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Understanding the NCI nitty-gritty: Methodology & pricing concerns
Non Coking
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25 Sep 2020, 12:20 IST
Understanding the NCI nitty-gritty: Methodology & pricing concerns

Taking a major leap towards initializing commercial coal mining, the government has amended the existing auction process to entice higher involvement of industry participants.

One of the key features of the revision involves introduction of "National Coal Index" which would form the basis for determining revenue share of auctioned mines.

Although the exercise was aimed to benchmark the prices at which the blocks are sold, there remain certain concerns regarding its application which the participants are finding difficult to adapt.

What is NCI?

National Coal Index (NCI) is a price index developed by Indian Statistical Institute, by computing weighted combination of three price sales channels viz. (a) notified price of CIL, WCL and SCCL, (b) auction price of CIL, and (c) imported coal price.

Thereafter, these are categorized as per five sub-sectors, in order to derive the individual grade-wise prices for non-coking and coking coal. The weights, which are positive fractions that sum up to one, represent the importance given to different channels.

Reference weightage of sub-sectors for each sales channel has been tabulated below, based on the price levels seen during FY18:

Sub-sector Description Channel-wise Weightage
Notified Price Auction price Import Price
Non-Coking, Top Grade G1 to G6 38.33 11.42 50.25
Non-Coking, Middle Grade G7 to G14 51.38 13.05 35.56
Non-Coking, Bottom Grade G15 to G17 45.43 54.57 -
Coking, Top Grade ST-I and ST-II 1.04 1.12 97.84
Coking, Bottom Grade W-I to W-IV 79.68 20.32 -

How it will work?

After computing the weightage for various price channels, the ministry declares grade-wise representative prices of coal in order to evaluate the amount to be paid by successful bidder as monthly revenue against the coal produced from the acquired block.

The monthly payment is determined as product of:

a) Final Offer;
b) Total quantity of coal on which the statutory royalty is payable during the month; and
c) Notional Price or Actual Price, whichever is higher.

Notional price represents the price arrived at after adjusting the representative price with sub-index of NCI of the relevant basket of coal grade(s) on the date on which royalty becomes payable.

Whereas, Actual price represents the sale invoice value of coal, net of statutory dues including taxes, levies, royalty, contribution to NMET and DMF etc.

Illustration: Methodology of determination of monthly payment on the basis of NCI for a bidder who has quoted final offer of 10% is tabulated below:

Particulars G11 G12 G13
Representative Price (A) 1640 1420 1380
National Coal Index of coal grade as on issuance of tender document (B) 105 105 105
National Coal Index of coal grade on the date on which royalty becomes payable (C) 115 115 115

 

Coal Grade Quantity on which royalty is payable (D) Notional Price (A*C/B) Actual Price Max of Notional & Actual Price (E) Revenue Share (D*E*Final Offer/10)
G11 0.5 1796 1800 1800 9.00
G12 0.7 1555 1550 1555 10.89
G13 0.6 1511 1500 1511 9.07

Quantity in mn t | Prices in INR/t | Revenue Share in INR Crore

It may be noted that in addition to the monthly payment, other statutory dues including taxes, levies, royalty, contribution to NMET and DMF, etc. would be payable as per applicable law.

What are the drawbacks?

The representative prices highlighted under National Coal Index (NCI) visibly indicate that the grade-wise coal prices have significantly exceeded the notified price set by CIL. Therefore, the sales of coal from the blocks acquired in the auction would always be at a risk of rejection as buyers would always prefer low priced coal supplied by CIL.

Price Comparision NCI vs CIL

Moreover, concerns have been raised regarding the constitution of bands in terms of GCV, which would unnecessarily impact prices of lower grade coal due to rise in weightage on account of imports for the higher grades.

Considering the middle tier for non-coking coal, the volume of imported coal falling under the grades ranging from G7 to G9 is quite large, which significantly pushes the weightage of coal higher. Thus, any price variation in imported price would considerably reflect upon all the seven grades in the basket.

Consequently, the rise in price for G7 coal driven by higher imports from DRI and associated industry would adversely affect the prospective bidders having block of G14 grade, as they would have to pay additional revenue due to deviation in import component for higher GCV coal.

Earlier, the ministry had kept the steel and washery grades of coking coal under a single basket. However, in order to safeguard washery products from the costly import weightage these two have been separated upon request of various steel associations, but no decision has been made in case of non-coking coal.

As per the efficiency parameters, a timeline of 9 months have been stipulated for completion of transfer of statutory clearances obtained by prior allottees for schedule II coal blocks offered in the commercial mining auction. But, for fully and partially explored blocks, a timeline of 51-66 months have been stipulated for obtaining mine opening permission.

Given the complex mechanism involved in NCI, participants interested in long-term investment are facing difficulties in carrying-out financial model for evaluating coal prices to understand whether the acquired block would be viable, which require necessary steps to be taken in order to simplify the process.

 

25 Sep 2020, 12:20 IST
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