Disaster Strikes in the 1950s

In 1956, disaster struck more or less overnight for the German coal mining industry, which, in the mid-1950s, produced 150 million tons of coal and employed over 600,000 miners. The steady rise in oil consumption, especially in the form of light fuel oil on the heating market and of heavy oil for industrial use, had gone almost unnoticed. As a result, within a relatively short period, coal stockpiles had grown so big that short-time work had to be introduced extensively for the miners in 1958 in order to prevent these stockpiles, suddenly unsaleable, from reaching the sky. Coal, so long in demand, which had been particularly sought after in the early postwar years, could now find no buyers. As late as 1957, when 133 million tons of coal were produced in the federal republic, the high commission of the European Coal and Steel Communitylater to become the European Communitywas still demanding a rise in production in Germany of 40 million tons within 20 years.

At first it was believed that the fall in demand at the end of the 1950s was merely a transient economic phenomenon. Yet stockpiles grew to over 15 million tons, and for the first time pit closures had to be considered. At this point, it became clear that this was no short-term economic crisis. It was, rather, a structural crisis based on long-term shifts in demand. Imported oil was, in the long term, much cheaper than German coal and ousted coal from the heating market. Cheaply produced imported coal, especially from the United States, forced its way into the growing German industrial and heating markets.

Confronted with the prospect of multiple pit closures in the German coal fieldsthe Ruhr accounted for around 70 to 75 percent of coal production in the Federal Republicas well as by protest demonstrations by miners, public demand for a coal and energy plan grew. Increasing weight was given to the suggestion that the mining industry of the Ruhr area, which at the beginning of the 1960s still consisted of around 30 independent private companies, should be brought together in a single company or group.

More than a dozen plans were proposed in those years to rehabilitate the coal industry. Yet all these plans had a common focus in the assertion that the sharp reduction in work force numbers, which would have to be faced, must take place in a socially acceptable manner.

From 1958 to the end of 1990, during which time the number of employees in the German coal mining industry declined from 607,000 to around 130,000, not a single miner was dismissed via the unemployment office. All the affected miners received special state support payments, whether these took the form of compensation, pension supplements, or some other type of payment. Support was given not only to the miners affected by pit closures but also to the companies, which received millions of marks worth of finance from the state. These payments were given in the form of closure premiums; that is, the companies received a certain sum of money when they closed pits with the aim of adjusting the overcapacity to the sharply reduced overall demand.

Federal governments attempted to get a grip on the retreat of the coal industry; since its disordered beginnings, it had already swallowed billions of marks. Too many attempts had been made to cure the symptoms with restrictions on coal imports, agreements of voluntary restrictions with the oil industry, the promotion of coal-fired power stations, and taxes on fuel oil. Finally, in 196768, the measures which had been taken to reconcile coal production and demand were standardized and new targets were formulated.

The Coal Adjustment Law of 1968

In May 1968, the Kohleanpassungsgesetz"coal adjustment law"was passed. The basis of the law was that optimal cost effectiveness was only possible in a single company; in this way, the pits which were least profitable would be closed. Individual closures in over 30 separate companies might prevent the continued functioning of relatively profitable pits while allowing unprofitable pits to survive. Measures to concentrate the coal businesses therefore formed the core of the Kohleanpassungsgesetz. As the government's most important instrument in achieving this aim, the law laid the foundations for the removal of a series of privileges which had hitherto been granted, especially the high premiums for pit closures and the subsidies for coke production. It was this legal threat above allthat subsidies would be withdrawn from companies below the optimal size after January 1, 1969which hastened the process of concentration and thus the foundation of Ruhrkohle AG. Without subsidies, practically any mining company operating at this time was condemned to a swift demise, which continued to be the case into the 1990s.

During the foundation phase of Ruhrkohle AG, the concept of optimal size became a magic formula. The fact that no one defined it exactly, not even the government, made it seem all the more ominous for the independent survival of most small and medium-sized companies. The law defined it simply as "such size as is necessary to achieve the greatest possible economic efficiency."

In the public sphere, this abstract threat was received exactly as it was meant by the politicians, who were tired of throwing good money after bad, namely as a means of exerting pressure, to drive the hesitant pits to join a common company in the Ruhr. There were to be no subsidies without "optimal size," that is, the merger of the coal companiesall of them if possibleto form a single company.

The two largest coal mining companies on the Ruhr, the Gelsenkirchener Bergwerks AG (Gelsenberg) and the Bergswerksgesellschaft Hibernia, part of the Veba group, made renewed efforts to achieve concentration in the form of a conventional merger of the two businesses. Investigations as to the viability of a merger had already taken place earlier. The miners' union IG Bergbau und Energie had demanded that such a company be createdwith as strong a state influence as possiblefor a long time.

Company Perspectives:

In pursing a three-pronged strategy of focusing on coal mining, real estate, and chemicals, the RAG Group is laying the groundwork for a secure and prosperous future.

After lengthy negotiations, the Grundvertrag was, as stated, signed in July 1969; this formed the basis of the existence and business activities of Ruhrkohle AG. The parent companies undertook to provide Ruhrkohle AG with a share capital of DM 600 million. Ruhrkohle AG and the parent companies made Einbringungsverträge, or contribution agreements. The members of the work force had to be kept on. A provision of the Grundvertrag stated that "profit is not the principal aim of Ruhrkohle AG."

Thus the parent companies made various financial commitments. Although they could not, according to the company's Articles of Association, expect a profit from the capital they had invested, they were to be paid interest on their contributions at a rate of 6 percent. The government also took on extensive commitments, initially giving guarantees of up to DM 2.2 billion, two-thirds from the federation and one-third from the state of Nordrhein-Westphalen.

These founding arrangements were accompanied by two treaties which were vital to the company's existence: the Hüttenvertrag, regulating the agreement between Ruhrkohle and the seven steel-producing Ruhr groups which had brought their pits into the joint company, and the power-station treaties, or agreements with the electricity supply businesses. Both were essentially concerned with competitive prices: Ruhrkohle had to supply the steel companies with coal at world market prices, and public money would be paid to compensate for any difference.

For sales of coal to power stations, the electricity consumers would pay the difference between the price of the expensive Ruhr coal and cheaper imported coalor oilin the form of the Kohlepfennig, or "coal penny." This amount would be added to the bill of each individual consumer.

Complaints were made from the beginning by all parties, and especially by the managers of Ruhrkohle themselves, that this company, which was eventually joined by 26 of the 28 mining companies on the Ruhr, had been brought to life in "skeletonized" form, stripped of its assets, without the large, productive, and thoroughly profitable power stations and above all without the valuable land holdings which the companies, some of them well over a century old, had accumulated over time. Apart from the land needed for operational purposes, none of this extensive property had remained under the ownership of Ruhrkohle AG.

Upon its creation, Ruhrkohle was structured as a private enterprise but was unable to exist without the support of the state, unless energy prices were extremely high, around $35 for a barrel of oil. It had to operate as efficiently as it could, and it could not, according to its constitution, make any profit. It was forced to manage itself alone as far as possible, yet it was not allowed to undertake all that it wished. The statethe Federal Ministry of Economicsensured that nothing was undertaken outside the company's main area of operation, the production of coal, and which could involve any risk. This restriction was meant to prevent the need for additional subsidy requirements. The former owners, the Altgesellschafter, paid close attention to ensuring that Ruhrkohle did not become a competitor in sectors in which they were activefor example, in certain trading and service sectors, such as waste management. The principal companies concerned here were Veba AG, with a shareholding of 39.2 percent; the electricity supply company Vereinigte Elektrizitätswerke Westfalen AG, with 30.2 percent; Thyssen Stahl AG, with 12.7 percent; and Hoesch AG, with 7.2 percent.

From its inception, Ruhrkohle AG has been a company unlike others of its kind, and continues to be so. The company had a bad start. In 1969, its first year of operation, it had to overcome a loss of DM 330 million, which used up more than half of its share capital. According to the laws governing shares, this loss should have been reported and an extraordinary shareholders' meeting should have been called. However, Heinz P. Kemper, the first chairman of the supervisory board and formerly chairman of Veba's management board, together with the first chairman of the management board Hans-Helmut Kuhnke, was able to reduce the loss to DM 199 million and thereby to gain time. This was achieved through what Kemper called "accounting policy measures." When a steel crisis developed in 1971, leading to a dramatic reduction in sales to the steel industrywhich, along with the electricity industry, was the largest purchaser of Ruhr coalit became essential to strengthen the company's weak capital base. Otherwise bankruptcy would have been inevitable, with incalculable consequences for the 170,000 employees. Again a joint action resulted: the shareholders decided to forego, in part, the interest income owed to them, amounting to approximately DM 700 million. Also, the government conceded a debt register claim, which the company was to pay back if it made profits, of DM 1 billion.

Although the company's financing and balance-sheet arrangements were stabilized, it became clear that Ruhrkohle AG could not become competitive in the long term, even with the most modern mining technology and the continual adaptation of its production to demand, because of difficulties presented by the nature of German coal deposits. Kuhnke, his successor Karlheinz Bund, and Heinz Horn, chairman of the management board of Ruhrkohle AG since 1985, emphasized the company's function in ensuring the coal supply, embodied in the three energy programs produced by the federal government after 1973. The theory of a necessary safe base provided by German coal in the face of Germany's very high dependence on imported oil and gas for its energy requirements, has for many years been an important, and controversial, component of Germany's energy policy.

Key Dates:

1968:
The coal adjustment law is passed; nineteen companies in the Ruhr area combine to form Ruhrkohle AG.
1969:
The Grundvertragthe articles of association for Ruhrkohleare signed.
1989:
The company acquires a majority stake in coal mining firm Eschweiler Bergwerks-Verein (EBV).
1997:
The company changes its name to RAG AG.
1998:
RAG takes control of Saarbergwerke AG and renames it Deutsche Steinkohle AG (DSK).
1999:
Preussag Anthrazit GmbH is added to DSK's holdings in a move that consolidates all of Germany's mining activities under one corporate umbrella.
2002:
The European Union Council of Energy Ministers sets forth new regulations for state aid for the German coal industry through 2010; plans are set in motion to acquire a majority interest in Degussa AG.

In the late 1980s and early 1990s, the European Commission made repeated interventions. The commission underlined the incompatibility of German coal subsidies with policies within the European Communitysubsidies without which Ruhrkohle could not survive. In reaction, the German government produced another program to adapt production to demand and thus to reduce the need for subsidy payments, which at the time amounted to DM 8 billion to DM 10 billion per year as a result of low world energy prices and the low U.S. dollar rate. Ruhrkohle AG was hopeful that the union of East and West Germany would result in additional markets for coal in the five new federal states, although energy experts warned that such expectations should not be too high.

During this time, Ruhrkohle continued to strengthen its coal-related holdings. The Eschweiler Bergwerks-Verein (EBV) become one of the firm's newest subsidiaries. Ruhrkohle took a majority stake (97 percent) in the long-established coal-mining company on the Aachen coal field in 198889. In 1989, EBV produced approximately 4.2 million tons of coal and achieved a turnover of DM 1.9 billion. A second investment in the coal sector followed, also within the framework of Ruhrkohle's goals in coal politics, when the group took over 99.72 percent of Sophia Jacoba GmbH at Hückelhoven, from the Robeco Group of the Netherlands, on January 1, 1990. Sophia Jacoba was essentially an anthracite mine, with production of around 1.7 million tons in 1989 and a turnover of DM 570 million.

The long-term survival of Ruhrkohle appeared certain in the early 1990s, even with the prospect of a reduction in coal production in the federal republic in the years to come, following the recommendations of a state commission that production should stand at between 45 and 55 million tons annually, rather than 70 million tons. Despite the high, economically controversial subsidies needed by Ruhrkohle AG, a halt to coal production in Germany did not appear imminent, as was the case in some neighboring western countries in past years.

Changes in the 1990s and Beyond

Germany's coal problems continued to remain a political hot topic well into the 1990s. By 1993, German crude steel production was faltering, which in turn led to diminished demand for Ruhrkohle's coal. The following year, the company reduced its output capacity by three million tones. At the same time, Germany as a whole was determining where its future energy sources should come fromcoal, nuclear resources, or imported coal and gas. At the end of 1993, the European Commission drafted new grant legislation for the hard coal mining industry that was effective through July 23, 2002. The German government also created a new "Articles Act" which allowed for the use of German hard coal for electricity generation from 1996 through 2005. At the same time, however, German utilities were deregulating, which allowed those companies to seek out alternative sources of energy.

In order to keep pace with changing times, Ruhrkohle began to diversify its holdings in the mid-1990s by branching out into non-mining-related fields. By 1996, the company reported that for the first time in its history, its non-coal businesses secured a higher turnover than its coal mining operations. Overall, Ruhrkohle began to morph into a diversified conglomerate. The company marked this transition by changing its name to RAG AG in 1997.

By 1998, RAG had taken control of Saarbergwerke AG and renamed it Deutsche Steinkohle AG (DSK). Preussag Anthrazit GmbH was added to DSK's holdings the following year in a move that consolidated all of Germany's mining activities under one corporate umbrella. By this time, German coal production had fallen to 46 million tons and was expected to drop to 30 million tones in the next few years, while the number of active coal mines was anticipated to drop to just ten or eleven.

As German's coal market faltered, RAG looked to the international scene for growth. In 1999, the companythrough its RAG Coal International subsidiaryacquired Colorado-based Cyprus Amax Coal Co. It also purchased a 95 percent stake in the Burton Coal Joint Venture, a coking coal mine based in Australia. The company continued to fight against cutbacks in subsidies that under current laws were ensured until 2005. These subsidies were to be reduced from DM 10.4 billion per year to DM 5.3 billion by 2005. RAG management as well as industry employees felt that the subsidies needed to stay at current levels to ensure RAG's future. According to a 2000 Handelsblatt article, "RAG's existence, including its nonmining activities trade, power generation, process technology, chemicals, plastics, and the environment would come under threat if no compromise on subsidies to Germany's coal industry was reached." Karl Starzacher, RAG's chairman at the time, commented that unless a compromise was met, "it would mean the end of hard-coal mining in Germany." In December of 2000, the European Commission authorized state aid for the industry for 2000 and 2001.

During the early 2000s, RAG operated in a dramatically different fashion than it had in its past. The company continued to make strategic moves to ensure its future viability. In 2002, the company acquired the shares of Steag AG that had been previously owned by RWE AG and E.ON AG. The deal allowed RAG to assume full control over Germany's second-largest coal-fired power plant operator. More importantly, the company made a play for specialty chemicals group Degussa AG as part of its strategy to move into high growth areas. The deal was expected to be completed in 2004.

In June 2002, the European Union Council of Energy Ministers set forth new regulations for state aid for the German coal industry through 2010. This new regulation was adopted just as the treaty that originally established the European Coal and Steel Community, which allowed for the granting of state aid to the coal industry, expired.

Conditions in the German coal mining industry continued to weigh heavily on RAG's operations. As such, the company set a strategy in place to focus on three main business areas: mining, real estate, and chemicals. As part of its focus, it planned to sell off its interests in power generation and gas and its plastics holdings. While the future of German coal mining remained uncertain, RAG appeared to be on track for growth in the years to come as a diversified conglomerate.

Principal Subsidiaries

Deutsche Steinkohle AG; RAG Coal International AG; RAG Immobilien AG; Rütgers AG; Steag AG; RAG Saarberg AG; RAG Bildung Gmbh; RAG Informatik GmbH; RAG Versicherungs-Dienst GmbH.

Principal Competitors

BHP Billiton Ltd.; CONSOL Energy Inc.; Peabody Energy Corporation.

Further Reading

"Coal Mines Close, Domestic Mining Industry Fades," Coal Week International, March 5, 2001, p. 5.

"German Coal Plan Will Boost Imports," Coal Week International, March 18, 1997, p. 1.

"Germany's Ruhrkohle Confident for Subsidy-Free Future," European Energy Report, July 5, 1996, p. 19.

"Labor Unrest Faces Ruhrkohle," The Mining Journal, September 24, 1993, p. 217.

Payne, Mark, "German Coal," Mining Magazine, June 1999, p. 293.

Peel, Quentin, "Future of German Energy Industry in Doubt," Financial Times, October 29, 1993, p. 2.

"RAG Sees Existence under Threat Without Subsidies Coal Mining," Handelsblatt, October 23, 2000.

"RAG to Get Control of Degussa in Complex Deal with E.ON," Chemical Market Reporter, May 27, 2002, p. 2.

"Ruhrkohle Adapts to Changes; Sees Big Gain in Imports," Coal Week International, July 4, 1995, p. 1.

"Ruhrkohle Reconfigures Itself for Life After Subsidies," Coal Week International, March 3, 1998, p. 2.

Spiegelberg, Friedrich, Ein Geschäft im Wandel, 10 Jahre Kohlenkrise, Baden-Baden: Nomors, 1970.

Stein, George, "Germany Reassures Hard-Coal Industry," Journal of Commerce, June 16, 1993, p. 5C.

Wiel, Paul, Wirtschaftsgeschichte des Ruhrgebiets, Siedlungsverband Ruhrkohlenbezirk, 1970.

Heiner Radzio

update: Christina M. Stansell

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RAG AG

RAG AG

Rellinghauser Strasse 1-11
D-45128 Essen
Germany
Telephone: (49) (201) 177-01
Fax: (49) (201) 177-3475
Web site: http://www.rag.de

Private Company
Incorporated:
1968 as Ruhrkohle AG
Employees: 65,200
Sales: DM 26.7 billion ($13.6 billion) (1999)
NAIC: 212111 Bituminous Coal and Lignite Surface Mining; 212112 Bituminous Coal Underground Mining; 212113 Anthracite Mining; 213113 Support Activities for Coal Mining; 325199 All Other Basic Organic Chemical Manufacturing; 42152 Coal and Other Mineral and Ore Wholesalers; 42181 Construction and Mining (Except Oil Well) Machinery and Equipment Wholesalers

RAG AG is one of the worlds leading hard coal producers and Germanys number one coal producer. Based in Germany, the company consists of an international group of more than 450 companies active in mining, coal trading, engineering, power generation, and chemicals, and has over 220 subsidiaries around the world. RAGs domestic coal and coke mining activities are managed by Deutsche Steinkohle AG. Its international mining activities, including the American coal producer Cyprus Amax Coal and the Australian Burton Coal Mine, are managed by RAG Coal International AG. STEAG AG is an power generation engineering firm. RÜTGERS AG is a producer of plastics, basic organic and specialty chemicals, and a construction firm. RAGs activities in the fields of environment and coal trading are organized through Saarberg AG. About two-thirds of RAGs revenues come from its domestic and international coal subsidiaries and one-quarter of total sales originate outside Germany. The three main RAG shareholders are German energy suppliers VEBA with 37.1 percent, VEW with 30.2 percent, and steel maker Thyssen Stahl AG with 12.7 percent of the share capital.

Origins in 1968

RAGs history is inextricably linked to the postwar history of the German coal industry. It was a history of reducing production of hard coal and closing down coal mines, determined by German economic politics. After World War II, Germany was confronted with a serious shortage of energy, due primarily to the destruction of many power plants and transmission systems during the war. Previously the coal industry was one of Germanys motors of economic growthbut it also fed the German war economy. The formerly powerful coal cartel was put under control of the occupation forces after the war. However, when the Western Allies gave up control over Germany, the German coal industry together with the West German government began making plans for a new coal conglomerate.

Hard coal had fueled German power generation for half a century, and in the mid-1950s the country was faced with a dilemma when coal production had surged so that stockpiles grew and sales plummeted. Three main factors contributed to this development. First, domestic coal had to compete with imported coal which was cheaper due to falling shipping costs. Second, cheap oil from the Middle East was replacing coal as a fuel. Third, the German energy and steel making industries, two of the main consumers of German coal, implemented new, more energy efficient technologies which radically cut the amount of coal needed.

By the middle of the 1960s it became clear that a fundamental structural change in Germanys energy industry was on its way and that, unchecked, it could lead to an economic and social crisis for the country. Most of Germanys coal mines and processing facilities were located in the Ruhr; an unregulated decline could have had serious consequences for the whole region. In 1968 the German government issued legislation aimed at the regulated reorganization of the German coal industry. At its core was the establishment on November 27, 1968 of Ruhrkohle AGRAG for shortwhich was owned by 24 companies, including VEBA, Hoesch, Mannesmann, Thyssen, and Klöckner.

RAG became the national umbrella organization for 52 coal mines, 29 coke producers, and five briquette manufacturing plants with combined sales of DM 5.8 billion and 182,650 employees. On November 30, 1969, all these plants and employees were reorganized into seven companies, the Bergbau AG Niederrhein, Oberhausen, Gelsenkirchen, Herne/Recklinghausen, Essen, Dortmund, and Westfalen. RAG was thus unique in Germany, operating as a private enterprise yet dependant on support from the state. This support was given mainly in the form of subsidies but also through laws protecting German coal interests in some sectors.

Oil Shocks and Energy Policy: 1970s-80s

In August 1970 RAG enacted a strategy that became the foundation of the gradual transformation of the German coal industry into a leaner but more efficient industrial sector. This strategy included six major points: 1) concentration on the most productive coal mines and an optimized allocation of coal reservoirs to the mines; 2) the creation of combined coal mines as an alternative to closing some of them down completely; 3) to protect the environment, satellite mines would be planned and operated in regions with new coal deposits; 4) downsizing activities were to take into consideration the effects on the regional economies and job markets; 5) job cuts had to be timed in such a way that employees had enough time to prepare for the change by either moving, training for a new job, or retiring; 6) downsized employees had to be supported in this transition through job offers from other companies or early retirement programs.

RAGs basic strategy did not change much during the following decades. However, it had to be modified in response to the economic turbulence that came with the 1970s and 1980s. When the first oil price increases hit the German economy in 1973, they brought an increase in unemployment and a sudden decline of economic growth. The government realized the dangers of dependence on foreign fuel supplies and demanded that German coal production be kept at then-current levels. A second oil price shock followed in 1978 and the government went so far as to request the domestic coal industry to prepare for expansion. Much development work was initiated which resulted in a decline of productivity.

In 1973 RAG consisted of 38 coal mines, 22 coke production plants, and two briquette factories which employed a total of 148,425 people. By 1984 the numbers declined to 23 mines, 12 coke plants, one briquette factory and 122,257 employees. During the same time period, coal production dropped by 22 percent while sales climbed by 50 percent. In the 1980s, after the oil crises of the 1970s were forgotten, the market for coal started declining again.

In 1985, when Heinz Horn became RAGs new CEO, the German coal industry seemed to have stabilized. However, when the U.S. dollar abruptly lost almost half of its value, energy prices on the world market declined, making German coal far too expensive. To prevent economic disaster, the German government subsidized the German coal industry heavily, despite regulations of the European Community (EC). However, the German public became more and more critical towards this policy. In 1987 a so-called Kohlerunde took place, a get-together of government officials and representatives from the industry. The result was an agreement to gradually diminish coal production and the number of employees by about 18 percent by 1995.

Coal Concept 2005 in the Early 1990s

In 1989 the European Community (EC) pressured Germany to reduce subsidies for steam coal. That year government subsidies for the German coal industry amounted to approximately DM 66,000 per employee. The EC formed a Coal Commission to develop a new policy for the German coal industry after 1995. The commission came to the conclusion that the coal industry was a strategic factor in securing Germanys energy supply and that it was not able to survive without government subsidies. However, the industry agreed on reducing the annual output of steam coal from 45 million MT to 40.9 million MT annually. At the end of 1989 RAG reorganized its subsidiaries. The three remaining Bergbau AGs were merged with RAG. At the same time, two new companies were founded to manage RAGs mining business: Ruhrkohle Niederrhein AG and Ruhrkuhle Westfahlen AG.

After East and West Germany were reunified in 1990, coal subsidies became an issue once again, because the high cost of integrating the East German economy was putting the German government under extreme financial pressure. In 1991 a second Kohlerunde was held to find a solution. The result was the Coal Concept 2005, a mutual agreement between the coal mining industry, the miners trade union, the electricity industry, the state governments of coal-producing states, and the federal government. According to Coal Concept 2005, subsidized sales of domestic coal to energy and iron and steel producers was to be reduced from 66 million MT in 1991 to 50 million MT by 2005. Any steam coal output that exceeded this limit would not be subsidized. Existing contracts with power stations to buy domestic coalthe Jahrhundertvertrag were continued but with gradually reduced volumes until 1997 and a fixed volume after that until 2005. Another existing contract with steel millsthe Hüttenvertragwas also ex-tended until 2005. For RAG the Coal Concept 2005 meant reducing coal mining capacity by nine million tons a year. The number of active coal mines was reduced from 17 to 12 by the end of 1991. In connection with those measures, the number of RAG employees would be reduced by 27,000 by the year 2000.

Company Perspectives:

RAG AGs roots are in domestic mining. It is among the most important driving forces of structural change in the mining regions of the Ruhr and Saar. The tasks connected with this role are diverse as well as demanding. Between our tradition and the demands of the future, RAG takes responsibility for the people in the mining regions. Beyond that, trend-setting innovations create profitable national and international growth. This growth, together with continued efforts to train our employees, create new perspectives and contribute in a major way to secure domestic jobs.

While coal mining was gradually reduced, RAG began transforming itself into a diverse technology concern. Specifically, the company became active in logistics, coal-based chemistry, and environmental technology. One field of activity for environmental services became the clean up, recultivation, and reforestation of areas where coal mines and processing plants had been closed down. The government subsidies were used more and more to strengthen growing markets instead of conserving old structures in declining industries. One of the new areas of activity was logistics. RAG owned a 600-kilometer-long railway system and 140 locomotives which were used to ship 70 million tons of coal across the Ruhr. In addition, Ruhrkohle owned ten harbors and a shipping company at Duisburg harbor on the river Rhine and a share in another shipping company at Rotterdam harbor.

Between 1970 and 1992, the percentage of RAGs total sales generated by activities other than coal jumped from two percent to over 30 percent. By 1992, 27 percent of RAGs 124,000 employees worked in areas other than coal mining and production. In October 1992 the RAG advisory board approved a new company structure. All of RAGs non-coal activities were organized under the umbrella of a new management holding company, the RAG Beteiligungs GmbH. They included the energy division STEAG AG, chemicals producer Rütgerwerke AG, the environmental division Ruhrkohle Umwelt GmbH, the logistics complex RAG Umschlags- und Speditions GmbH and the real estate arm RAG Immobilien AG.

In 1992 and 1993 there was a sudden decline of prices in the steel market, and sales dropped. This in turn led to rising coal reserves, and demand for coal went down. Moreover, cheap coke from countries such as China and Australia flooded the world market. Not surprisingly, the German steel making industry put pressure on RAG to significantly reduce coal prices. The conflict escalated when Kl#x00F6;ockner, one of Germanys largest steel makers, was granted the right in 1993 to purchase up to 30 percent of its coal supply abroad in order to avoid bankruptcy. German steel giants Krupp/Hoesch and Thyssen claimed they needed similar consideration. However, while those companies partly relied on their own coke production facilities and bought additional volume only as needed from RAG, Klockner depended completely on the expensive RAG coke. Finally, in May 1994 an agreement was reached between RAG and the German steel makers. The latter agreed to buy between 3 and 3.5 million tons of coal from RAG annually until the end of 1997. As a result of the crisis period in the early 1990s, RAG closed down one coke plant and cut the output of the other three from seven million tons in 1991 to 4.2 million tons in 1995. At the end of the same time period, RAGs briquette factory had produced 0.2 million tons of briquettes, only half of the output from 1991.

Diversification and Reorganization After 1995

At the end of 1994, RAG CEO Heinz Horn, who had managed the company through a crucial process of diversification for almost a decade, retired and was succeeded by Gerhard Neipp. Under Horns leadership, RAG had managed to generate almost half of its total sales in areas other than coal mining. Moreover, a new agreement with the German government reached at the beginning of 1994 had allowed RAGs non-coal subsidiaries to keep 25 percent of their profits instead of transferring them to the parent company. In July 1995 a new company structure was introduced that transformed RAG into a pure management holding company. To express the new, broader focus of its activities, Ruhrkohle AG was renamed RAG AG. A new subsidiaryRAG Vertrieb und Handel AGwas established to better coordinate all activities connected with the distribution and trading of coal, as well as other logistics activities and services.

In 1996 the German electricity lobby finally won its battle against the Kohlepfennig, a tax on electricity that was collected as a partial funding for the coal subsidies, which diminished the competitiveness of the German electricity industry by keeping the prices at an artificially high level. The highest German court ruled the policy to be against the German constitution, which at the same time voided the Jahrhundertvertrag, the treaty that had subsidized the German steam coal.

In March 1997 a new Coal Compromise was negotiated between the coal industry, the mining trade union, the German federal government, the state governments of North RhineWestfalia, and the Saarland. That year total government subsidies for the German coal industry amounted to over DM 9 billionDM 7 billion to subsidize German steam coal and DM1 billion for the steel industry. According to the new agreement, coal subsidiaries were to be cut gradually until 2005 and the industry would be downsized to about ten coal mines and an annual output of 30 million tons of coal. The 90,000 employees in 1997 would be cut in half by 2005. At the same time a new regulation allowed RAG to use more of its profits derived from its non-coal activities to invest in its non-coal and international business. In the same year RAG Bergbau AG took over the Saarbergwerke AG, a government-owned coal mining company based in Saarbrücken, and was renamed Deutsche Steinkohle AG which included RAGs domestic coal mining activities. Another new subsidiary, the new Saarberg AG, organized all non-coal activities of the former Saarbergwerke, RAGs environmental services and oil trade.

Key Dates:

1968:
A new German coal conglomerate, Ruhrkohle AG, is established.
1985:
RAGs new CEO Heinz Horn begins a policy of diversification.
1987:
Plans made to reduce coal production and coal industry workforce by about 18 percent by 1995.
1991:
New plans to regulate the industry result in RAGs Coal Concept 2005.
1994:
An agreement with the German government allows RAGs non-coal subsidiaries to keep 25 percent of their profits.
1995:
Horn steps down as CEO and is replaced by Gerhard Niepp. 1999: RAG acquires 95 percent of Burton Coal Joint Venture and Cyprus Amax Coal Company.

RAGs domestic coal activities were still dominated by closing down coal mines, training the staff that had been laid off in new professions, and making existing coal mines more efficient. At the same time, however, the company expanded its international coal business. In 1996 RAG Coal International was founded to manage all RAGs coal activities abroad, including the exploration and development of new coal reservoirs; the planning, development, and operation of coal mines and processing facilities; and the manufacture of mining equipment. In the fall of 1999, when RAG bought 95 percent of an Australian coal mine, Burton Coal Joint Venture, and the American firm Cyprus Amax Coal Company based in Denver, Colorado, it was suddenly the worlds second largest private coal producer. Cyprus-Amax included seven coal mines and two strip mines in Wyoming and Colorado. In 1999 RAG Coal International generated an output of 65 to 70 million tons of coal in 17 coal mines, totaling almost $1 billion in sales. Geographic advantages and more efficient technologies in the United States made the costs for coal mining one-tenth those of Germany. In American strip mines the difference was staggering; while it cost about $137 to produce a ton of coal in Germany, it cost not much more than $5 in an American strip mine. Another new market for RAG was China, with its international coal trading firm RAG EBV AG and its mining equipment arm DBT Deutsche Bergbau-Technik GmbH.

RAGs non-coal activities also became increasingly successful in the late 1990s. STEAG AG invested in a petrochemical power plant in Leuna and was also active in STEAGs Micro Tech division. It was the market leader for wet-process engineering for semiconductor production, serving clients such as IBM, Intel, and Hewlett Packard. Moreover, RÜTGERS AG subsidiary Isola, which was merged with the electro plating business of Allied Signal, became a world market leader in its field.

Principal Subsidiaries

Deutsche Steinkohle AG; RAG Beteiligungs-GmbH; RAG Coal International AG; RAG EBV AG; STEAG AG (72%); RÜTGERS AG (95%); Saarberg AG; Ruhrgas AG (18%); RAG IMMOBILIEN AG (99%); RAG INFORMATIK GmbH; RAG BILDUNG GmbH; Harpen AG (23,5%).

Principal Competitors

The Broken Hill Proprietary Company Limited; Peabody Holding Company, Inc.; CONSOL Energy Inc.

Further Reading

Building Round Coal, World Mining Equipment, September 1995, p. S4.

Garding, Christoph, Ruhrkohle: Es kommt noch dicker, Focus, July 5, 1993, p. 118.

Heinz Horn 65 Jahre, Sueddeutsche Zeitung, September 15, 1995.

Hessling, M., German Hard-Coal Industry, Engineering & Mining Journal, October 1992, p. 16.

Husemann, Ralf, Ruhrkohle hat sich vom Bergbau emanzipiert, Süddeutsche Zeitung, September 12, 1996.

Knop, Carsten, Die RAG lŏst sich langsam aus der politischen Umklammerung, Frankfurter Allgemeine Zeitung, Septembers, 1998, p. 21.

Pollard, Sidney, The German Tradition of Organized Capitalism: Self-Government in the Coal Industry, Business History, January 1995, p. 127.

Sturm, Norbert, Von der Kohle zum High-Tech-Konzern, Süddeutsche Zeitung, January 30, 1992.

The Energy to Export, World Mining Equipment, September 1999, p. S22.

Evelyn Hauser

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