NTPC, SAIL could make windfall by e-auctioning coal

Subhash Narayan Posted online: Friday, Jul 19, 2013

New Delhi : State-owned bluechip firms NTPC, NMDC and SAIL could end up making windfall gains from the government's decision to preferentially allot them coal blocks for commercial exploitation. The central public sector undertakings are set to be allowed to sell 10% of the production from their coal blocks under the e-auction route as is being done by Coal India (CIL). With e-auction coal fetching up to 85% premium over the notified price, it could provide new avenues to de-risk business and become an alternative revenue model for companies, promising assured profits.

Under the Auction by Competitive Bidding of Coal Mines, Rules, 2012, grant of coal mines to companies for specified end-uses other than power, shall be done by auction through competitive bidding process. For the power sector, coal blocks would be earmarked to the ministry of power or the state government for carrying out the tariff-based bidding, while government companies, including PSUs, would be given coal blocks under government dispensation route on payment of a reserve price.

The coal ministry has allocated 14 blocks under the new rules to government entities recently, out of which NTPC bagged a lion's share of four blocks with a total reserve of 1995 million tonne (mt). This is in addition to the six coal blocks already with the power major with an annual production capacity of close to 40 mt. With all blocks under production, NTPC could accommodate a small quantity to be sold outside its power projects under the e-auction route under the new proposal. An NTPC official said that the new policy could come handy when production from their mines peaks and surplus is available for sale outside.

"This is a good development that can help in de-risking our business. It will give us an alternative revenue stream that will be important at times like these when demand in the market is low and prices are flat," said an official of a public sector steel company, requesting anonymity. State-owned navratna PSU SAIL is reporting losses for the last few quarters due to sluggish steel demand and heavy investment to ramp-up capacity.

India's monolithic coal producer CIL, which is allowed to sell 10% of its produce through e-auction (it sold close to 47 mt of coal under e-auction last year), has found this route highly lucrative with roughly 20% of its revenue coming from this business. The contribution of spot sales or e-auction to CIL's overall revenues has seen a sharp rise from 11.9% in 2007-08 to 17.5% in 2010-11. Since then, due to a fall in coal prices globally, its contribution to CIL's total revenue has fallen, but it still stands at the double-digit mark.

If other government companies manage e-auction of just 5 mt of coal annually, their revenues would jump by about R1,000-1500 crore annually, analysts said.

As per the guidelines for allocation of coal blocks under the government dispensation route, the coal ministry would identify blocks to be offered under this route and fix a reserve price for a block. This would be offered to government entities having the best mining plan and a good track record on payment of the reserve price.

The company will have the right to mine and sell coal from the block to approved end users under a linkage formula, similar to the one being followed by CIL. It would also notify coal prices from time to time. The company may sell 90% of the production under the said route and e-auction the balance 10%.