Suggestions of Cement Sector on Procedure & … of Cement Sector on ... Pet coke, E-auction and other ... Policy for allocation of Coal Blocks should streamline and expedite the

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Cement Manufacturers’ Association

Presentation made to the Nominated Authority on

the suggestions of Cement Sector regarding

Allocation of Coal Blocks

New Delhi16.12.2014

Suggestions of Cement Sector on

Procedure & Methodology of

auction/ allocation of coal blocks : A Presentation before the Nominated Authority

2Cement Manufacturers’ Association

Who We Are……..Cement Manufacturers Association (CMA), the apex representative body oflarge cement manufacturers in India was established in 1961. It is a uniquebody in as much as it has both the private and public sector cement companiesas its members. It is a registered body under the Societies Registration Act XXIof 1860. Its registered office is in New Delhi, while the Corporate Office inNoida with Branch offices in Mumbai and Hyderabad. It represents 75%Cement manufacturers in the country.

Indian Cement industry is the 2nd Largest cement producer in the world,

next only to China.

The installed capacity is more than 360 Million TPA and in the year 2013-

14 the production was limited only to about 255 Million TPA. Approx 100

Mn TPA of capacity lying idle, leaving an investment of Rs. 60,000 Crores

stranded - mainly on account of non availability of assured fuel &

infrastructure sectors growth of meager 3%.

Vision to Achieve a Production of 550 – 600 MTPA by 2022.


Fuel Requirement for Cement

Cement is manufactured by heating limestone with small quantities of other

materials to 1450°C in a kiln, a process which requires large amounts of fuel.

A cement plant consumes 170 to 250 kg of Coal G 10 to G 11 Grade of Coal fuel

per tonne of clinker produced, depending on the raw materials and the process

used.

Projected Cement demand with 12% growth is 285 Mil Tonnes requiring 48 Mil.

Tonnes Coal for the Kiln and 20 Mil. Tonnes for the CPP 3400 MW in 2014-15.

With a projected growth of 15% the Coal requirement for production of 328 Mil.

Tonnes of Cement would require 56 Mil Tonnes Coal and 24 Mil. Tonnes for

CPP for 4000 MW in 2015-16.

Fuel Requirement vis-à-vis Investment of Various Sectors.

Sector Fuel Requirement Investment

Power – 1000 MW 5 Mn TPA Approx. Rs. 6000 Crores

DRI/Sponge Iron – 1 Mn

TPA

1.6 Mn TPA Approx. Rs. 500 Crores

Cement – 10 Mn TPA 1.7 Mn TPA Approx 6000 Crores


Fuel Procurement by CMA Members for Cement

Plants and its Captive Power Plants

% of Total Fuel 30.8% 30.3% 13.1% 19.9% 5.9%

Cement Industry gets only 31% of Coal requirement through FSA. No Coal linkage granted after 2007 while new cement

units and CPPs have come up and are in operation. Consequently, forcing cement industry to meet its fuel requirement

from costlier Imported Coal, Pet coke, E-auction and other fuels.

.


About Cement Sector

100 Million TPA cement capacity stranded in the financial year

2013-14 worth Rs. 60,000 crores of investments. It is imperative

that more and more coal blocks in surrounding area of the cement

plants be allocated to the sector to meet the rising fuel

requirement and for a sustainable growth of the sector.

More coal blocks should be allocated to Cement Sector as CementSector is a fully grown sector producing finished goods and

contributes to the socio economic development of the country.


Three Coal Blocks auctioned to the Steel, Sponge iron and Cement

industry did not receive any bids due to very high valuation of coal blocks

for upfront payment as well as floor price and other stringent terms &

conditions, though over 40 firms purchased bid documents in March, 2014.

Government had to cancel the Auction.

Care needed to consider above facts to make this round of block auction

successful.

Valuation of coal blocks to be done in a fair manner to attract investors.

Investors would look for long term supply from dedicated source and draw

benefit for the risks undertaken in investing in coal blocks.

Coal Block Auction in March 2014


Suggestions for Procedure and Methodology of

auction of Coal Blocks

Auction of coal blocks should be done as one auction event per day

for specific end use sector like cement (including CPP)

Auction should remain open for minimum one hour followed by

unlimited auto extensions by another 15 minutes. if any bid is

updated during the last lap of 15 minutes, bidding should be

extended by another 15 minutes & so on.

Bidder should be given visibility to see their ranking during the

bidding time. Name of bidders & bid price should not be visible to

other bidders as well as administrators during bidding time.

Contd....




Tie of bids at the same price should not be permitted. In case of tie,

system should flash message for the same enabling bidder to revise

the bid.

Advanced training followed by mock bidding should be provided

to the eligible bidders prior to actual bidding event to familiarize

with the situation of bidding process.

Online help desk should be available to the bidders to deal with

any technical difficulties faced by bidders. Logs of such issues

should be captured by the system to review post-bidding by the

nominated authority

System/IT requirement at bidder side should be well

communicated in advance to all biddersContd....




Bidding should be fully automated & system driven without any

human intervention.

Draft auction process & methodology should be released in public

domain for comments by all the stakeholders including

prospective bidders, well in time.

Cement Industry being the 3rd largest coal consumer in the

country, equitable and fair distribution of coal blocks to the

Cement Sector as per the future projection based on the Report of

the Working Group of Cement Industry for XII Five Year Plan

and beyond needs to be considered.

Contd....


Intrinsic value of the coal block be calculated by computing its Net Present

Value (NPV), based on Discounted Cash Flow Approach (DCF).

Linkage coal prices as applicable to the Power Sector needs to be taken

into account to derive the intrinsic value of coal block for upfront payment

and not the imported coal prices or multiple of linkage coal prices

Floor price should be kept nominal say at Rs 100 per ton. Competitive

bidding through e-auction will ultimately help discovery of prices. Fixing

very high floor price linked to international prices or multiple of domestic

prices will defeat the very purpose of auction which itself is a price

discovery mechanism.

Floor price should be common for PSUs / IPPs / Cement / others as dynamic

auction is a price discovery mechanism



Contd....




Most of the cement plants are located away from coalfield areas and

would on an average need transportation of coal beyond 400 kms up to

1500 kms. Hence, for determining intrinsic value of coal block, such

factors should be considered realistically

Only 10% of the bid price should be payable upfront and the balance

should be annuitized equivalent to the Mining lease period.

Flexibility should be provided for use of coal in any of the end use plant

to minimize distance for transportation of coal & also for optimum

utilization of coal linkages of existing end use plants of the successful

bidder under the same registered Company (both present and proposed

end use plant). Contd....


Infrastructures facilities, Coal Handling Plant, Washery, Coal Crusher,

Railway sidings, etc. developed at the coal mines by the prior allocattee

should be made available to the successful bidders to ensure commercial

viability of the Coal Blocks.

Information related to the Coal Blocks to be auctioned should be made

available in public domain by uploading the same on the Government

website to enable bidders to evaluate the Coal Blocks before participation

in auction.

Policy for allocation of Coal Blocks should streamline and expedite the

procedure for land acquisition and grant of various clearances required for

development and operation of coal mines, maintaining parity whether in

public or private sector. The FC & EC clearances should be obtained by the

Government prior to the Coal Blocks E-auction.

Suggestions for Procedure and Methodology

of auction of Coal Blocks

Contd....




In the previous auction of March 2014 coal requirement of 0.114 kg coal/ kg

of clinker produced was considered as the norm for assessing requirement.

This norm is at variance with the norm fixed by MOC in its minutes of the

SLC(LT) for Power/Sponge/Cement sector held on 27th June 2014 , which

decided the following.

“As coal is used for manufacture of clinker, therefore entitled coal

quantities under various LOAs will be worked out considering total

clinkerisation capacity of the plant (including pre-existing + enhanced

capacities). Based on this capacity, the total eligible quantity will be at the

rate of 17% of the clinker capacity as normative quantity”.

MOC to kindly consider the norm of 0.17 kg. coal /kg of clinker capacity as

coal requirement for assessing of coal requirement for auction of coal

blocks for the cement sector, in line with present actual coal consumption.

Contd....




Requirement of coal for CPP should be combined with the

Cement plant for assessing the total requirement of the Coal

for cement sector. High Gross Calorific value in the range of

G7 – G8 GCV Grades of coal is suitable for clinkerisation

and Low Gross Calorific Value/rejects/ middlings is suitable

for Captive Power Generation.

Quality of coal available in the coal blocks has extensive

variations. So poorer quality coal can be utilised for power

generation. Allowing coal use in both cement and Captive

Power Plant will help Government optimise coal usage &

conserve mineral resources.Contd....


Bid documents must clearly provide for beneficiation and utilisation of washery by

products in Captive Power Generation in the same or other end use plants. To ensure

optimum utilisation of coal blocks and also conservation of minerals.

Incentive should be given for Higher production. Excess production over requirement

of particular end use plant should be permitted to be diverted to other similar end-

use-plant of the same company This would infuse investment in coal mining to

achieve higher economies of scale, reducing the mining cost.

Coal bearing areas (Acquisition & Development) Act, 1957 for land acquisition for

mining coal applies only to the Central Public Sector Undertakings. To provide a level

playing ground in coal mining across the country, the Act needs to be made

applicable also to the private companies engaged in Coal Mining also to enable them

to acquire land through this Act.



Contd....




Maximum number of mines/reserves: As per section 10 (5) of the draft

Rules, the Nominated Authority may specify the maximum number of

mines and/or coal reserves that may be allocated to one or more

persons.

In case of captive consumption of coal for a specified end-use, cap on

maximum capacity or reserves should be linked to coal requirement of

bidder and investment capabilities as some bidders may have

significantly higher installed capacities compared to others resulting in

higher coal requirements.

Limiting the maximum capacity/reserves based on requirement will

ensure uniformity of mechanism for all bidders. Otherwise this may

prove to be hindrance to growth of industry..

Contd....




In order to satisfy the needs of the Cement Sector for an

equitable and fair distribution of Coal, blocks in the

surrounding areas of cement plant clusters should be reserved

for auction to cement sector end use as per the entitlement and

coal requirement.

Coal blocks situated in surrounding areas of cement clusters in

different parts of the country to be made available to cement

sector so that all cement manufacturers located in different part

of the country are able to source their coal requirement from

coal block in a fair & equitable manner.

Contd....




On the last occasion bid documents lacked clarity on following

points with regard to the payment of per tonne levy which should be

clarified in the bid documents:

- Base coal production to be considered for payment of per tonne levy, i.e.

actual coal produced and not on rated capacity.

- Point of time such amount would be payable i.e. upon mining of coal or

at the time of transportation out of mining lease area.

- Frequency of payment of amount etc.

- Such amount would be paid to whom

- Tax treatment of such amount.

Contd....


In Sum

Request consideration of our suggestions and

providing appropriate clarifications in the

proposed procedure and methodology of

auction of coal blocks and Bid Documents.

20Cement Manufacturers’ Association.

Thank YouEmail: [email protected]