Coalmine auction an opportunity for domestic sponge iron units: Analysts

Sponge iron plants could shift to new technology on availability of coal

With government opening coalmine auctions for commercial extraction, an opportunity for the domestic sponge iron industry has emerged. Players could now look to have a coal-gasified direct reduced iron (DRI) plant though investment cost would be a big constraint.

“We see a potential for at least 10-12 new (coal-gasification based) DRI plants to come up across country. Incentivising coal gasification is an encouraging move for the sponge iron industry which faces stiff competition from cheap scrap imports,” VR Sharma, managing director at New Delhi-based Jindal Steel & Power Ltd, told Business Standard.

Jindal Steel and Tata Sponge are among the largest players in the domestic sponge iron industry. According to the Sponge Iron Manufacturers Association website, India’s sponge iron production in FY19 stood at 29.4 million tonne, of which 21.4 million tonne output came from coal-based units and balance from gas-based plants.

“A coal-gasified DRI plant will yield better quality product (sponge iron) as against a coal-based plant unit and so to that extent this is a good opportunity for the domestic sponge iron industry as coal will be available in abundance,” said Bajrang Lohia, chairman Brahmaputra Metallics. Lohia runs a 105,000 tonne coal-based sponge iron unit in Jharkhand.

JSPL is already using coal gasification technology at its 1.8 million tonne sponge unit in Angul, Odisha. The Naveen Jindal-led company is the country's first plant producing steel using this technology.

Producing sponge iron via the coal-gasification route brings down cost of production by about 10-15 per cent as compared to using coal as feedstock, said industry officials.

While the DRI is a superior technology also because of lower environmental impact, the investment cost could be a dampner especially at this point of time when demand for  end product is low. According to industry estimates, the total investment in mine and unit put together could be around Rs 25,000 crore. “Sponge iron units cannot afford to invest in a coal-gasification technology unless they are assured uninterrupted supply of coal which can come from holding rights to a mine. So, on the policy front there has to be an assurance that decisions will not be reversed,” said an executive with Agni Steels Limited on condition of anonymity.

The government plans to gassify around 100 million tonne of coal by 2030 for which four locations have been identified. For the 41 mines on offer for commercial mining, around 35 percent of the land falls in forest areas. Therefore, proactiveness of the Central and the state governments to ensure time-bound clearances would remain critical towards achieving self-sufficiency in India’s thermal coal availability, said rating agency ICRA in its comment-note.

Besides, as Sharma of Jindal Steel points out, "It makes sense to have new sponge iron plants in the vicinity of 40-50 km from the coal site for the product to be economical."

While units using the gasified coal are planned little away from the mine, the process of gasifying coal can also be done in the mine vicinity.

On the issue of opening up of mines for commerical use, sponge iron industry players are of the view rights to the mine alone will not help the industry and resolving logistics is an important aspect that needs to be addressed.  “Availability of rakes is a perpetual problem when it comes to lifting coal. If coal supplies are far from plant site and logistics is not strong, having higher coal production will not help industry,” said Lohia of Brahmaputra Metallics.

The company has had to wait for almost a year for rail rakes after having made the payment for the same on account of low availability. Meanwhile, it had to opt for road transport which increased the cost of production.

In 2014, the Supreme Court cancelled nearly all 218 coal blocks the central government had allocated between 1993 to 2010. The worst-hit company then was Jindal Steel as it had the largest number of operational captive mines, which produced 12 million tonne coal annually.