Will coal linkage auction really help the deregulated sector?

The Centre plans to take the auction route to offer coal linkages to deregulated sector such as steel, cement and aluminium, among others.

A draft ‘approach paper’ expects this move to end the discretionary powers of the government in allocating fuel produced by Coal India Ltd, and the associated negatives.

Theoretically, it’s a welcome step that should, besides shoring up CIL’s earnings, correct a historic wrong.

Though arbitrary allotment of linkages was prevalent in the power sector, the deregulated sector hardly got anything. Records show that not a single linkage has been made for this sector since 2007.

The share of the deregulated sector in CIL’s fuel sales dipped from 20 per cent to approximately 10 per cent over the last decade. New capacities coming up in these sectors were left looking for open market purchase of the fuel.

According to an analyst with a top consulting firm who didn’t want to be quoted, in its latest draft policy paper, the government could have ensured the deregulated sector got a slice of CIL’s increasing production. But the paper’s silence raises the suspicion that the move, contrary to the government’s claims, is primarily a revenue maximisation initiative. After all, since a steel or an aluminium maker sells products at market price, there is no reason for it to get the benefit of cheap fuel, seems to be the rationale.

The deregulated sector has gotten used to such an approach since 2010, when CIL adopted a dual pricing method forcing these units to pay 40 per cent more than power plants.

But the higher price was no assurance of getting the coal. And, forget linkages, the government even forced CIL to cut down on open market offerings even though close to 11 per cent of its annual production lay piled up at the pithead.

This step-motherly treatment and falling international prices turned the deregulated sector to look at imports. This proved costly to both the country and CIL. Last year, India imported 51 million tonnes of thermal coal even as CIL’s pithead stock soared from 49 mt to 54 mt.

In this milieu comes the government move to auction linkages but the deregulated industry is hardly convinced that this will really solve its problems, as it only sees a redistribution of existing linkages at a higher price. CIL shares are already soaring, in anticipation.