State-run miner Coal India Ltd (CIL) has decided not to renew long-term contracts for coal supplies under linkage auctions meant for the non-power sector.
These auctions have been conducted across various tranches for different sub-sectors namely sponge iron, cement, captive power, steel and others. As per policy guidelines, the tenure of fuel supply agreements (FSAs) against these auctions was five years, which was initially proposed for extension for another five years upon mutual agreement.
However, the company has informed that the expiring FSA contracts under tranches II and III of linkage auctions held during January-November, 2017 would not be renewed beyond five years. Similar instruction was also issued in case of contracts under tranche-I auctions.
Double whammy for non-power sector
The decision has come as a big blow to the non-power customers who are already facing supply tightness amid CIL’s disparity in coal allocation. Besides, there is a growing prospect of coal procurement at high prices in the regular spot auctions.
Notably, the company continued to bolster supplies to the power sector at a time demand for electricity has grown at a staggering pace. As a result, supplies to the non-power sector have been curtailed.
During April-May, 2022, CIL’s coal dispatches to the non-power sector has fallen 26% y-o-y to 16.88 million tonnes (mnt). In the same period, dispatches to the power sector have increased 18% y-o-y to 101.82 mnt.
So far, CIL has concluded five tranches of auctions under the linkage scheme of allocation for the non-power sector, with the latest being held in January, 2022.
The consumers, whose FSA contracts are expiring, can opt for regular spot auctions for coal procurement but these are currently available at elevated prices supported by the supply tightness.
Coal sales via regular spot auctions conducted by CIL subsidiaries have fetched bid premium of 383% over the notified price during April-June, 2022. In contrast, sales under tranche-II and III of the linkage auctions fetched nominal bid premium of 11% and 13%, respectively.
Under this scenario, the production cost of end-user industries would be impacted by the increased raw material costs. Plus, there is no major relief via imports since global prices are also at record levels. This situation may persist till new tranches of linkage auctions are announced.
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