The much awaited Cabinet nod for auctioning of coal mines for commercial use by private players will provide operational flexibility to coal consumers — predominantly power, metals and cement producers — who have been mostly dependent on public sector Goliath Coal India for coal linkages. Besides, it is expected to boost capital investment in the Indian economy, by attracting independent mining companies, both domestic and foreign, as well as other foreign investors with deep pockets, to participate in the auction process. Anil Agarwal, billionaire chairman of the diversified Vedanta Group, said that commercial mining is a big opportunity for foreign investors with deep pockets, as these projects will require huge investments. “Since we have invested in one of the largest miners in the world (Anglo American) we would be willing to facilitate their investments in India.” However, his advice to the Indian government is that it should come out of the ‘“revenue mindset” and “focus on productivity”, which would help the sector.
The government said that the auction will be an “ascending forward auction whereby the bid parameter will be the price offer in `/tonne, which will be paid to the State Government on the actual production of coal”. It added that there will be no restriction on the sale and use of coal. Indian corporates have welcomed the development and are keen to participate in the auctions. Sharad Mahendra, head mining, JSW Energy, said that the approval for commercial mining is a big step for private players. It would provide flexibility over the usage of coal. The usability under coal linkages is limited by PPA and at present not many state discoms are coming out with long-term PPAs. Commercial mining, on the other hand, would allow flexibility over production as sale can be through exchanges as well. “We are willing to participate in auctions for anything between a 2-4 million tonne capacity mine,” Mahendra said. A Subbarao, executive director finance and strategy at CLP India (China Light & Power) told FE, “A lot of players will participate in this as it’s one development people have been waiting for a long time. If the resources are available in India people would like to use it rather than sourcing it from abroad. It will be a big saving on cost as well.”
This view of Subbarao echoes the government’s thinking, of increasing domestic coal output to reduce imports and making more coal available at competitive prices, by driving efficiencies through private sector participation. Coal India presently commands a near 80% share of the Indian coal market. It should be noted that the government passed the Coal Mines (Special Provision) Act in 2015, which allowed it to auction mines to private entities for mining and commercial sale. However, the three phases of the coal auction for nearly 45 coal-producing blocks conducted in the seven-month period of February-August 2015, were auctioned only for captive use by companies, and sale of coal on commercial basis was disallowed. Earlier, in September, 2014, the Supreme Court of India had de-allocated 214 coal mines over arbitrary allocations.
Some of the mines that are expected to be bid out in the first phase are from Odisha, Chhattishgarh and Madhya Pradesh and Jharkhand. The four coal mines from Odisha that are likely to be auctioned in the first phase are Chendipada, Chendipada-II, Mahanadi and Machhakata. Four coal mines from Chhattisgarh are Shankarpur Bhatgaon II Extension, Durgapur II/Taraimar, Durgapur II/Sariya, Madanpur (North), and one each from Madhya Pradesh (Dongri Tal-II) and Jharkhand (Mednirai). “The Centre is yet to decide the timeline to auction these ten coal mines,” sources said. While coal mines such as Chendipada and Machhakata have fairly high estimated extractable reserves of 1,244.37 million tonnes (MT) and 474.34 MT, respectively, mines such as Shankarpur Bhatgaon II Extension and Mednirai have estimated extractable reserves of only 80.14 MT and 80.832 MT.
Kameswara Rao, leader, energy, utilities & mining at PwC India told FE that the power generators can source commercial coal to improve PLFs and margins, and distressed assets can contract with commercial coal suppliers to revive their projects. The competition in domestic coal supply market will drive merchant power prices down, and power utilities as well as manufacturing industries will benefit from lower energy costs. “However, the scope for use of domestic coal in imported coal based power plants is limited, it’s likely that commercial coal suppliers will come up with improved quality of coal that can be used in greater proportion in a blend than ordinarily,” Rao said.
“The non-regulated sectors, such as cement and steel, that have a greater dependence on imports and e-auctions are likely to bid more aggressively for these blocks to save on price risk and exchange rate risk. Also, the coal blocks earlier proposed were sub-scale and not properly accessible. It’s important that larger and more viable blocks are offered in the initial auctions for this landmark policy initiative to really bear fruit,” Rao added. Dipesh Dipu, founder and managing director of Hyderabad based Genissi Consultancy, however, believes that unless the demand for coal improves, the auctions may not generate enough interest. The investments could be further affected by requirements of premium for selling coal over the CIL prices. “Why would someone like to buy costly coal from a commercial miner when it is likely to be made available at lower price by Coal India? The objective of finding a competitor to Coal India can be served only if the auctions are for bigger blocks of over 24-25 million tonne per annum capacities, and then too a lot would depend on demand,” Dipu said.