Rag Ag Business Information, Profile, and History

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.

History of Rag Ag

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, miners--or Kumpel, as they were known--received 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 Party--that 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 Community--later to become the European Community--was 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 fields--the Ruhr accounted for around 70 to 75 percent of coal production in the Federal Republic--as 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 1967-68, 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 all--that subsidies would be withdrawn from companies below the optimal size after January 1, 1969--which 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 companies--all of them if possible--to 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 created--with as strong a state influence as possible--for a long time.

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 coal--or oil--in 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 state--the Federal Ministry of Economics--ensured 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 active--for 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 industry--which, along with the electricity industry, was the largest purchaser of Ruhr coal--it 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.

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 Community--subsidies 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 1988-89. 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 from--coal, 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 company--through its RAG Coal International subsidiary--acquired 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 non-mining 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.

Chronology

• Key Dates:
• 1968: The coal adjustment law is passed; nineteen companies in the Ruhr area combine to form Ruhrkohle AG.
• 1969: The Grundvertrag--the articles of association for Ruhrkohle--are 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.