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Coal auction floor price reasonable: KPMG

According to Santosh Kamath, the overall auction of the coal blocks at reasonable price is positive as it will increase the availability of coal. However, the end-use plants that had coal blocks earlier may now lose them and incur loses...

Coal ministry's draft auction rules for coal block auction puts floor price at reasonable level of Rs 150 per tonne for sectors like steel, sponge iron, cement and captive power. CNBC-TV18 spoke to Santosh Kamath, Partner- Infrastructure & Govt Services, KPMG (India) to know how positive will be this move for metal and power sectors. According to Kamath, the overall auction of the coal blocks at reasonable price is positive as it will increase the availability of coal. However, the end-use plants that had coal blocks earlier may now lose them and incur loses.

Menaka: What do you make of what you have seen and this is a broad opening question so far in terms of the auction modalities that are out in the draft note, the highlights, the challenges that this might pose for companies?

A: Overall, it is a positive development. It will increase availability of coal in the country. In terms of the challenges what I see is that if the end use plants that had coal blocks, if now they lose those blocks then what happens to the investments?

Menaka: Lose the blocks as in if those blocks are not available for those particular end users and therefore, they have no opportunity to bid for those blocks in any fashion?

A: Yes. So, then that is a matter of concern.

Menaka: Isn’t it happening with Hindalco ?

A: Yes true, so as you said they are getting classified under the power category whereas earlier it was for the metals category.

Senthil: How cast in stone are these classifications? Is there scope or do you think they can be reclassified or is that a risk that bidders will not want to take?

A: At this point they are as they have been classified.

Menaka: This draft note, if this is the final modality then its cast in stone because then you are bidding for – whether that block is available for you to bid at or not because if Mahan has been moved to power then only those companies which are power generators will be able to bid for Mahan and others will be left out. So, I don’t think anybody will give up that, Mahan is also a great mine.

A: You are right. For such instances the end-use company may end up losing it. So, safe guard should be that the government should allocate linkages on priority to those end use plants which have already made the investments and have lost those blocks.

Menaka: What do you mean by linkages on priority?

A: I mean new linkages.

Menaka: But all these companies are going to re-bid, right? So, what linkages are you talking about?

A: They should re-bid and should try to get new blocks. However, the example that you gave, if something was reserved for a particular end-use sector and now that classification has changed and if later on some of these end-use plants are not able to win blocks then in order to prevent those investments from getting stranded the government should look at allocating future linkages on a priority manner.

Menaka: Just to stick with the Hindalco example as one illustration, if they don’t get a block that is as good as Mahan to bid for or if they bid and they aren’t successful you are saying the government should figure out a plan B to keep the coal supplies to Hindalco's smelters going, that is what you mean?

A: Yes. Not just Hindalco but I am saying all those cases.

Menaka: So, that is the one big challenge, what else do you pick up as the other challenges in these modalities? A: The other challenge I would say is, these are long-term coal supply, coal development and production contracts. We should have enough safeguards to prevent these contracts from running into the same difficulties as some of the power PPAs and road contract concessions have got into. So, there should be enough safety valves to prevent these contracts from getting stranded.

Menaka: What kind of safety valves?

A: They should have certain level of indexation of these contracts to market variables as far as the prices are concerned. In the case of power they have said, about 20 percent can be sold in the merchant market as far as power sector is concerned.

Menaka: Have they said that it can be sold to the merchant market or they said that any excess supply has to be sold to Coal India? Any power generated from this coal can be sold to merchant market.

A: Yes. So, that in a way gives a bit of a safety valve because if I can sell 20 percent of my capacity in the merchant market at market prices then that is a bit of a safety valve. On the other hand, if it is 100 percent tied up and my coal supply is also tied up and the prices are tied up and tomorrow if there is a variation in the coal production costs, private sector does not have much experience in coal mining in India.

Menaka: This would only apply to power because in case of other end use like cement or metals you are free to sell at market prices. So, you can actually factor in a change in coal access cost. So, is it only power where you are saying there should be safeguards?

A: Yes, power is where there should be enough safeguards.

Source: Moneycontrol