Sponge iron makers struggling to meet demand

IN FOCUS/SPONGE IRON

Sponge iron has developed a silver lining. The industry is set to make gains in the next few years thanks to rising steel demand globally as well in the domestic market.

According to a report by Motilal Oswal Securities (MOS), global demand for sponge iron will remain strong. About 34 per cent of the world's steel making capacity is based on the electric arc furnace (EAF) or induction furnace (IF) route.

Analysts believe that environmental and financial constraints would limit creation of blast furnaces (BFs) and ensure the market share of EAF/IF sector. The BF process of steel making is more polluting.

In India, sponge iron is the preferred raw material for steel production. In FY03, about 10.5m ton of steel or 33 per cent of total domestic production was produced using the EAF/IF process.

Over the years, EAF/IF units in India have used a mix of melting scrap and sponge iron as the charge for making steel.

Lately, the sector was using more of sponge iron, in some cases upwards of 60:40 in favor of sponge iron. Sponge iron was becoming the preferred raw material for steel making on account of easy domestic availability and less fluctuation in prices. Scrap was in short supply and volatile.

MOS expected an improvement in capacity utilisation and increase in sponge iron production in India over the next two years. About 2 million tons capacity was likely to be added by 2006.

Demand for sponge iron was expected to exceed 8.5 mn.t.. Incremental demand would more than absorb the incremental supply.

Booming sales in the long products segment had led to revival of idle mills, further fuelling demand for sponge iron in India. Secondary steel producers, the main users of sponge iron, had over 55 per cent market share in the Indian steel market.

Scrap availability in India has declined following a global supply crunch and reduction in ship breaking activity at the Alang ship-breaking zone. Prices of junk vessels have shot up by more than 50 per cent from $150 per tonne in early 2003.

High coke prices were also driving sponge iron demand, as steel makers have started using more sponge iron and less hot metal to save on coke.

Currently, sponge iron prices in India were ruling in the Rs9,900-10,300 per ton range, having gained 35 per cent in the last 16 months.

As more rolling capacity comes on stream, analysts said sponge iron prices would settle at slightly lower levels if not at present levels.

Domestic sponge iron prices were generally in line with melting scrap prices, with sponge iron trading at about 10-15 per cent discount to melting scrap.

The problem was with iron ore prices, which have moved up globally after spot market buying by Chinese producers. Spot prices of iron ore have risen 25 per cent in the last five months to $40 per ton.

International players dependent on imported ore were also suffering on account of a 10-year high freight rates. Indian producers have been hit by rising global iron ore prices as well.

Higher realisations overseas had led Indian ore companies to focus on export markets, leading to tight supply in the domestic market. India's proximity to China made it the preferred sourcing destination for producers there.