Sponge iron prices up 25 per cent

Prices of sponge iron, the major raw material for steel making, have risen 25 per cent in the last two months and are likely to go up by another 5 per cent by month-end on a spurt in demand from steel mills.

As the construction sector is in full swing, the demand for steel is growing. Thereby, the price pressure is being passed on to raw materials including sponge iron.

Since shredded scrap, another raw material for making steel, is in short supply, the demand for sponge iron is swelling up.

Surprisingly, sponge iron producers have failed to increase their margins. "We are just passing on the raw material and energy cost to consumers without impacting margins," an official with one of the leading sponge iron producers said. He added that energy cost and iron ore prices have risen proportionately.

Sponge iron producers operate with a margin of 13-18 per cent depending upon the vicinity and cost of iron ore and coal supplies.

"Our margin has slightly gone down as buyers shy away in case of price hikes. They turn up when orders are negotiated at a lower price," another industry official said.

Therefore, sponge iron prices have been highly volatile in the last one month, ranging between Rs 16,500-18,000 per tonne.

"Sponge iron producers are being squeezed from both sides. Iron ore prices have doubled in the last one year. Electricity charges and freight rates have also gone up substantially," an industry source said.

Also referred to as direct reduced iron (DRI), sponge iron was likely to hit Rs 19,000 a tonne by the Union Budget, said the official. "By the end of this quarter, sponge iron is expected to hit Rs 20,000 a tonne, if the present trend continues."

For making each tonne of sponge iron, around two tonnes of iron ore are required. Today, iron ore is contracted in the range of $140-160 a tonne, a 50 per cent rise from the last quarter of 2007.

The industry expects a 4 per cent cut in excise duty in the forthcoming budget from the present level of 16 per cent which is likely to pressure producers to raise volumes in order to compensate the exchequer.

Sponge iron futures on the Multi Commodity Exchange (MCX) recorded 11 per cent growth in a month-and-a-half to Rs 18,005 a tonne.

India produced 16.28 million tonnes of sponge iron in 2006-07 with 5.26 million tonnes contributed by the gas-based variety and 11.01 million tonnes by the coal-based one.

India produces about 45 million tonnes of steel a year.