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India's sponge iron production rises by 35% in Apr-Oct'21; what to expect in the rest of FY'22?

India’s sponge iron production increased by 35% in the Apr-Oct’21 period compared to the corresponding period of FY’21. SteelMint data shows that the co...

Sponge Iron
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26 Nov 2021, 09:29 IST
India's sponge iron production rises by 35% in Apr-Oct'21; what to expect in the rest of FY'22?

India's sponge iron production increased by 35% in the Apr-Oct'21 period compared to the corresponding period of FY'21. SteelMint data shows that the country's sponge iron, or direct reduced iron (DRI), production stood at over 21 million tonnes (mn t) in the first seven months of FY'22 versus 15.5 mn t in the year-ago period.

Sponge iron production has been consistent at around 3.1-3.2 mn t per month in the ongoing fiscal, with the exception of Sep when it dropped below 3 mn t.

Sponge output rises

In comparison, production remained on a low-key in 2020 due to the devastating effect of COVID-19 in H1FY'21. Sponge production in Q1FY'22 was, in fact, over 100% higher compared to the same period last fiscal.

Domestic sponge iron production stood at over 30 mn t in CY'20. Of this, the share of iron pellet-based DRI was roughly 65%, while the rest was produced from iron ore lump. As per SteelMint estimates, the share of pellet- and iron ore-based DRI in total sponge production used to be 50:50 previously.

As mentioned, the pandemic and the subsequent lockdown in 2020 severely impacted sponge iron production. This, of course, accounts for the major hike in production in the current fiscal.

Price factor

Another reason for robust production was sustained demand from steelmakers on comparative cost-effectiveness compared to melting scrap and/or pig iron. In contrast to substitutes, sponge iron remained cost-effective.

For example, pellet-based sponge iron prices hovered in the INR 32,800-35,500/t region in central India's Raipur market over the last month. In comparison, melting scrap (HMS 80:20) prices were assessed at INR 36,000-38,500/t DAP Jalna in the same period, while steel grade pig iron prices remained elevated at INR 44,800-46,000/t exw-Durgapur.

The neck-break rally in coal prices on global supply concerns and the sharp rise in imported coal prices, plus rising coke costs, drove pig iron and DRI prices higher.

Higher exports

In addition, sponge production remained supported on higher exports in FY'22 that reached 350,000 t in the Apr-Oct period compared to less than 300,000 t in the year-ago period.

Exports rose by 20%, y-o-y, in the first seven months of this fiscal on a low base effect as well as additional new demand from neighbouring Nepal. The commissioning of induction furnace steel capacity in the Himalayan nation has boosted imports of metallics, especially from preferred supplier India.

Coal supplies recover

At an estimated monthly rate of roughly 3.2 mn t, India's sponge iron production may touch 38-40 mn t in FY'22, SteelMint notes, considering the fact that domestic coal production by Coal India Ltd. (CIL) has reached nearly 300 mn t in the Apr-Oct period, which is 6% higher from the same period last fiscal. Moreover, imported coal prices have corrected lower over the last one month.

Due to low stock positions at several power plants, CIL had asked its subsidiaries to refrain from conducting any e-auction of coal, except the special forward e-auction for the power sector, till the situation stabilised. Coal auctions for the non-power sector are expected to start soon.

Coal demand for sponge making is around 40 mn t per year, of which 13 mn t is sourced through linkage arrangements with CIL, around 15 mn t is imported, and 10-12 mn t is sourced through auctions conducted by CIL.

In fact, consumption of low-calorific domestic thermal coal by sponge producers - instead of pricey imported coal - resulted in a drop in production by roughly around 20% during the period under review, as per SteelMint estimates.

Cost edge over substitutes

Moreover, ferrous scrap imports has edged lower in Apr-Oct'21 compared to the imports of 2.21 mn t in the year-ago period. It is expected that scrap imports won't deviate much from normal levels owing to the disparity between domestic scrap/sponge prices and higher landed cost of imports.

Moreover, due to seasonal factors affecting scrap collection in the major supply regions prices are expected to remain elevated, thereby effectively boosting sponge demand.

On the other hand, coke costs are likely to remain high as global coking coal prices are still at multi-year highs. Supply concerns due to weather-related disruptions in Australia - the world's largest supplier of metallurgical coal - are unlikely to let prices soften in the short term. This, in turn, will keep pig iron prices on the higher side.

Infrastructure and construction activities are poised for a take-off boosting steel production further after the seasonally dull Q2. Therefore, demand for sponge iron is expected to remain robust in the last five months of the current fiscal.

 

26 Nov 2021, 09:29 IST

 

 

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