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Web Exclusive | March 2013

Fall in global coal price may reduce bid price in auction

The decline in the price of coal in the international market may reduce the price that applicant companies will have to pay for securing coal blocks, reports suggest.

The government has planned to auction several coal blocks in the country through competitive bidding. The floor price of bidding will be based on the “intrinsic value” of a mine which, in turn, will be calculated using either the global benchmark prices or domestic prices offered by CIL.

The power ministry has already asked the coal ministry to link the intrinsic value to CIL prices or give 90 per cent discount in case global prices are used as benchmark for calculation.

The global prices of thermal coal recently plunged below CIL’s price of best-quality coal. This eliminated the traditional price differential between domestic and international rates.

Meanwhile, this implies the impact of the price-pooling mechanism on domestic companies would be less severe. In fact, the narrowing of the gap between domestic and international prices has negated the entire basis of pooling — differential with cost of imports — raising doubts on whether the mechanism is even required.

The fundamental reason for pooling is to spread the price differential between domestic and imported coal evenly across projects that have coal linkages with CIL.

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