In an interview to SteelMint, Dipesh Dipu, Partner, Jenissi Management Consultants, expressed his views about the reason behind Coal linkage auctions, its floor price, methodology and the impact to various sectors.
What could be a major reason behind Coal linkage auction? Don’t you think rationalizing Coal linkage was more important than auctioning?
In view of the Supreme Court’s decision with regard to coal block auction, which indicated that coal distribution through standing linkage committee could also be open to similar scrutiny and interpretation of subjectivity and discretionary approvals, the Ministry of Coal has proposed to auction coal linkage. This is also an approach to align the coal prices with market forces of demand and supply and not keep it artificially suppressed as the “notified prices” regime does and thus distorts the market.
Rationalizing coal linkage has been initiated as a separate exercise. That targets economic benefits through savings in transportation and better availability of coal by reducing bottlenecks in coal supply chain. While the auction of linkage is proposed for non-regulated sector, rationalizing may be applicable for power sector in particular as power sector is the largest consumer of coal. For non-regulated sector also, the mechanism of auction will bring in economics of transportation in to play.
What do you have to say about determining the floor price?
For now the applicable notified price of CIL for the grade of coal may be considered floor price.
A slight discount over the energy-equivalent import parity price may also serve the purpose, wherein discount may reflect the risk perceptions of coal quantity, quality and other technical parameters; coal supply chain factors; payment and other tender terms and conditions; and such other factors.
Is there any methodology by govt. for auction of the linkages?
The Ministry of Coal has published a draft methodology for auction of coal linkage that proposes Supplier Controlled Ascending Market Clearing Auction. In this method, at a given price quantity demanded by various bidders are aggregated and if that exceeds the total supply quantity, the price is increased incrementally. This step is repeated till the time aggregate demand matches the supply and thus equilibrium price is discovered, at which point the demanded quantities are supplied to all the bidders at the same price.
Assumption is this mechanism is that the consumers will have a price and quantum demand curve, most-likely a linear downward sloping one. But textbook descriptions may not fit the reality, particularly in case of scarcity.
What could be the impact of coal auction to Steel/Power/Banking sectors?
From the cost of procurement point of view, the auction of coal linkage may push it higher making an impact on profitability of steel or cement or aluminium manufacturing, and thus having an adverse impact on debt service coverage ratio from the lending perspective.
However, alignment of domestic coal markets with global markets will be good news as the lower dependence on domestic sources would mean enhanced supply security from international markets where practices are reliable; quantities and qualities are certain as per the contracts; and from economic standpoint due to auction the consumer would be indifferent.
What is your final take on the proposed auction?
The step to align the domestic coal market with global, auction of coal linkage is essentially that, is in the right direction. Now when the global coal prices are low, this provides the government a window of opportunity for this much needed reform. Doing this for non-regulated sector should be the first step and should be followed with the same for power sector as well.
The power generation thus should be cost reflective and any subsidies in view of lack of affordability in a certain section of consumers should be provided at consumer end itself through cash transfers, for which Aadhar-linked mechanism are available. This would certainly rid the coal mining and power generation value chain of perpetual ills.
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