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ICRA rating feature January 2015

ICRA RATING FEATURE

Corporate Ratings
Contacts:

Impending Coal Auction: High level of competition expected in the

non-regulated category

Jayanta Roy
+91 33 7150 1120
jayanta@icraindia.com
Ritabrata Ghosh
+91 33 7150 1107
ritabrata.ghosh@icraindia.com
Soumyajyoti Basu
+91 33 7150 1109
soumyajyoti.basu@icraindia.com

January 2015

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ICRA rating feature January 2015

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) nonregulated (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 sectors now 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 nonregulated 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, steel1 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, 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:eauction 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 eauction 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).

In 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 capacities. 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 deallocated blocks, the immediate task at hand for the Government remains the re-distribution, through auctioning or allocation, of the 422 operational 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 redistribution3.
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

Coal blocks earmarked for auction

-of which Power

Nos.

Geological Reserves
(million tonne)

% of Total
Reserves

65

8,914

100%

28

5,377

60%

-of which Steel (Coking Coal)

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)

109

1%

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

0%

101

17,496

Total (for 101 Schedule II blocks)

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, given the

Of 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 nogo area, and as such 41 blocks would be taken up for auction/allotment initially before the end of February 2015
3
A total of 101 coal blocks would be re-distributed in Round 1
4
In 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 blocks

Re-distributed to Power
6

Existing sectoral allocation

Iron & Steel
Commercial mining
Aluminium smelters (captive power)
Dispensation made against small isolated mines
Total

Geo. Res.
(mio. tonne)
2436
874
761
4071

Annual capacity
(MTPA)
47.78
17.4
23.5
88.68

Re-distributed to "Non-Regulated"
Geo. Res.
(mio. tonne)
380
9.3
389.3

Annual capacity
(MTPA)
4.9
0.3
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 sector10 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
Utkal B1

Prior allottee
Jindal Steel & Power Ltd.

Jitpur (for CPP)

Utkal C (for CPP)
Source: ICRA Research

Utkal Coal Ltd.

Geo. Res.
(mio. tonne)
228

Mine Capacity
(MTPA)
5.5

End-Use Plant

81

2.5

2.5 MTPA steel plant and 810 MW CPP commissioned at Angul

Ongoing steel capacity expansion to 6 MTPA
1320 MW CPP at Godda

209

3.4

120 MW operational CPP

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

Talabira-I

Operational

Hindalco Industries Ltd.

23

3.0

DurgapurII/Taraimar

Advanced stage

Bharat Aluminium Company Ltd.

211

4.0

Mahan

Advanced stage

Hindalco Industries Ltd.

Essar Power Ltd.

144

8.5

End-Use Plant
368 MW CPP and 0.16 MTPA aluminium smelter
operational at Hirakud
Ongoing 1200 MW CPP linked to 0.65 MTPA
aluminium smelter under development at Korba
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

GCV of coal
8
ROM cost/CFR cost
Port handling cost
Transportation cost
Royalty + Excise + SED + Clean energy cess etc.
Landed coal cost
Source: ICRA Research

Captive

Kcal/kg
Rs/tonne
Rs/tonne
Rs/tonne
Rs/tonne
Rs/tonne

CIL linkage

4100
9
600
500
320
1420

4100
950
500
467
1917

E-auction

4100
10
1520
500
635
2655

Imported Coal
South African
(for kiln)
6300
11
5448
250
500
6198

Indonesian
(for CPP)
4400
12
3268
250
500
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 manufacturers
Company
BALCO

Smelter and CPP

Location
Korba

Aluminum capacity
(in lakh tonnes)
8.95*

Captive Power
Capacity (in MW)
2010*

Current source of coal

NALCO

Angul

4.60

1200

Combination of e-auction and tapering linkage coal

Sesa
Sterlite
(Standalone)
Hindalco

Jharsuguda

5.00

1215

Combination of e-auction and imported coal

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

E-auction, imported and tapering linkage coal

*Includes BALCOs Korba III smelter with captive power plant, which is at an advanced stage of commission; ~source: Company Presentations
7
8

Excluding bid price

ROM: run of the mine; CFR: Cost and freight for imported coal (incl. import duty)
Based on Coal Indias cost of mining in FY14
10
Assuming e-auction price is 60% higher than notified price from Coal India
11
Calculated assuming FOB coal price of $65.7/tonne and includes import duty
12
Calculated assuming FOB price of $40/tonne and includes import duty
9

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

Amount

Unit

Energy Required
Station Heat Rate (Assumed)

15,000
2,550

units/MT
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%

Source: ICRA Research

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

Imported coal from Indonesia

Manufacturer X
Coal through e-auction

Coal through linkage

Point P: Maximum bid price of Rs 900/MT for X
Coal through captive sources

Source: ICRA Research

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).

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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 eauction 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
End-use plant details
DRI capacity
DRI : scrap mix in furnace
Linked steel billet capacity
Specific coal cons for DRI
Dolochar produced in kiln/tonne DRI
Waste heat recovery boiler capacity
Additional captive power capacity (CPP)
Station heat rate
Coal cost details
Cost of coal (for DRI kiln and CPP)/tonne
steel
Coal of coal/steel billet realizations
Source: ICRA Research

Unit
lac TPA
lac TPA
times
tonne
MW
MW
kcal/kwh

Captive

CIL linkage

e-auction
1
70:30
1.24
1.45
0.25
7.5
6.68
2550

Imported coal

1.45

1.45

Rs/tonne

1914

2584

3579

5671

6.71%

9.07%

12.56%

19.90%

13

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%.

13

South 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

Imported coal based

Coal cost per tonne of steel at various bid prices

Coal through e-auction

Coal through linkage

Coal through captive sources

Source: ICRA Research

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.

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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
Consumption norms
Specific consumption of coal per MT of clinker
Cement clinker ratio
Specific consumption of power per MT of cement
Station heat rate
Coal cost details
Cost of coal (for cement kiln and CPP)/tonne cement
Coal of coal/cement net realizations
Source: ICRA Research

Unit

Captive

CIL Linkage

tonne
kwh
kcal/kwh

0.21

0.21

Rs./tonne
%

283
7.08%

383
9.57%

e-auction
0.21
1.43
75
2550

530
13.25%

Imported coal

14

0.13

741
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%.

14

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

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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
Coal cost per tonne of cement at various bid prices

Imported coal based

Coal through e-auction

Coal through linkage

Coal through captive sources

Source: ICRA Research

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.

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Table 10: Estimated probable bids till indifference

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

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

15

16

Hit on OPM per Rs 100/MT increase in bid level

Steel

Aluminium

Cement

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

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 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).

15
16

OPM: operating margin

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

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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 risks
associated 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.

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 round, 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 also 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.

ICRA LIMITED

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ICRA rating feature January 2015

[Type text]
Annexure I: Detail of mines re-allocated in the upcoming first round of auction
Coal Block
Utkal B1

End-use
(Revised)

Previous allottee

Power

Geological Reserves
(mio. tonne)
228

Jindal Steel & Power Ltd.

Blocks re-allocated from

iron & steel sector

81

Advanced stage of
development
Advanced stage of
development
Advanced stage of
development

Jitpur (for CPP)

Power

Utkal C

Power

Utkal Coal Ltd.

209

Gare Palma IV/6

Power

Jindal 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

130

Not Operational

Radhikapur (West)

Power

210

Not Operational

Radhikapur (East)

Power

210

Not Operational

Ganeshpur

Power

Tata 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

Mahaveer Ferro Alloys Pvt. Ltd. Bhusan

Power & Steel Ltd.
Rungta Mines Limited
OCL India Ltd.
Ocean Ispat Ltd.
Tata Sponge Iron Ltd.
Scaw Industries Ltd.
SPS Sponge Iron Ltd.

Subtotal

ICRA LIMITED

Status

2,436

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ICRA rating feature January 2015

[Type text]
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

Amelia (North)

Power

101

Operational

Bicharpur

36

Trans Damodar

"NonRegulated"
"NonRegulated"
"NonRegulated"
Power

Madhya Pradesh State Mining Corporation

Ltd.

103

Expected to start
production in FY15
Advanced stage of
development
Advanced stage of
development
Operational

Ichhapur

Power

335

Not Operational

Tara

Power

260

Sondhia

"NonRegulated"
"NonRegulated"
Power

70

Advanced stage of
development
Not Operational

27

Operational

75

Not Operational
Operational

Mandla South
Dongeri Tal-II
Blocks re-allocated from
State owned commercial
miners

Namchi Namphuk
Suliyari
Subtotal
Talabira-I

Blocks re-allocated from

aluminium smelters

Blocks re-allocated from

earlier dispensation made
against small isolated
mines

ICRA LIMITED

72
175
West Bengal Mineral Development Trading
Corporation Ltd.
Chhattisgarh Mineral Development
Corporation Ltd.

Arunachal Pradesh Mineral Dev. Corporation

Ltd.

Power

Hindalco Industries Ltd.

1,254
23

DurgapurII/
Taraimar
Mahan

Power

Bharat Aluminium Co. Ltd.

211

Power

144

Utkal-E
Tubed

Power
Power

Hindalco Industries Ltd.

Essar Power Ltd.
National Aluminium Company Ltd.
Hindalco Industries Ltd.
Tata Power Ltd.

Subtotal
Gotitoria (East)
Gotitoria (West)

"NonRegulated"

BLA Industries Pvt. Ltd.

194
189

Advanced stage of
development
Advanced stage of
development
Not Operational
Not Operational

761
9.3

Operational

Page 17

ICRA rating feature January 2015

[Type text]

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