Delay in development of captive coal blocks proves costly for sponge iron makers

At least nine ferro-alloy manufacturers of the country availing themselves of ‘tapering (coal) linkage' against allotment of captive blocks, are now faced with a tough choice. The recent hike in prices ensured that they should pay import linked price for Coal India Ltd (CIL) supplies. To add the woes, many of the companies are far away from developing the captive assets.

Tapering linkage is granted at 40 per cent premium over notified price – which has moved up by 30 per cent (54 per cent for CIL mines in Orissa) for the de-regulated sectors on February 27.

According to a Coal Ministry notification in June 2010, the companies offered with tapering linkage during this fiscal are: Adhunik Metaliks Ltd, Bajrang Ispat Pvt Ltd, Nalwa Sponge Iron Ltd, Nilachal Iron and Power (acquired by Jai Balaji Industries), Rungta Mines Ltd, Shree Veerangana Steel, SMC Power Generation Ltd, SPS Sponge Iron Ltd and Visa Steel Ltd. Adhunik, Visa and Jai Balaji are listed entities.

When contacted, a Sree Veerangana official said their captive mine at Marki Mangli in Maharashtra would be operational in two months.

Mr Aditya Jajodia, Managing Director of Jai Balaji, said that the Dumri coal mine (allotted jointly to Nilachal and Bajrang) at Jharkhand would take another 6-9 months to be operational till then the company would continue availing itself of coal under the scheme.

Visa Steel Managing Director, Mr Vishal Agarwal, said that he had “no clue” when the captive block at Patrapara in Orissa (held jointly with Adhunik, SMC and others with Bhushan Steel as leader of consortium) be operational. Visa will approach the Coal Ministry for relief. Comments were not available from Bajrang, SMC, Nalwa, Rungta, Adhunik and SPS.

Background

Introduced in mid-2000, the scheme offers captive blocks owners a 3-4 year window to develop the mines and enjoy requisite supply of coal at notified price. Considering possible delays in mine development, CIL offers linkage for another four years – based on a tapering (or reducing) allocation formula – at 40 per cent premium.

It was assumed that the higher price tag would discourage use of CIL coal. In reality, the erstwhile low notified price made CIL supplies dirt cheap (even at 40 premium) in comparison to imports.

New dynamics

The rules of the game have changed following price hike. For example, the pit head cost of E grade coal (4300-5100 GCV) sourced from Orissa under ‘tapering linkage' has moved up from Rs 868 to Rs 1,330 a tonne.

Taking into account the freight and tax elements (55 per cent of final price), the average final price of the coal has increased by nearly 50 per cent from Rs 2,000 ($44) a tonne to Rs 3,000 ($67) a tonne.

Though India imports superior coal at landed prices exceeding $100, according to an analyst with India Coal Market Watch, a ‘like-to-like' import should have cost $80 a tonne. When contacted, a CIL official said that the company supplies a total of 10 mt to over 20 companies through the scheme. He said such linkage is charged a premium to compensate the missed opportunity to earn “bonus payments” from regular customers for supplies over and above the guaranteed quantities.

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