Contribution of global prices and loopholes in coalgate

Last Updated: Sat, Sep 29, 2012 18:47 hrs

The rush for grabbing coal reserves by companies with links to political heavyweights, as stated in a report by the Comptroller and Auditor General (CAG), shouldn’t come as a surprise. Superimposing the consistent rise in global coal prices over the annual data for coal blocks allocated through the past decade reveals the primary reason behind the alleged Rs 1.86-lakh crore scam.

The reserves allocated to companies moved in surprising tandem with global prices, year after year. Not only did the allocations jump with the rise in prices between 2002 and 2007, these also dropped when prices fell.

Global coal prices remained largely stable—below $25 a tonne—in the late 1990s and early 2000s. In India, the allocation of coal blocks began in 1993 and through the following decade, the government allotted 41 blocks.

In 2003, coal prices started rising, as demand from developing economies, particularly China, rose. The trend continued, with prices rising to $190 a tonne in 2008, when the global meltdown led to a crash in coal prices.

Consider the benchmark price for thermal coal exports from Newscastle in Australia, the world’s largest coal export harbour. The Newcastle prices rose from $25 a tonne in 2003 to $185 a tonne in early 2008. And, the number of blocks allocated in India jumped from five in 2004 to 52 in 2007.

From early 2008, the prices fell—from $185 a tonne to the current $80 a tonne. The number of blocks allocated in India also fell— from 52 in 2007 to 24 in 2008, 16 in 2009 and two in 2011. Between 1993 and 2011, the government had allotted 195 coal blocks, with reserves of a whopping 43 billion tonnes, to 289 companies.

A closer look at the growth in margins of coal mining companies between 2003 and 2008, along with the relative ease of bagging reserves, reveals why the coal scam was waiting to happen. Against a market price of $25-30 a tonne in 2003, the cost of production stood at about $20 a tonne in India, leaving a margin of only $5 on every tonne of coal mined. This margin rose to $130 a tonne in 2008, when prices jumped to $180 a tonne, even as the cost of production rose to $50 a tonne. “Coal mining did not make much business sense in 2003. But the possibility of huge profits due to a rise in market prices in 2008 ensured blocks that were hitherto unviable became economically viable. Hence, the mad rush for grabbing blocks. Otherwise, there is no business sense in acquiring an asset without experience,” said Dipesh Dipu, partner at Hyderabad-based energy and resources focused consulting firm Jenisse Management Consultant.

While the spurt in global coal prices provided economic backing to the rush for grabbing coal blocks, the loopholes in the allocation process provided an administrative environment favourable for the scam to flourish, experts say. “The process was such that companies that could prove their projects had performed well were found more eligible. There was a feeling that less influential people would find it difficult to get blocks in this ‘beauty parade’ of projects,” said a senior analyst from a consultancy firm.

In its first term, the United Progressive Alliance government, headed by Prime Minister Manmohan Singh, had floated the idea of competitive bidding for the allocation of captive blocks. However, a Bill to introduce auctioning was tabled in Parliament only in October 2008. The rules for competitive bidding in the allocation of blocks were notified on February 2 this year.

The government attributed the delay to conflicting opinions by the law ministry in formalising the legislation, as well as opposition from sates, which feared they would lose control over allocations.

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