Group 5- Coal E-Auction Business Marketing- Case Study 9/4/2013 Great Lakes Institute of Management, Surgeon Ankhs Vistas, Anural Sappy, Kina Matt, Reject Raving, Shall Shirtwaist Introduction: Mining in India is a major economic activity which contributes significantly to the economy of India. The GAP contribution of the mining industry varies from 2. 2% to 2. 5% only but going by the GAP of the total industrial sector it contributes around 10% to 11%. India has the fifth largest coal reserves in the world.
Coal with a proven reserve of 860 billion tones is mined the most in the world. At the same time, the emend curve for this sector is always on the rising side. The power sector is the largest consumer of coal followed by the iron and steel and cement segments. Apart from the major coal consumers there are other smaller sectors which need coal for their operations. Coal India Limited which is the controlling arm of all the coal business in India is required to meet the growing needs of the demands from all sectors. Coal is primarily being transported through roadways, railways and through carriers.
An innovative method of transporting coal through slurry pipelines is also under consideration in India to be implemented on a larger scale. Problem in coal marketing: Coal Marketing in India has seen a lot of changes since the mining industry began flourishing. All the coal was supplied to the buyers through the Fuel Supply Agreement (FSP). Initially in sectors other than the major three like power, steel and cement, there was a fixed price regime, and corner black market premium under a quota system where permits were given on a first-come, first-served basis.
The normal buyers had to pay a lot of extra money to the mafia who had their claws firmly on the coal logistics. The government came up with a solution of introducing E- auctioning of coal which would be a more equitable and rational marketing system. By introducing E-auctioning for the coal allocation, the government aimed to achieve the following benefits: * total transparency in coal marketing * Single window clearance for sale of coal * Dowdiest coverage of participation possible * Equal treatment to all categories of customers * buyers get coal of their choice of grades/sources * buyers can book coal trot any. . ‘here in the country * Coal price would become fully market driven leading to better price discovery * None consumers would get the chance to buy coal NON quota/linkage would be needed for purchase of coal. By using the cutting edge technology, primarily the internet, parties provide the clients with an opportunity to cut costs and at the same time increase revenue and enhance margins.
E-Auction has become a preferred mode of selling for coal, lignite and other minerals, due to its various advantages spanning from transparency of the selling process to fair market price realization, and more and more companies are adopting this mechanism for the sale of their products. Auction System: Auction is a market mechanism by which buyers make bids and sellers place offers; hardhearted by the competitive and dynamic nature by which the final price is reached. Electronic Auctions or E-Auctions are those which are conducted online.
In the case of coal the scenario is of a single seller I. E. Coal India Limited (COIL) and many buyers. This type of auctioning is known as forward auctioning. See: Exhibit 1 Another form of auctioning is called the reverse auction. This is the scenario where there are many potential sellers and Just one buyer. The buyer places an item for bid (tender) on a request for quote (REF) system, potential suppliers bid on the Job, with he price reducing sequentially, and the lowest bid wins; used mainly in BIB and BIB e-commerce.
E-Auction services in Coal Business: According to the Coal distribution policy of India, 10% of the coal produced is to be sold through E-auctioning. A minimum bidding quantity of 50 tons of coal is required as criteria to participate in the e-auctioning. Any buyer can participate in spot e- auction and only actual consumer can participate in forward e-auction. The procedure for participation in e-auction is specified in the scheme for spot e-auction and scheme for forward e-auction. A customer can get E Auction schedule from captive websites of Coal Companies or portal of MAST and injunction.
This is a competitive bidding process and the highest bidder is awarded the coal block. Then payments are done followed by the transportation of the coal to the buyer through the available modes of transportation. See: Exhibit 2 The New Coal Distribution Policy: Problems persisting in the extant distribution policy led to a series of litigation’s between Consumers and Coal companies. Ultimately the Apex Court, in one such dispute, ruled that Government should come out with a New Coal Distribution Policy in view of stake-holders.
A committee under the Chairmanship of Secretary (Coal) was formed by the Government with the following terms of reference: * Review of existing classification of consumers into “Core and “Non Core” sectors. * Suggest a Mechanism for supply of coal to consumers in different sectors. * Mechanism for supply of coal to small/tiny consumers who are unable to access coal * Directly from coal companies. * Strategies to bring about transparency in coal distribution by use of Modern * Technologies including Intimation Technology.
Target Markets: The Coal E-auction has its targets markets in the following sectors such as: Kilns * Rice Husk Plants Steel plants * Power Plants see: Exhibit 3 Result of introducing E-auction in coal business: * Brick After 2005, over the years since the introduction of e-auction in coal business, Coal India Limited has seen an increase in its business and the losses it was incurring due to the coal mafia has been significantly minimized. A huge price increase of coal in e- auctions has allowed Coal India to substantially increase its revenue and profits.
See: Exhibit 4 The above innovative methodology was put to test on February 19, 2005. The results were fantastic: * Price realization was 54% over the floor price * Forced the breakup of cartels. Enabled small consumers to participate due to smaller lot sizes. * Bidders were extremely satisfied with the simple and user friendly screen. * The methodology was adopted as the standard methodology for sale of coal, across all the subsidiary companies of COIL. * The earlier service provider was asked to adopt this methodology. 10 Million Tons of coal was initially earmarked by Ministry of Coal to be sold in FYI 06, which was subsequently revised to 20 Million Tons. * Consumers could buy coal of their choice directly in small lots – efficiently, conveniently & transparently. * Disappearance of middle men. * Stoppage of black marketing. Sill’s average realization above the notified price during April – November 2005 was around 54. 2%. For the first time since the nationalization of the coal industry and the formation of COIL, the public sector behemoth looked set to report a net profit of more than 6,000 core.
E-auction growth opportunities in India: With the fast growing technology along with the tremendous growth in Internet, the E-auction has more opportunities to grow with innovations by branching itself across various sectors in India. Some of the sectors where the E-auction can grow are: Telecoms: The auctioning of the telecoms spectrum earlier this year was severely reductive by Major Service providers such as Birth Airtime and Idea Cellular. There is a huge opportunity in this sector which is still yet untapped. Power: E-Auctioning in electricity kicked off in India in June 2008.
Since then the volume of daily power traded has gone up from 60 Mega watt hours (MPH) to 37000 MPH. This e-auction in power sector is mainly used for short term power market. In the main stream market the e-auctioning can be introduced once the surety for supply of power is ensured tort all demands. Real State The E-auction to mill properties by state-owned National Textile Corporation (ANT) has received good response from the developers and consultants. Most of the properties in real estate business can be sold through E- auctioning. This will revolutionize the way of operation of the real estate business.
Apart from the above mentioned areas, e-auction can be primarily used to replace any business which involves normal auctioning process. Limitations of the E-auction: Any service though has a lot of advantages will always falter in certain aspects. In the same way E-auctioning services also suffer some limitations. They are as follows: * Possibility of fraud * Limited participation Security * Auction software * Long cycle time * Monitoring time * Equipment for buyers * Order fulfillment costs Future of E-auctioning: Global Auctioning: E-auctioning can be extended worldwide without confining to the businesses of the country.
This allows buyers and sellers from all over the world to interact with each other seamlessly to do business. Real Time Auctions: E-auctions can be used to conduct real time auctions for almost all items from selling of antique items to minerals. Exhibit 1 Source: Electronic Commerce – Prentice Hall 2006 Publication Exhibit 2 Exhibit 3 Source: Coal India Limited