Coal news and updates

Small bidders wary of methodology for CIL output auction

While the government is trying to put in place a transparent methodology for auctioning Coal India’s output, prospective bidders have urged caution against chances of the bids getting tilted towards financially strong companies and leaving out the weaker ones to fend for themselves.

The coal ministry has announced that state-run Coal India Limited’s (CIL) output, which is given to its buyers through linkages or fuel supply pacts, would now be auctioned. In a media conference last week coal secretary Anil Swarup announced that the auctions would be for the unregulated sectors like steel, cement, sponge iron, aluminium, captive power and fertilisers.

A draft approach paper put up by the coal ministry on its website prescribes supplier controlled ascending market clearing auction system (AMCAS) as the desired methodology to bid out CIL’s fuel supply pacts. It will be a market-based pricing mechanism and winning bidders would secure assured supply for five years. Different quanta of coal linkage would be earmarked for particular user industries and would be continuously reviewed at periodical intervals.

Under AMCAS, initial floor price will be set at the relevant CIL pithead price and for a particular link quantity. If bids are received for quantity greater than link quantity, then the floor price is increased in steps. Auction stops when bids are received for the auction quantity offered.

Justifying the new mechanism, the approach paper says in this methodology single price would prevent wide variations and speculation. “Prices are directed by the auctioneer through algorithmic iteration. Clearing price reflects an overall market equilibrium where demand matches supply at a single price,” the paper said. Also a single price would be acceptable to all bidders and price discovery would be attained while avoiding unviable prices, it says.

For auctioning linkages, CIL would be asked to chalk out an auction calendar to minimise speculation and allow achievement of realistic prices. To make more quantity of fuel available for the bids, CIL’s existing fuel supply pacts for the unregulated sectors would not be renewed.

An inter-ministerial committee constituted earlier this year to examine various structures and models for implementing auction of linkages recommended that bids should be based on a market based pricing structure and must ensure that all bidders have fair chance to get linkages.

The primary question arising in auctioning of CIL’s coal is absence of clarity on quantity of fuel the PSU can spare for the bids since it is is already committed by a Presidential directive to compulsorily supply coal for 78,000 MW to the power sector.

Secondly, the AMCAS methodology is fraught with a possibility of companies having stronger financial muscle winning most bids. Since the methodology is to match number of bidders with the quantity of coal being bid, it is likely that in case of higher bid prices,

the financially weaker ones would be weeded out. Not surprisingly that stakeholders like the Indian Captive Coal Power Producers Association (ICCPPA) believe that auctioning linkages would defeat the very purpose of ensuring the fuel to the needy enterprises.

“To me it appears to be an unconstitutional move. Coal mines were nationalised decades ago to ensure coal for all. The ministry is saying that auctions would be based on market pricing mechanism. There is no coal market in India as it is a monopoly sector. Then how do you categorise coal sector as a market,” ICCPPA secretary Rajiv Agarwal told The Indian Express.

“The auctioning of linkages is welcome, but they should be linked to end use plants. The auction rules should be transparent and should go in making the businesses viable …,” JSW Steel’s director, marketing Jayant Acharya told this newspaper.

In reply to an e-mailed query, an Essar Steel spokesperson said due to long gap in demand supply, the government should bring sufficient quantity in the auction to avoid aggressive bidding as seen in the coal mine auction held recently otherwise, the auction may be unviable to the business and yield no benefit.

source: http://indianexpress.com