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CIL might suffer setback in Q4 e-auctions due to muted power sector demand

Amid the projection of tepid demand from the power industry, the cement and steel sectors might come to the miner's rescue

Avishek Rakshit  |  Kolkata 

Coal shortage
Representative image

After a 76 per cent increase over the average notified price in the e-auctions during October-December last year, India might see auction prices falling as demand from the is expected to remain muted in the fourth quarter (Q4) of the current financial year.

Analysts are of the view that power demand usually declines in the winters and with India stepping up its sales, the country's power generators would be returning to near-normalcy latest by mid-February.

"In turn, this is going to affect demand from the in the e-auctions", an analyst from Motilal Oswal said.

In November 2017, despatches to the rose by 9.1 per cent to touch 40.9 million tonnes (mt) against the despatch of 37.6 mt in the year-ago period.

Backed by robust demand from this sector, special forward prices rose by 35 per cent over the notified prices of the grades in November while for the Q1-3 period, the increase over notified price stood at 25 per cent.

According to sector analysts, while the average prices during the Q3 period would have hovered around more than Rs 2,100 a tonne, it is likely to fall to Rs 1,800 a tonne in the fourth quarter.

"Trend in Q4 would depend upon the trend in the core sector and Index of Industrial Productivity growth numbers. However, allocation of fuel supply agreements to independent power producers holding power purchase agreements and further action on linkage auction would dampen the spot trade volumes," said Debasish Mishra, partner at Deloitte Touche Tohmatsu India LLP.

Last December, ten private power producers obtained a 27.18 mt annual linkage from the Maharatna company.

Earlier, India officials had also conceded to the fact that sales volume, as well as prices, may get hit if linkage agreements are prioritised as the demand for in the auctions would fall.

E-auctions directly add up to India's bottomline as the prices are often higher by at least 20 per cent over the notified price.

Thus, effectively, while the miner spends the same amount of money to mine the coal, which is either sold as linkage or put under the hammer, it earns 20 per cent higher in the auctions.

"Till now, around 80 mt of has been put up in the auctions and, in Q4, it is expected that another 20-30 mt will be routed through this route," a India official said.

However, amid the projection of tepid demand from the power industry, the cement and sectors might come to the miner's rescue.

During November, auction prices for the non-power segment rose by 52 per cent over the notified price, which was the highest in any given category of auctions. The demand was primarily led by cement manufacturers on account of the uncertainty around petcoke.

Mishra is of the view that the and may drive demand in the forthcoming auctions in the non-power category if prices are more economical than global and petcoke prices.

"Also, there are signs of improving industrial activity, which would lead to increased electricity demand and, hence, demand for thermal coal," he said.

Edwin Yeo, managing editor-coking and metallurgical coke at S&P Global Platts, however, believes that India's dependence on imported coking coal, which is primarily used by the industry, will continue despite India allocating the requisite black diamond in the auctions.

First Published: Thu, January 04 2018. 20:28 IST