India’s cement and steel sectors to source coal through auctions

KOLKATA (miningweekly.com) – Buoyed by rising domestic production and to usher in the uniform allocation of coal through competitive bids, India’s Coal Ministry will not renew coal supply linkages to so-called unregulated sectors, including cement and steel.

These industries would now secure their coal through auctions. To ensure that the volume of coal in the bidding pool was sufficient to meet demand, the Ministry had directed that at least 25% of Coal India Limited’s (CIL’s) incremental production be added to the auction pool every year.

An official in the Coal Ministry said that the decision not to renew coal supply linkages from CIL was limited to the sectors in which government was not regulating the price of end products, allowing producers the flexibility to factor in higher fuel costs in their prices.

The fertiliser industry would continue to receive coal under negotiated agreements with CIL and would be exempted from sourcing through competitive bids. The government controlled fertiliser prices and reimbursed producers the difference between the cost of production and the retail price through subsidies.

Should fertiliser producers source coal through competitive bids, the higher cost of fuel and resultant higher cost of fertiliser production would entail a higher subsidy payout from the government, the official said.

A back-of-the-envelope calculation showed that the total coal available to be auctioned to unregulated industries would be about 24-million tons, 10-million of which would be freed up by nonrenewed linkages and 14-million tons from CIL’s incremental production in 2015/16.

Meanwhile, the Coal Ministry had unveiled the auction guidelines for bids from user industries.

Under the mechanism announced, the floor price would be fixed based on the run-of-mine price at mines of CIL and Singareni Collieries Company Limited. User industries would have to bid at a premium over the floor price, the official said.

The premium would be increased on a graded basis depending on the volume bid for by each bidder. However, to prevent bids for “irrational volumes”, the maximum volume limit would be fixed for each bidder based on the fuel consumption norm of end-use plants.

The Coal Ministry official ruled out any imminent scenario in which the volume of coal put up for auction fell short of the total requirement of the unregulated end users of coal, considering that Indian coal production was moving from a shortage to over-production.

It was pointed out that CIL would be able to sustain a 9% growth rate right through the current financial year and hit the production target of 550-million tons by March 31, 2016. The Ministry was also confident of meeting the entire demand of user industries, considering it was pushing CIL to rapidly liquidate its current pit-head stocks, estimated at 40-million tons, or risk it being a drag on further production and offtake increases, the official said.