Coal Auction - Round 1: Price War; Event Update :: Edelweiss

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The coal mine auctions so far have broadly been on expected lines, with aggressive bids for the operational mines. While the objective for the power sector bids has been mainly to achieve fuel security and retain the mines (except in 2 out of the 6 cases), the benchmark for non-power sector bids seem to be landed cost of imported coal costs (with most of the prior allottees losing them). Financial impact for power developers from the current bids is expected to be cushioned as most of them (except CESC) have some open/merchant capacity. For non-power developers the prospect of ramping up the output, higher utilisation of end-use plant due to assured fuel supply and lack of volatility in coal costs are the key mitigating factors. Going forward, we continue to believe due to the huge demand/supply mismatch bidding for power sector mines will be fierce, while we expect some moderation in the non-power space, especially for the non-operational mines.

Cut-throat bidding by power developers

The bidding for coal mines by the power developers have been overly aggressive with every bid being in negative (additional premium being offered). Securing/retaining fuel seems to be the predominant reason, even if it calls for foregoing some profit/incur marginal loss. However, developers are confident that due to the potential merchant sale (as coal cost would be only ~INR400-500/tonne as against the earlier assumed ~INR2,800-3,000/tonne) as well as tying up the spare/open capacity with better rates, losses will minimise.

Bid at import parity: Mantra of non-power developers

Similar to the aggression shown by the power companies, non-power companies also witnessed stiff competition in the first round of the coal block auctions to secure coal for their existing end-use plants. Most of the blocks got auctioned at prices much higher than expected with few blocks getting auctioned almost at par with the landed cost of imported coal. Key reasons for bids: 1) to hedge themselves from the risks of future rise in international coal prices; 2) secure fuel supply for thirty years at a price lower/at par than the landed price of currently subdued international coal prices; and 3) greater control in operating the end use plant.

Expect future bids to be mixed 

We expect power developers to bid aggressively as: 1) ~20GW of untied power capacity; 2) concerns from uncertainty of ramp up in Coal India’s (CIL) output; and 3) potential cash losses from an underutilised power plant till they get secured fuel supplies. Since there aren’t many significant stranded/loss making capacities, the non-power segment bids will largely lean towards import substitution.

LINK
https://www.edelweiss.in/research/Coal-Auction--Round-1-Price-War;-Event-Update/28429.html