Coal India Ltd (CIL) has decided not to renew the fuel supply agreements (FSAs) of various non-power sectors after the initial term of agreement draws to conclusion under the linkage auction scheme.
It is pertinent to note that the company had initiated linkage auctions in order to meet long-term coal supply of the non-power sector by conducting a one-time auction for various sub-sectors, viz. cement, sponge iron, captive power plants, steel and others on a yearly basis.
The FSAs were inked for an initial term of five years which was earlier proposed to be extended for a further five years on mutually agreed terms. However, the company has decided against extending the contracts after completion of the initial term of five years.
So far, four tranches of auctions have been concluded under the linkage scheme, the first of which was held during Jun-Oct’16. Fifth tranche was temporarily suspended due to Covid, but is expected to resume soon.
Consequently, FSA holders from tranche-I auctions whose contracts are expiring from Aug’21 onwards have been informed to participate in subsequent linkage auctions in order to continue with long-term coal supplies.
What are the consequences?
As a result of the latest development, CIL is at risk of losing contracts worth 22.14 mn t coal which were sold in the first tranche of the linkage auctions. Nonetheless, the company would be relieved of supplying these coals at a comparatively lower price as the volume was booked at a paltry premium of 6.95%.
Even in case of upwards price revisions, the fixed premium clause in the linkage auction scheme ascertains lower earnings from the FSAs in comparison to the subsequent tranches which had witnessed an improvement in bid premiums.
By the time the next phase of the linkage auctions are resumed for respective sub-sectors, the customers whose FSAs are expiring are expected to satiate their short-term coal requirements by participating in various e-auctions.
In this case, CIL’s sales from regular auctions would rise from improved participation from such customers as they will seek avenues to meet the short-fall in supply post-expiry of their FSAs.
In particular, an exclusive auction earmarked for the non-power sector would be beneficial which has already seen higher allocations against the offered quantity compared to the spot and special forward auctions in this fiscal.
CIL Auction Summary during Apr-Jul’22
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