India Coal auction may see strong bidding from Aluminium companies: ICRA

Aluminium companies having large smelters at advanced stages are likely to bid more aggressively in the upcoming India 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, according to a report by ICRA.

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.

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 Government’s 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.