Date | Jan 11, 2015:
Over-emphasising end-use to the detriment of commercial mining is what’s holding it back
What lessons have we learnt from two rounds of coal auctions? Yes, while they brought transparency to the allocation process, the policy did not break from the past. It continues to expect successful bidders to mine coal for specific end-use with a proviso that surplus coal may be offloaded in the open market.
Coal mining operations remain secondary to the main business, be it power generation among the regulated sectors, or steel, cement and aluminium production amongst the non-regulated sectors. The difference is that while in the non-regulated sectors the highest bidder (H-1) was awarded coal blocks with no price cap, in the regulated power sector, it was the lowest bidder (L-1) who won the blocks reserved for the sector. The policy thus continued to perpetuate a segmented market for coal depending on its end-use.
Auctions and after
While the H-1 auctions were more or less straightforward, L-1 auctions were beset with difficulties and anomalies. In a desperate attempt to retain blocks, some L-1 companies bid below zero or even negative value. That is, not only did they charge nothing for operating the mine but were also ready to subsidise mining operations out of their fixed power generation costs in order to give an extra ‘premium’ to the government. It was this ‘premium’ that comprised the great windfall, for which the government congratulated itself after the first round.
Subsequent to the conclusion of the auctions, the government directed the Central Electricity Regulatory Commission (CERC) to advise power discoms to cap payment of fixed charges from power producers in their power purchase agreements so that miners (power producers) would not have the luxury of recovering the exorbitant premiums committed by them in the race to win the auctions. Some bidders even accused the government of compromising its own auctions by changing goalposts after having received the bids!
However, there are doubts as to the economic viability of many of these projects. The government has to respond to L-1 winners whose commercial bids appear to make no sense, and yet have not violated auction procedures. Summary rejection of these bids will only lead to prolonged litigation.
So far, of the 204 mines slated for auction or allotment, only 29 have been awarded and of those awarded, barely 7 have started operations. If bidders in both, the regulated and unregulated sector, appear to be driven by compulsions to procure the coal blocks at any cost, some of the blame must be shared by the construction of the bidding process.
Captive mining
The problem with captive mining operations is that no major international mining company can ever find the auction process attractive enough to participate in. The model offered by the government does not fit in with their normal business models, for which long-term lease rights over the mine are essential in order to plan investments and manage mining operations. Such a lease provides certainty, which encourages full-fledged technical and managerial freedom and the confidence to commit large financial resources to extract maximum value from the asset.
Captive mining by definition is devoted to specific end-use objectives that compromise mining practices. It reduces mining to an intermediate step in the production of power, steel or cement. In the short term this only leads to poor exploitation techniques where easier and more accessible reserves are developed quickly and the more difficult core reserves ignored. The long-term health and geological integrity of the mines tends to get compromised. The manner of auctions and size of blocks has been such that they only attract companies whose priorities in their main business activity rather than in the optimal development of the mines themselves.
This is not a policy designed to bring in world-class practices. Further, more effort needs to go into the proper demarcation of coal blocks so that surface boundaries conform as far as possible to subsurface geology or at the very least to surface topography, obstacles and boundaries. Legislative reforms to modernise The Mines Act and the Coal Mines Regulations have been in random motion, doing the rounds of various central ministries for over six years.
Many of the opportunities missed this time could perhaps be realised by introducing auctions for genuine commercial mining. It is commercial mining that will bring to the Indian coal sector the much-needed benefits of competition and efficiency. However for it to be a success, free market pricing of coal would be required. With commodity prices world-over at a trough right now, this may be the moment to integrate India’s coal markets with the world and create a competitive coal industry in the country.
(Source: http://www.thehindubusinessline.com/)