Sensible of JSPL to not bid for low quality coal: Macquarie

So, I think it is a very sensible decision by JSPL management to withdraw at the right time. It doesn’t make any financial sense to bid at these levels. There are a lot of coal blocks which are coming up in the next few days. Coal secretary yesterday was highlighting about another 50-60 coal blocks coming up. So there is plenty of coal in India, there is no panic and JSPL should be able to get some decent coal blocks going forward.

Sumaira: Are you at all surprised by yesterday’s development where they managed to secure Gare Palma IV/2 as well as Gare Palma IV/3 at Rs 108 per tonne?

A: I am not at all surprised. The surprise was earlier when people were bidding irrationally but now since the coal secretary and the power secretary has categorically said that there won’t be any pass-through allowed in the fixed charge which a lot of companies are hoping that they will get, so I think now some sense is returning to the bidding in the power side because there is very little to manoeuvre and going forward I expect this trend to continue.

Secondly, those two mines are big mines, 6 million tonne and I don’t think any small player could have bid for it so that limits the competition in some sense. Also, the nearest railway is around 70 kilometers so it is not easy to evacuate this whole 6 million tonne out of that mine. So probably that also played on the minds of bidders.

There is a big performance security and guarantees that you have to give that if you don’t produce and evacuate, there is a big charge that you have to face as a penalty. So most of the companies are bidding for smaller coal blocks where they can evacuate the coal properly. This was a big coal block and evacuation was one of the key concerns.

Companies like Adani also are not bidding and they haven’t won any bids. Clearly, they also understand that it doesn’t make economic sense. So what is happening is change in trend from the initial euphoria and going forward, there will be more sensible bids for the power sector.

Nigel: With regard to this particular mine, the total requirement was around 6 million tonne, you said that maybe they can go ahead and bid for the other mines that are going to be put up for auction. The next round is on Sunday and that is for Gare Palma IV/7, that as well is a good mine. But the number of bidders who were there is the highest number, 16 bidders and qualified bidders are 12, do you expect them to go with a non-aggressive bid even over there and you think that will be practical as well?

A: Today the e-auction price of 3,000 kilocalorie coal is only Rs 1,600-1,700 per tonne. So if somebody is already bidding Rs 1,570 per tonne plus another Rs 500 per tonne for the mining cost, you are talking about Rs 2,000 per tonne which is way ahead of what the e-auction prices are today. This area is full of coal. So there is no dearth of coal blocks.

Currently we are seeing auction of coal blocks, which are operating or near operation but if you are willing to take a one-two year waiting game, the amount of coal available is plenty. So I think it makes real sense because for global commodities like aluminium and steel, it doesn’t make sense to go and bid at import parity pricing which we are seeing right now.

Nigel: We know that the minimum bidding price for this particular block that JSPL has lost out on is around Rs 1,500 per tonne, so all these are non-sensible because giving that the landed cost would be higher than the e-auction price, so what is the sensible cost then that these guys should go ahead and bet, will you have a negative view on the other companies? Balco is there, Sesa Sterlite, Hindalco, they are the qualified bidders for tomorrow’s auction, so do you think that they are not doing a very wise thing?

A: We wrote a report called Winner’s Curse. So the guys who are winning are not winning anything because they are inflating their cost to the highest level, which is import parity and they become uncompetitive as compared to their global peers who don’t have to bear this high cost. So the unique selling proposition (USP) for putting up an aluminium plant or a steel plant based on thermal coal in India was cheap availability and once you take that out, the economics suddenly change. So we are not so positive on the companies who are going so aggressive on bidding it. Only saving is that they are bidding on 10-20 percent of their requirement so hopefully senses will return and remaining 80-90 percent they will get at a lower price once underdeveloped blocks come for bidding.