The new coal distribution policy announced by the government on Friday spells bad news for cement and steel sectors, as it reduces assured coal supply to the two key sectors by 5 percentage points to only 75% of their requirements.
However, the government has decided to do away with the current classification of coal-consuming companies into core and non-core sectors and has decided to replace it with regulated and non-regulated sector, entailing power, fertiliser and defence sectors to get assured supply of their entire coal requirement.
The governments move is likely to hit cement companies more as they meet a substantial part of their demand for coal from the domestic market, while steel companies depend on overseas cooking coal for consumption.
Initially, the coal ministry was contemplating to reduce the assured supply of coal to power sector to 90% from current 100%. However, stiff opposition from the power ministry has forced it to change the stand.
The power sector alone consumes 80% of total coal production and the ministry felt any reduction to power sector would hurt the envisaged generation in future. Besides, it had also argued that it could result in an increase in power tariffs.
The small and medium enterprises (SMEs) sector will get more coal linkages now. The existing cap of 500 tonne per year would be increased to 4,200 tones per year. After accessing the demand of SMEs, state governments would enter into fuel supply agreement with coal companies and would distribute coal according to the need of various companies in their respective state.
The new policy has also done away with the floor price for bidding for coal under the e-auction route. This has been done keeping in mind the Supreme Court judgment in 2006 banning coal selling through e-auction on the basis that it was a misuse of Coal India Ltd?s monopoly status to seek the highest price rather than fulfilling its constitutional goals.
However, coal companies would still have the flexibility of setting reserve price. As per the new policy, reserve price cannot be less than the notified prices. Also, e-auction would now have two platforms ? one for supply of coal for a period of a year or more and another for less than a year.
The premium for longer period of one year or more may come at higher premium than that of shorter period.
The government has earmarked a minimum of 10% of total coal production to sell through e-auction. It expects a total production of 380 million tonne in 2007-08, which is likely to increase to 520 million tonne by 2011-12.
Additionally, the government has allowed coal companies to import coal to meet their supply commitments to various consumers, and if necessary, CIL can make necessary price adjustments.
Moreover, The existing linkage system has been replaced with a more transparent bilateral fuel supply agreement (FSA) system. This has done with a view to bring accountability, both for consumers as well as coal companies.