Coal block allocation: Sponge Iron, cement could benefit; worries for power

Prospects for cement and sponge iron look bright whereas the same for power appear bleak.

Dec 10, 2014 03:12 IST India Infoline News Service

“Recommendation of the sub-committee for allocation and auction of coal blocks and for their classification for various end uses, are broadly in line with our initial expectations” states a recent IIFL institutional Equities Report. The coal blocks originally allotted to PSUs would be kept within the PSU domain. However, there is no certainty that the coal blocks would be allotted to the same PSUs. Out of the 74 blocks, 49 blocks would be left for auction. The initial analysis of IIFL suggests that sponge iron and cement players are likely to benefit whereas private sector power entities may see increased competition.
Here are the key points of this research as given in the IIFL report.
  • The government is likely to auction 49 coal blocks to private companies in the first round of coal auctions. Out of these, 24, 17, and 8 coal blocks could be reserved for steel, power, and cement sectors respectively.
  • Coal blocks originally allotted to government entities will likely be reserved for allocation to PSUs.
  • The sub-committee has recommended auctioning of all blocks that were earlier allocated to state mining corporations for commercial use or in JVs with private sector. Accordingly, 25 coal blocks could be allotted to public sector.
  • The committee has also suggested clubbing of some nearby coal blocks to conserve coal and make mining feasible.
The highlights of this report are mentioned below:
Draft rules on auction deals with administrative aspects: The draft rules published by the coal ministry last week largely relate to administrative aspects of auction/allocation of coal blocks. The rules do not give clarity the methodology for calculation of reserve / floor price. However, the Coal Secretary reiterated that the primary objective is to ensure stability of power tariffs and not maximize revenue.
Positive for sponge iron, cement: Commenting on the fruitful prospects of sponge iron and cement, the report said, “We believe the developments so far are positive for sponge iron and cement players. The steel and cement sectors have been allotted adequate mines for auction. Moreover, we do not expect smaller sponge iron players with stretched balance sheets to participate in the auctions aggressively, which may benefit large players such as JSPL. “
Power to see increased competition; aluminium still unclear: Private power entities may face increased competition since only 17 mines are earmarked for the sector. Besides the original allottee, several power plants running on imported coal or those not getting adequate supplies from Coal India may also bid. At present, aluminium is not classified as a separate sector. If it gets clubbed with power, aluminium players would benefit, as they earn market price for their product and would compete with power players having regulated tariffs, stated the report.
Limited competition in sponge iron could benefit JSPL
Based on media report, 24 mines could be reserved for sponge iron and steel sector during the auctions, compared with 28 mines allocated to them earlier. Although the number of mines available to the sector has been reduced, we highlight that many small sponge iron players that were allotted mines initially may not be in a position to bid aggressively in the auctions due to stretched balance sheets. Evidently, only one player, JSPL, with sponge iron capacity of more than 1mt and strong balance sheet, could benefit. 
Integrated steel players such as Tata Steel and JSW Steel are unlikely to bid aggressively as they use the blast furnace route, which requires limited quantity of thermal coal.
In case of the cement sector, eight mines have been reserved for the upcoming auction compared with only two mines allocated earlier. This is definitely positive development. However, we are yet to ascertain the reserve size and location of these eight mines. If they are from the 13 small mines (<20mt reserves), then the cement sector may not benefit substantially
The IIFL Institutional Equities Report further mentioned, “Our initial analysis suggests that sponge iron and cement sectors would benefit whereas private sector power entities may see increased competition. We highlight that apart from the number of coal mines, the size of reserves would also be crucial to determine which industry would benefit. We still await the exact number of coal mines and their reserves that will be set aside for different end use during the auctions.”
Draft rules for auction - silent on pricing mechanism
The coal ministry released the draft rules last week that largely relate to administrative aspects of the auction/allocation of coal blocks. The government plans to complete the process by mid-March 2015. The Coal Secretary reiterated that the primary objective of the auction is to ensure stability of power tariffs and not maximise revenue. This is in line with the government’s commitment to make available affordable power to all. The rules do not provide clarity on the methodology for calculation of reserve / floor price.
The other highlights of the coal mines (Special Provisions) Rules, 2014, as clearly written in the report are as below:
Eligible bidder: Besides the conditions outlined in the Coal Mines (Special Provisions) Ordinance, the rules state that to bid for mines that are already operating (42 mines), the bidder should have already spent 80% of total project cost on the end-use plant. This requirement is lower at 60% for mines at an advanced stage of commissioning (32 mines).
Application for allotment: The government would create a pool of mines that would be allotted to public sector entities. The authority nominated under these rules would invite applications for allotment of the mines.
Power projects won based on competitive bidding may be allotted coal mines: Based on the recommendation of Power Ministry, the central government may allot any mine to a power company that has won project through competitive bid for tariff.
Cap on acquisition / allotment of number of mines/reserves: The rules suggest that the nominated authority would put a cap on the number of mines that can be allotted / acquired by one entity. This cap may be in the form of the number of mines or aggregate reserves.
Public sector would be allowed to participate in auction: Public sector companies will also be allowed to participate in the auction. This is over and above the potential allocation of coal mines on allotment basis.
No clarity on reserve / floor price: The rules do not provide insights into the methodology to be adopted for determining the reserve / floor price for individual mines. It is also silent on whether the auction would be based on lumpsum payment or payment linked to production.
Arrangement with other coal users: The rules require the successful bidder to disclose arrangements it proposes to enter into with any other party for optimum utilization of coal. The Ordinance permits swap arrangements with other parties for same end use, subject to central government approval, said the IIFL Institutional Equities Report.

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