Why Coal Block Auction Premium May Not Surge As Much As Expected

Rising coal prices were expected to drive up bids by companies participating in the thirteenth tranche of the auctions for the fossil fuel’s blocks. That premium is now likely to be capped.

Prices of coal, largely consumed by power plants, have fallen off the September peak globally. Thought they are still twice the levels prior to the spike.

What that means is the premium in the ongoing coal block auction will be higher than the twelfth tranche of bidding in 2020, according to ICRA Ltd. But it will be lower than what may have been expected in September. At least.

VR Sharma, managing director at Jindal Steel & Power Ltd., however, sees it falling even below last year. He cited abundant supply and limited interest from potential buyers.

Only 23 mines were bid against 88 offered and the same parties—including JSPL, Trident Chemphar, Adani Group, Jindal Power Ltd., and Vedanta Ltd. —applied for multiple blocks, he said.

What Has Changed

Multiple factors impact the auction premium—which is the percentage of revenue to be shared with the government. That includes how close a mine is to the facility of a bidder, and what kind of raw material security it provides.

There is an external link: prices of the coal sold in the spot market and the global market.

The premium or discounts are based on the urgency of fuel required and the participation in the coal block auction is a direct outcome of that, based on delivery schedules of imported coal, Brij Bhushan Agarwal, vice chairman and managing director of Shyam Metallics Ltd., told BloombergQuint over the phone. The company was the sole bidder for one block, prompting cancellation.

That urgency was felt in September. Coal prices surged as demand spiked ahead of the winter in the northern hemisphere. Indian power plants were low on fuel, prompting the government to ask Coal India Ltd. to prioritise supply to electricity generators over steel and aluminium producers in October. As prices of the fuel sold via e-auctions for immediate and forward delivery surged, the miner, too, advised its subsidiaries to avoid selling in the spot market.

The shortage persisted through October, but Coal India improved supply for November. That brought down the premium in spot e-auctions over the notified price, at least for power producers.

To be sure, the premium is still twice the average of the 12 months through October.

International benchmark coal prices, too, cooled from September highs. Yet, these too are nearly twice of what they were at the start of the year, according to Bloomberg data.

According to Ritabrata Ghosh, assistant vice president and sector head at ICRA, premium bid at coal block auctions is always lower than the premium that spot auctions fetch.

Around 27 coal blocks have been auctioned for commercial coal mining so far since the government opened up the sector, he said. These blocks fetched a median bid of 23% and a maximum bid of 75.5%—or the percentage of revenue to be shared with the government.

“These bids, so far, have been significantly lower compared with the spot e-auction premiums quoted by consumers for Coal India,” he said. “This suggests that buyers are displaying caution while bidding for mines, adequately pricing in the operating risks associated with commercialising a block.”

Still, according to Ghosh, international coal prices are poised to hover above the long-period median levels over the next three to four years due to continued shortage on account of stricter environmental guidelines. That, he said, indicates the possibility of median bids in the latest tranche of block auctions to be a little higher than 24% in the previous round even as prices ease.