New Delhi: Indian metal and cement companies have bid aggressively for coal blocks in the country's first auctions to sell mines as they look to cut imports and their dependence on inefficient government monopoly Coal India Ltd (COAL.NS).
The auction follows a court cancellation of all previous licences and the initial bidding suggests companies are keen to secure supplies as the economy improves.
The companies are allowed to bid for enough coal to fuel a 50 per cent expansion of their current metal or cement capacity.
The stiff competition may strain the balance sheets of the winners, including aluminium makers Hindalco Industries (HALC.NS) and BALCO, Jaiprakash Associates (JAIA.NS), Sunflag Iron and Steel (SFLG.NS), OCL Iron & Steel, Reliance Cement and Essar Power.
Most of the winning bids so far have been higher than analysts' expectations based on the benchmark price of state-run Coal India (COAL.NS).
OCL, for example, would pay 2,302 rupees ($37) per tonne, 50 per cent more than Coal India's average price for the grade available in the mine OCL has won.
The companies have declined to comment on the auctions until the whole process is complete, which should be on March 5.
Though world coal prices have fallen about 30 per cent over the past year, a tonne of imported steelmaking coal costs about $120 in Indian ports while the thermal variety comes for $70.
"We should not read too much into the current prices companies are bidding as we are looking at the next 30 years," said Dipesh Dipu, a partner with Jenissi Management Consultants.
"With their own mines, companies will have control over costs, while for imports you can forecast just for a year. Also, given the growth in the economy, Coal India is unlikely to be able to meet demand."
India is on track to overtake the United States as the second-largest coal consumer after China this decade, but Coal India has failed to ramp up supply in line with demand.
Coal India's prices are set according to cost rather than based on supply and demand in the market and its costs are high at 1,118 rupees per tonne, more than half of which comes from employee and social costs.
For the private companies, mining costs are likely to be between 400 and 600 rupees per tonne, according to Pinakin Parekh, an analyst with J.P. Morgan.
The Coal Ministry has so far auctioned 13 blocks in the first phase of 18 blocks until February 22.
A power sector auction is taking place under a reverse bidding process in which the lowest bidder wins the mine, as a way of keeping power tariffs under control.
The second round of auctions, from February 25 to March 5 for 43 blocks, is likely to be more sedate as aggressive bidders will have got their mines by then, Dipu said.