Coal Auction Analysis

7/24/2019 Coal Auction Analysis

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ICRA rating featureJanuary 2015

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January 2015

Impending Coal Auction: High level of competition expected in the

non-regulated category
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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Executive Summary

The Government of India has come out with an Approach Paper for Auctioning of Coal Mines on December 17, 2014, which lays the ground rule for the coal block auctions.

Of the 204 de-allocated blocks, the initial list of 101 coal blocks which has been put up for auction or allotment in Round 1, has been classified into 2 categories: A) non -

regulated (for iron & steel, cement, and captive power plants) and B) regulated (for power sector). For the non-regulated sector, the forward auction method would be

applicable, where the highest bidder would be offered the block. For the power sector, the reverse auction method would be applicable, where the lowest bidder would win

the block.

In the first pool of 101 mines, Government of India has laid a clear emphasis on the power sector, allocating almost 80% of the identified geological reserves to the same, as

against around 60% allocated to the sector earlier in the entire pool of 218 mines. The sectors which have suffered in the first round of auction include steel (allocated 20%

of reserves earlier), commercial mining by State Government entities (allocated 14% of reserves earlier), and aluminium (for captive power generation). For these 101

blocks, having geological reserves of ~17.5 billion tonne, a closer analysis reveals that coal mines having geological reserves ~ 3.2 billion tonne, which were earlier allocated

to the non-regulated sector, are now reserved for the power sector. Moreover, with all non-regulated sectorsnow being clubbed under one group, ICRA expects the

competitive intensity in this group in the upcoming auctions to be high, especially given their lower share of coal reserves. Going forward, even if allocations to these non-

regulated sectors are increased from the current level in subsequent auctions, since the progress made by the remaining mines is lower than the mines being auctioned in

the first round, non-regulated sectors will continue to be at a disadvantage in the medium term.

Within the "non-regulated" space, iron & steel players have been the most impacted by the reallocations, followed by aluminium smelters. 10 non operational coal blocks,

having geological reserves of ~2.4 billion tonne and a combined annual mining capacity of ~48 million tonne per annum (MTPA), which were earlier allocated to iron & steel

players, have now been transferred to the power sector. Though none of these 10 blocks are operational at present, 3 are at an advanced stage of development, and steel

capacities linked to these blocks would be adversely impacted on account of the re-distribution. Similarly in the aluminium sector, which were earlier allocated coal blocks

for captive power generation, 5 blocks (including 1 operational block) having geological reserves of ~0.8 billion tonne and a combined annual mining capacity of ~23 MTPA

have now been transferred to the power sector.

For aluminium, steel1and cement players operating an end-use plant based on 100% linkage coal from Coal India, ICRA estimates that the maximum bid at which there

would be cost neutrality between captive coal and linkage coal is ~Rs 468/tonne, other components of landed cost of coal remaining the same. On the other hand, for

players currently dependant on a mix of linkage and e-auction coal, the range of bids would be higher than 100% linkage holders, and would depend on their linkage:e-

auction fuel mix. As per ICRAs analysis, for those players operating their end -use plants using 100% e-auction coal at present, cost neutrality between captive coal and e-

auction coal is likely to be achieved at a bid price of ~Rs 1,163/tonne. ICRA further estimates that in the extreme but likely case, where an end-use plant is 100% dependant

on imported coal, the maximum bid price where a player would be indifferent between captive coal or imported coal is the highest for steel (~Rs 2,625/tonne), followed by

aluminium (~Rs 2,189/tonne) and cement (~Rs 2,159/tonne).

1In this note, the analysis is carried out for steel producers making steel using the sponge iron route


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As per an ICRA analysis, coal cost relative to product price is the highest for the aluminium sector, which can vary in a range of around 14%-28% depending upon the source

of coal. The same for cement and steel players are estimated to vary in a range of around 9.5%-18.5% and 9%-20% respectively. Additionally, the operating margin of an

aluminium player has the highest sensitivity to coal price movements. Therefore, ICRA expects aluminium companies having large smelters at advanced stages to bid more

aggressively in the upcoming coal block e-auction than the cement and steel sector players, whose margins have similar (but lower than that of aluminium) level of coal

price sensitivity. The criticality of a captive coal mine would be further accentuated by the fact that new fuel-supply-agreements by Coal India are expected to be limited for

the non-regulated sector, and e-auction volumes of Coal India too is unlikely to increase significantly going forward.

The above calculations however do not factor in the risk appetite of bidding companies as well as their relative paying capac ities. Given the operational risks associated with

commissioning of a coal mining project as well as carrying out mining operations, auction participants are likely to factor in a risk discount, which would incorporate the

business and execution risks associated with captive mining. Moreover, companies that have no prior experience in coal mining operations are likely to apply a higher risk

discount, given their exposure to increased execution risks as compared to the experienced players. The extent of bid price will also be a function of the distance between

the end use plant of a bidding company and various sources of coal for the plant, since freight costs can be quite large relative to mining cost for plants at a distance from

the mine.


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Background

On September 24th

2014, the Honble Supreme Court of India (SC) de-allocated 204 of the 218 coal blocks allocated earlier through the Screening Committee/Government

dispensation routes. ICRA believes that this judgment would have far reaching implications for the Indian coal sectors growth trajectory going forward. Of the 204 de-

allocated blocks, the immediate task at hand for the Government remains the re-distribution, through auctioning or allocation, of the 422operational blocks before March

31, 2015, after which mining would not be allowed by the prior allottees. With these 42 blocks having a rated mine capacity of 80.9 million tonne per annum (MTPA) (~11%

of current domestic coal demand), any delay in the auctioning or allocation process would exacerbate the already tight domestic coal availability scenario in the near to

medium term. Additionally, the Government has further identified a list of 59 blocks (which have achieved substantial progress thus far) and has initiated the process of re-distribution

3.

The initial list of 101 coal blocks put up for auction or allotment has been classified into 2 categories: A) non -regulated (for iron & steel, cement, & captive power plants)

and B) regulated (for power sector). For the non -regulated sector, the forward auction method would be applicable, where the highest bidder would be offered the

block. For the power sector, the reverse auction method4 would be applicable, where the lowest bidder would win the block. The previous round of coal block auctions

carried out in June 2014 had received a lukewarm response. Thus, fine tuning of the auctioning guidelines before the next round scheduled in February 2015, as well as

appropriate evaluation of intrinsic value of each block to determine the floor price would be important factors determining the success of the upcoming auctions. The

Government of India has come out with an Approach Paper for Auctioning of Coal Mines on December 17, 2014 which lays the ground rule for the coal block auctions. In the

following note ICRA takes a closer look at the criticality of the upcoming coal block auctions to the "non-regulated" sectors of iron & steel, aluminium & cement.

Competitive intensity in the non-regulated sector in the coal block auctions is expected to be high, given their lower share of coal reserves now

Table 1: Sectoral coal block allocation for 101 mines in first round of auctions

Nos. Geological Reserves

(million tonne)

% of Total

Reserves

Coal blocks earmarked for auction 65 8,914 100%

-of which Power 28 5,377 60%

-of which Steel (Coking Coal) 3 697 8%

-of which non-regulated (Iron & Steel/Cement/Captive Power) 34 2,840 32%

Coal blocks earmarked for allotment 36 8,582 100%

-of which Power 35 8,473 99%

-of which Steel (Coking Coal) 1 109 1%

-of which non-regulated (Iron &Steel/Cement/Captive Power) 0 0 0%

Total (for 101 Schedule II blocks) 101 17,496

In the first pool of 101 mines, Government of India has laid a clear

emphasis on the power sector, allocating almost 80% of the

identified geological reserves to the same, as against around 60%

allocated to the sector earlier in the entire pool of 218 mines. The

sectors which have suffered in the first round of auction include

steel (allocated 20% of reserves earlier), commercial mining by

State Government entities (allocated 14% of reserves earlier), and

aluminium (for captive power generation). For these 101 blocks,

having geological reserves of ~17.5 billion tonne, a closer analysisreveals that coal mines having geological reserves ~ 3.2 billion

tonne, which were earlier allocated to the non-regulated sector,

are now reserved for the power sector. Moreover, given the

2Of the 42 operational blocks, 24 would be auctioned and 18 would be allocated by the Government of India; Ministry of Environment & Forests have indicated that 1 coal block falls in the no-

go area, and as such 41 blocks would be taken up for auction/allotment initially before the end of February 20153A total of 101 coal blocks would be re-distributed in Round 1

4In the reverse auction process, the concerned Regulatory Commission would determine the allowed energy charge based on the lowest bidders quoted bid price


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declining share of coal reserves, and with all the non-regulated sectors now being clubbed into one group, ICRA expects the competitive intensity in the upcoming auctions

to be high. Additionally, it is also observed that coal blocks earlier allocated to State Government owned commercial mining companies have now been re-allocated to the

power as well as non-regulated sectors, and as such the future prospects of such companies remain uncertain. The table below indicates the sectoral re-distribution of 27

coal blocks whose allocations have been modified by the Government. Details of the block-wise re-allocations are shown in Annexure I.

Table 2: Sectoral re-distribution of coal blocks5

Re-distributed to Power Re-distributed to "Non-Regulated"

Existing sectoral allocation Geo. Res.

6

(mio. tonne) Annual capacity(MTPA) Geo. Res.(mio. tonne) Annual capacity(MTPA)

Iron & Steel 2436 47.78 - -

Commercial mining 874 17.4 380 4.9

Aluminium smelters (captive power) 761 23.5 - -

Dispensation made against small isolated mines - - 9.3 0.3

Total 4071 88.68 389.3 5.2

Source: Ministry of Coal, ICRA Research

Within the "non-regulated" space, iron & steel players have been the most impacted, followed by aluminium smelters

Re-distribution of coal blocks away from the steel sector-

10 coal blocks, having geological reserves of ~2.4 billion tonne and a combined annual mining capacity of ~48 MTPA, which were earlier allocated to iron & steel players,

have now been transferred to the power sector. Though none of these 10 blocks are operational at present, 3 are at an advanced stage of development, and steel capacities

linked to these blocks would be adversely impacted on account of the re-distribution. The table below indicates the status of iron & steel end-use projects linked to coal

blocks which are at an advanced stage of development.

Table 3: Non-operational coal blocks which are at an advanced stage of development and re-distributed from the iron & steel to power sector

Coal Block Prior allottee Geo. Res.

(mio. tonne)

Mine Capacity

(MTPA)

End-Use Plant

Utkal B1 Jindal Steel & Power Ltd. 228 5.5 2.5 MTPA steel plant and 810 MW CPP commissioned at Angul

Ongoing steel capacity expansion to 6 MTPA

Jitpur (for CPP) 81 2.5 1320 MW CPP at Godda

Utkal C (for CPP) Utkal Coal Ltd. 209 3.4 120 MW operational CPP

Source: ICRA Research

5Of the 101 coal blocks in Round 1, sectoral allocation of 27 blocks have been changed, details of which can be found in Annexure I

6Indicates geological reserves


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Re-distribution of coal blocks away from the aluminium sector-

For the aluminium sector, for which coal blocks were earlier allocated for captive power generation, 5 blocks having a combined geological reserve of ~0.8 billion tonne

and annual mining capacity of ~23 MTPA have now been transferred to the power sector. Of these blocks, Hindalco's operational Talabira coal block, which was linked

to the company's captive power plant at Hirakud would be the most affected. Apart from the Talabira block, 2 other blocks were at an advanced stage. This includes

BALCO's DurgapurII/Taraimar block, for which the end-use project has been in progress, and Hindalco's Mahan coal block, where the end-use plant has already been

commissioned. Given that coal accounts for a considerable part of the overall cost of aluminium production, ICRA expects these aforementioned aluminium producers

to be key players in the upcoming auctions.

Table 4: Operational and non-operational blocks which are at an advanced stage of development and re-distributed from the aluminium to the power sector

Coal Block Status Prior allottee Geo. Res.

(mio. tonne)

Mine Capacity

(MTPA)

End-Use Plant

Talabira-I Operational Hindalco Industries Ltd. 23 3.0 368 MW CPP and 0.16 MTPA aluminium smelter

operational at Hirakud

DurgapurII/Taraimar Advanced stage Bharat Aluminium Company Ltd. 211 4.0 Ongoing 1200 MW CPP linked to 0.65 MTPA

aluminium smelter under development at Korba

Mahan Advanced stage Hindalco Industries Ltd.

Essar Power Ltd.

144 8.5 900 MW CPP and 0.36 MTPA aluminium smelter

at Bargawan commissioned in 2013

Source: Ministry of Coal, ICRA Research

Analysis of the criticality of a captive coal block to various industries in the non-regulated category

ICRA believes that the range at which bids will be placed by "non-regulated" players in the upcoming auctions would be dependent on a) quantum of investments already

made in the end-use projects, b) current source and landed cost of coal for a player, and its share in the overall cost structure, that would determine coals criticality for the

player, c) logistical economics associated with lifting coal from captive mine, d) financial health of the entity and e) prior experience in coal mining operations. In order to

gain insights on the probable range for auction bid prices than can come from the "non-regulated" players in the upcoming auctions, ICRA has estimated the bid prices at

which a player will be indifferent between operating a captive coal mine or continuing with its existing fuel source. Table 5 shows our estimates of the landed coal costs for

the various players across the three sectors


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Table 5: Estimated landed cost of coal from various sources

Particulars Unit Captive7 CIL linkage E-auction Imported Coal

South African

(for kiln)

Indonesian

(for CPP)

GCV of coal Kcal/kg 4100 4100 4100 6300 4400

ROM8cost/CFR cost Rs/tonne 600

9 950 1520

10 5448

11 3268

12

Port handling cost Rs/tonne - - 250 250Transportation cost Rs/tonne 500 500 500 500 500

Royalty + Excise + SED + Clean energy cess etc. Rs/tonne 320 467 635 - -

Landed coal cost Rs/tonne 1420 1917 2655 6198 4018


A) Estimation of cost of coal per metric tonne of aluminium production

Aluminium smelting is an energy intensive process, with cost of power being the largest driver of the overall cost of aluminium production. Therefore, all the aluminium

smelters in India have been set up with a captive power plant. The following table shows the list of aluminium smelters in India, size of their captive power plant and their

current source of coal.

Table 6: Source of coal for aluminium manufacturersCompany Smelter and CPP

Location

Aluminum capacity

(in lakh tonnes)

Captive Power

Capacity (in MW)

Current source of coal

BALCO Korba 8.95* 2010* E-auction, imported and tapering linkage coal

NALCO Angul 4.60 1200 Combination of e-auction and tapering linkage coal

Sesa Sterlite

(Standalone)

Jharsuguda 5.00 1215 Combination of e-auction and imported coal

Hindalco Hirakud 1.61 467 Talabira-I coal mines. The captive mine has been de-allocated

Hindalco Renukoot/Renusagar 3.45 742 Mostly on e-auction coal

Hindalco -Mahan Bargawan, MP 3.59 900 Mostly on e-auction coal

Hindalco - Aditya Lapanga, Odisha 3.59 900 Mostly on e-auction coal*Includes BALCOs Korba III smelter with captive power plant, which is at an advanced stage of commission; ~source:Company Presentations

7Excluding bid price

8ROM: run of the mine; CFR: Cost and freight for imported coal (incl. import duty)

9Based on Coal Indias cost of mining in FY14

10Assuming e-auction price is 60% higher than notified price from Coal India

11Calculated assuming FOB coal price of $65.7/tonne and includes import duty

12Calculated assuming FOB price of $40/tonne and includes import duty


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Table 7: Cost of coal per metric tonne of aluminium production

Particulars Amount Unit

Energy Required 15,000 units/MT

Station Heat Rate (Assumed) 2,550 Kcal/KwH

Captive Coal Linkage Coal Coal Through E-Auction Imported Indonesian Coal

Coal Required per MT of aluminium production (in MT) 10.37 10.37 10.37 9.66

Estimated Landed Coal Cost (in Rs MT) 1,420 1,917 2,655 4118

Total coal cost per MT of aluminium (in Rs/MT of Aluminium) 14,718 19,870 27,522 38,811

Current Aluminium Realization (Benchmark + Spot Premium, in Rs/MT) 1,38,600 1,38,600 1,38,600 1,38,600

Coal Cost/Aluminium Realization (in %) 10.62% 14.34% 19.86% 28.00%


As indicated in table 6, domestic primary aluminium manufacturers use coal from multiple sources for captive power generation. Hence, the share of coal cost in aluminium

production depends on the mix of sources used for procurement. However, given the high energy intensity, cost of coal has a strong bearing on the profits. For instance, as

per our estimates, the difference on EBITDA/MT for a player having a captive coal mine and a player procuring coal only through imports can be as high as 24,093/MT (~17%

of current realization). Thus, apart from the end-use plants linked to the 3 captive blocks (as indicated in table 4) whose allocations have been changed to the power sector,

other existing players are also likely to be interested in securing captive coal blocks.


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Estimation of points of indifference for bidding by aluminium players

Based on the above cost calculations in table 7, inferences can be drawn on the probable ranges in which an aluminium smelter can bid in the upcoming auctions, depending

on their existing source of fuel.

Chart 1: Coal cost per tonne of aluminium at various bid prices


Chart 1 shows a linear coal cost curve for aluminium manufacturers with respect to the bid price. A hypothetical player X has been shown, with a coal cost of Rs 25,000/MT

of metal. The player can bid upto the level P on the cost curve without increasing its coal cost, i.e. it can bid upto ~Rs 900/MT (including the floor price of Rs 150/MT).

Coal through linkage

Coal through e-auction

Imported coal from Indonesia

Coal through captive sources

Manufacturer X

Point P: Maximum bid price of Rs 900/MT for X


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For manufacturers using only linkage coal, the range of indifference extends upto ~Rs 468/tonne. For a player using a mix of linkage and e-auction coal, as the share of e-

auction coal in the fuel mix increases, the indifference point gradually progresses from Rs 468/tonne (for 100% linkage coal) to Rs 1,163/tonne (for 100% e-auction coal). At

the extreme end, players whose captive power plants are based solely on imported coal from Indonesia, can bid as high as ~Rs 2,189/MT till its point of indifference is

reached. Nonetheless, given the higher operational risks associated with captive mining, auction participants are likely to factor in a proportionate risk discount, which would

incorporate the business and execution risks associated with captive mining. Moreover, companies that have no prior experience in coal mining operations, are likely to

apply a higher risk discount, given their exposure to increased execution risks as compared to the experienced players.

B) Estimation of cost of coal per metric tonne of steel production

Table 8: Cost of coal per metric tonne of steel production through DRI route having captive power plant

Key Assumptions Unit Captive CIL linkage e-auction Imported coal13

End-use plant details

DRI capacity lac TPA 1

DRI : scrap mix in furnace - 70:30

Linked steel billet capacity lac TPA 1.24

Specific coal cons for DRI times 1.45 1.45 1.45 1

Dolochar produced in kiln/tonne DRI tonne 0.25

Waste heat recovery boiler capacity MW 7.5

Additional captive power capacity (CPP) MW 6.68

Station heat rate kcal/kwh 2550

Coal cost details

Cost of coal (for DRI kiln and CPP)/tonne

steel

Rs/tonne 1914 2584 3579 5671

Coal of coal/steel billet realizations % 6.71% 9.07% 12.56% 19.90%


Share of coal cost as a percentage of steel billet realizations for integrated steel manufacturers having captive coal, as well as captive power plant is estimated at 6.71%

(excluding bid price). As against the same, for the players using 100% linkage coal or 100% e-auction coal from Coal India, the share of coal cost increases to 9.07% and

12.56% respectively. For 100% import coal based units, the share of coal cost is even higher at 19.90%.

13South African coal assumed for DRI kiln; Indonesian coal assumed for CPP


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Estimation of points of indifference for bidding by steel players

Chart 2: Coal cost per tonne of steel at various bid prices


As indicated in Chart 2, a steel manufacturer depending solely on linkage coal can place bids upto ~Rs 468/tonne. For manufacturers using a mix of e-auction and linkage

coal, the range of indifference extends upto ~Rs 1,163/tonne. At the extreme end, players whose DRI kilns and captive power plants are based solely on imported coal can

bid as high as ~Rs 2,625/MT till its point of indifference is reached.

Imported coal based




Coal cost per tonne of steel at various bid prices

C i f 20


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C) Estimation of cost of coal per metric tonne of cement production

Table 9: Cost of coal per metric tonne of cement production having captive power plant

Key Assumptions Unit Captive CIL Linkage e-auction Imported coal14

Consumption norms

Specific consumption of coal per MT of clinker tonne 0.21 0.21 0.21 0.13

Cement clinker ratio - 1.43

Specific consumption of power per MT of cement kwh 75

Station heat rate kcal/kwh 2550

Coal cost details

Cost of coal (for cement kiln and CPP)/tonne cement Rs./tonne 283 383 530 741

Coal of coal/cement net realizations % 7.08% 9.57% 13.25% 18.52%


Share of coal cost as a percentage of net realizations for cement manufacturers having captive coal and captive power plant is estimated at 7.08%. As against the same, for

players using 100% linkage coal or e-auction coal from Coal India, the share of coal cost increases to 9.57% and 13.25% respectively. For 100% import coal based units, the

share of coal cost is even higher at 18.52%.

14South African coal assumed for kiln; Indonesian coal assumed for CPP

ICRA ti f t J 2015


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Estimation of points of indifference for bidding by cement players

Chart 3: Coal cost per tonne of cement at various bid prices


As indicated in Chart 3, a cement manufacturer depending solely on linkage coal can place bids upto Rs 468/tonne, which is the region where there would be cost savings for

the player. For manufacturers using a mix of e-auction and linkage coal, the range of indifference extends upto Rs 1,163/tonne. At the extreme end, players whose plants are

based solely on imported coal, can bid as high as ~Rs 2,159/MT till its point of indifference is reached.

Imported coal based




Coal cost per tonne of cement at various bid prices

ICRA ti f t J 2015


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Table 10: Estimated probable bids till indifference

Max bid till indifference

(in Rs/MT)

Steel Aluminium Cement

Only linkage coal 468 468 468

Only e-auction coal 1,163 1,163 1,163

Only imported coal 2,625 2,189 2,159

Table 11: Estimated hit on operating margin per Rs 100/MT increase in bid price level

Steel Aluminium Cement

Hit on OPM15

per Rs 100/MT16

increase in bid level 0.50% 0.79% 0.53%

Source: ICRA Research; *Maximum probable bids for a manufacturer using a mix of sources would lie somewhere in between the two levels

15OPM: operating margin

16Floor price has been set by the Government at Rs 150/MT in the auction process

Key findings in coal cost criticality analysis for "non-regulated" sectors (everything else remaining the same):

Coal cost relative to product price is the highest for the aluminium sector, which can vary in a range of around 14%-28% depending upon the source of coal. The

same for cement and steel players are estimated to vary in a range of around 9.5%-18.5% and 9%-20% respectively. Additionally, the operating margin of an

aluminium player has the highest sensitivity to coal price movements. Therefore, ICRA expects aluminium companies having large smelters at advanced stages to

bid more aggressively in the upcoming coal block e-auction than the cement and steel sector players, whose margins have similar (but lower than that of

aluminium) level of coal price sensitivity. The criticality of a captive coal mine would be further accentuated by the fact that new fuel-supply-agreements by Coal

India are expected to be limited for the non-regulated sector, and e-auction volumes of Coal India too is unlikely to increase significantly going forward.

For aluminium, steel and cement players operating an end-use plant based on 100% linkage coal from Coal India, ICRA estimates that the maximum bid at which

there would be cost neutrality between captive coal and linkage coal is ~Rs 468/tonne (refer Table 10). On the other hand, for players currently dependant on a

mix of linkage and e-auction coal, the range of bids would be higher than 100% linkage holders, and would depend on their linkage:e-auction fuel mix. As per

ICRAs analysis, for those playersoperating their end-use plants using 100% e-auction coal at present, cost neutrality between captive coal and e-auction coal is

likely to be achieved at a bid price of ~Rs 1,163/tonne. ICRA further estimates that in the extreme but likely case, where an end-use plant is 100% dependant on

imported coal, the maximum bid price where a player would be indifferent between captive coal or imported coal is the highest for steel (~Rs 2,625/tonne),

followed by aluminium (~Rs 2,189/tonne) and cement (~Rs 2,159/tonne).

ICRA rating feature January 2015


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Conclusion

The financial year 2014-15 has been a year of immense significance for the domestic coal sector. The various policy actions of the SC and Government of India have created

an environment of rule-based coal mine allocation in the country, as against a non-transparent and arbitrary practice prevailing earlier, as observed by the SC. The draft

auction rules have been framed in such a manner so as to allow only the serious bidders to participate (with participation being linked to both actual investments as well as

requirements) in the upcoming auctions. The Governments immediate focus seems to be the power sector, which is reflected by the increase in the share of blocks

allocated to the sector in the first round, as compared to its original allocation. Additionally, the reverse auction process will put a cap on power tariff, which is a move that

would benefit power-intensive industries. However, the non-regulated sectors have been given lower allocation in coal reserves to be auctioned in the first round, which

will increase their dependence on costlier outside coal. Moreover, with iron & steel, cement and captive power units being clubbed under one group, the level of

competition among these companies in the upcoming auctions is expected to be high. Going forward, even if allocations to these non -regulated sectors are increased

from the current level in subsequent auctions, since the progress made by the remaining mines is lower than the mines being auctioned in the first ro und, non-regulated

sectors will continue to be at a disadvantage in the medium term.

As per an ICRA analysis, among the non-regulated sectors, coal cost relative to product price is the highest for the aluminium sector. Additionally, its margin als o has the

highest sensitivity to coal prices. Therefore, ICRA expects aluminium companies having large smelters at advanced stages to bid more aggressively in the upcoming coal

block e-auction than the cement and steel sector players, whose margins have similar (but lower than that for aluminium) level of coal price sensitivity.

Key findings in coal cost criticality analysis for "non-regulated" sectors (everything else remaining the same) (contd...):

However, the impact of bids on the operating profitability would be different for different sectors. As Table 11 shows, the sensitivity of OPM to coal bids is the

highest for aluminium, followed by cement and steel respectively. Therefore, an aluminium player will be impacted the most in case of bids at the same level as

that by a cement or a steel player. The extent to which a player can bid will depend upon its profitability without coal cost, the sensitivity of OPM to coal prices,

and the managements target level of profitability.

The above calculations however do not factor in the risk appetite of bidding companies as well as their relative paying capacities. Given the operational risksassociated with commissioning of a mining project as well as carrying out mining operations, auction participants are likely to factor in a risk discount, which

would incorporate the business and execution risks associated with captive mining. Moreover, companies that have no prior experience in coal mining operations

are likely to apply a higher risk discount, given their exposure to increased execution risks as compared to the experienced players. The extent of bid price will also

be a function of the distance between the end use plant of a bidding company and various sources of coal for the plant, since freight cost can be quite large

relative to mining cost for a plant at a distance from the mine.



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Annexure I: Detail of mines re-allocated in the upcoming first round of auction

Coal BlockEnd-use

(Revised)Previous allottee

Geological Reserves

(mio. tonne)Status

Blocks re-allocated from

iron & steel sector

Utkal B1 Power

Jindal Steel & Power Ltd.

228Advanced stage of

development

Jitpur (for CPP) Power 81

Advanced stage of

development

Utkal C Power Utkal Coal Ltd. 209Advanced stage of

development

Gare Palma IV/6 PowerJindal Steel & Power Ltd.

Nalwa Sponge Iron Ltd.156 Not Operational

North Dhadu Power

Jharkhand Ispat Pvt. Ltd.

Pavanjay Steel & Power Generation Pvt. Ltd.

Electrosteel Castings Ltd.

Adhunik Alloys & Power Ltd.

924 Not Operational

Bijahan Power Mahaveer Ferro Alloys Pvt. Ltd. BhusanPower & Steel Ltd.

130 Not Operational

Radhikapur (West) Power

Rungta Mines Limited

OCL India Ltd.

Ocean Ispat Ltd.

210 Not Operational

Radhikapur (East) Power

Tata Sponge Iron Ltd.

Scaw Industries Ltd.

SPS Sponge Iron Ltd.

210 Not Operational

Ganeshpur PowerTata Steel Ltd. (for CPP)

Adhunik Thermal Energy Ltd. (for IPP)138 Not Operational

Seregarha Power Arcelor Mittal India Ltd. (for CPP)GVK Power (Govindwal Sahib) Ltd. (for IPP)

150 Not Operational

Subtotal 2,436



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Annexure I: Detail of mines re-allocated in the upcoming first round of auction (contd)

Coal Block End-use

(Revised)

Previous allottee Geological Reserves

(mio. tonne)

Status


State owned commercial

miners

Amelia (North) Power Madhya Pradesh State Mining Corporation

Ltd.

101 Operational

Bicharpur "Non-

Regulated"

36 Expected to start

production in FY15

Mandla South "Non-

Regulated"

72 Advanced stage of

development

Dongeri Tal-II "Non-

Regulated"


development

Trans Damodar Power West Bengal Mineral Development Trading

Corporation Ltd.

103 Operational

Ichhapur Power 335 Not Operational

Tara Power Chhattisgarh Mineral Development

Corporation Ltd.


development

Sondhia "Non-

Regulated"

70 Not Operational

Namchi Namphuk "Non-

Regulated"

Arunachal Pradesh Mineral Dev. Corporation

Ltd.

27 Operational

Suliyari Power 75 Not Operational

Subtotal 1,254


aluminium smelters

Talabira-I Power Hindalco Industries Ltd. 23 Operational

DurgapurII/

Taraimar

Power Bharat Aluminium Co. Ltd. 211 Advanced stage of

development

Mahan Power Hindalco Industries Ltd.

Essar Power Ltd.


development

Utkal-E Power National Aluminium Company Ltd. 194 Not OperationalTubed Power Hindalco Industries Ltd.

Tata Power Ltd.

189 Not Operational

Subtotal 761


earlier dispensation made

against small isolated

mines

Gotitoria (East)

Gotitoria (West)

"Non-

Regulated"

BLA Industries Pvt. Ltd. 9.3 Operational



18/18

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