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Will new captive block winners actually mine coal?

April 14: A section of industry doubts that post the aggressive bidding of operational and soon-to-be operational coal blocks, a number of winners may not immediately mine the coal and may even consider forfeiting their bank guarantees and, instead, buy imported coal because of the latter’s lower costs.

These doubting Thomases feel so because winners have ended up paying huge amounts to get the rights to mine coal and ensure raw material security. In fact, the amounts they have paid are almost 5-10 times higher than $5-8 per ton that is generally charged in other countries.

The aggressive bidding in the first two rounds of the e-auction of captive mines might have fetched over Rs 305,000 crore to various state governments but experts in the industry are sceptical whether the winners will ultimately mine the coal after paying the high price to win the rights to mine that very coal.

According to information available with ICMW, most non-power and, to some extent, power sector companies, have bid in the range of Rs 126- Rs 4,000 per ton, just to get the rights to mine the coal.

“These winners will have to bear additional costs of around `1,000 per ton in the form of various taxes, plus there will be the cost of mining and transportation of coal from mines to their plants which will take the total cost to around Rs 4,500-5,000 per ton,” a former chairman of Coal India Ltd (CIL) said.

According to other experts, the benchmark price while bidding for the mines should have been that of imported coal because that is the alternate source since most consumers don’t get the fuel from Coal India (CIL).

“Those who don’t mine coal have to depend on the imported variety. And imported coal prices are ruling soft so the CIF or landed cost of lower-to-medium-to-better quality coal would be $40-$70 per ton, which, in Indian currency, means Rs 2,500-Rs 4,500 per ton,” sources said.

“The average bid price quoted would be not less than Rs 2,500 per ton. If the right to mine coal is available at Rs 2,500 per ton, then after mining and bringing the coal to the plant, the cost will go up to anywhere between Rs 4,500-Rs 5,000 per ton, depending on the location,” said the experts.

“Can such a price be just absorbed? It is a tall order! And where are the savings?” asked the ex-chairman of CIL.

“I don’t know the margins being enjoyed by the players mining coal from the operational blocks. But the point is, even with reference to imported coal, this Rs 2,500 per ton is the cost they will be paying over and above this. Plus, they will have to pay 14% royalty, undertake capital expenditure, operational expenditure, mine the coal etc,” he said.

Now the question is whether they will actually mine the coal or just import the fuel but keep the mine as of now and do the mining only after international prices firm up to the extent that these will be higher than the cost of coal that will come from the captive mines?

“If you look at the rights of mining captive coal, what is the price for that globally? Even for the best grade of coal, I don’t think prices are more than $5-8 per ton. Against that, if somebody is paying Rs 2,500 per ton, which around $40 per ton, they are out-pricing themselves,” said a source.

“You will obviously do benchmarking on like-to-like basis. It is basically a right to mine coal, which is not the best in the world but, at best, medium to low grade,” said the source.

“Overseas, if someone wants a running mine with this type of coal, he will not have to pay more than $6-8 per ton. At present, the cost of rights to mine coal from the mine which was acquired by ICVL- Riversdale from Rio Tinto would be in the range of some cents per ton … not even dollars!” experts said.

“Even if you compare the international deals with bid prices or benchmark these with the bid prices, then, on an average, these will be ten times higher. So, how can these be worthwhile deals?” they asked.

The experts are of the opinion that there is a strong possibility that imported coal will be available at lower than the price at which captive coal can be mined from the blocks won in the auction and thus mining will not take place from the auctioned blocks at least in the next 2-3 years as international coal prices are likely to remain soft till then.

“These players might simply forfeit the bank guarantees,” the experts observed.

Asked if they are suggesting that the companies which won the mines would just forfeit their BGs as mining of coal would be more expensive compared to imported coal, the experts said, “Bank guarantees are a one-time cost and far lower than a perpetual loss making scenario!”

Experts feel that having gone through the process (of auction), the government has relied on only one aspect and that is the “caveat emptor” which means bidders be aware.

“That the players bid foolishly, without looking at the economic considerations, has been proved in the cases of the ultra mega power projects and this is nothing new. There are instances of self-destructive biddings in the past,” sources added.

“I am not sure whether this is self-destructive,” wondered the former CIL chairman.

Asked about the impact of the bidding for blocks reserved for the power sector, the experts said, “It is the same with the power sector. Initially, it all started with the discount to CIL’s price and the discounted price will be factored into the power tariffs for the PPAs. This was the argument.”

“Now what the bidders found is that they don’t have the PPAs. They have the opportunity to bid for the PPAs through Stage I and Stage II bidding. They will bid in those auctions, as and when they come. But the scenario wherein the cost of coal being transferred to the cost of power is not arising at all,” said another expert.

Thus, they bid aggressively and what they did was make the coal price zero or the discount 100 percent. On top of that they decided to pay something to the state government, they said.

“Now even at this bid price, they are not getting the coal as they will have to bear the additional cost of mining and transportation. The question is, they will have to recover that cost through the process of PPAs, which will be difficult to achieve,” they observed.

Basically, they will try to recover the extra cost of coal through the fixed cost of coal and if that recovery happens, then it will be Chinese accounting, said one of the experts.

As of now, it appears that coal plus power units will be able to sustain themselves and the coal mine will be considered an extension of the power plant.

“In case they are unable to recover, then we don’t know how they will run the mine and again that UMPP kind of scenario will unfold. So there is uncertainty in both areas, going forward,” they feel.

“Nobody can question transparency and corruption, but questions arise over sustainable mining, which has not been assured,” sources concluded.

Asked about the impact of the auction process on the country’s economy, the experts said, “The country needs the coal production to more than double from the current 600 million tons to more than 1,500 million tons, if it has to become self-sufficient in coal and coal-based generation.”

“But, instead, what has been achieved is generation of huge amounts of money through the auction process, but that will be really achieved only if mining takes place. Now there are reasons to seriously believe whether the mining will take place or not,” they added.

Citing the example of HINDALCO’s bidding of Rs 3,500 per ton, the experts said, “Take the instance of HINDALCO’s winning bid of Rs 3,500 per ton, when that type of coal is available for Rs 3,000 per ton. How can you make it viable?

Asked if power tariffs will go up because of aggressive bidding, the experts said, “If they are able to recover the fixed cost through the power tariff, it will be viable. They have to fix the power cost and coal mining in a viable manner. if they cannot recover through the coal cost, they will have to recover through the fixed charge and as such everything will get passed through and ultimately power tariffs will go up.”

Asked if apart from transparency, nothing much has been achieved through the entire auction process, the experts said, “That’s true. There is nothing that can spur real economic growth. Coal mining is potentially capable of doing that through faster growth in coal production, but that main objective was transparency.”

“Transparency assumed priority above the main objective of economic growth. So it is difficult to say whether the entire exercise will trigger economic growth,” they added.