Sponge iron industry moves ahead despite constraints

With the payback period ranging between 18 and 24 months and the time needed for setting up a plant taking just around 8 months, the sponge iron production operations in Andhra Pradesh could have been even more but for the shortage of coal.

On an average, 1.3 tonnes of coal along with 1.7 tonnes of iron ore is required to produce 1 tonne of sponge iron.

According to T R K Rao, executive director of SCCL, the demand for C-grade coal from sponge iron industry phenomenally rose to 1.1 million tonnes this year from a mere 3 lakh tonnes a year a couple of years ago.

Despite such constraints, the sponge iron industry has been growing at a faster pace, especially around Hyderabad where most of the secondary sector steel mills, who use sponge iron as basic raw material, have been located.

Industry estimates put the existing production capacity of sponge iron units at around 2,000 tonnes per day out of which around 900-tonne capacity has been added this year alone. Production capacity of another 1,000 tonnes per day is expected to be added in the next 7-8 months time.

"Hyderabad enjoys an added advantage as the market and source of coal are nearer to the unit even though one has to buy iron ore from Orissa or Karnataka," says Vinod Kedia, managing director of Vinayak Steels, which also runs a sponge iron plant for captive purpose.

Apart from this, local availability of coal from Singareni Collieries Limited (SCCL) is also one of the key considerations for these units to start sponge iron operations here.

Sponge iron, also called as the direct reduced iron (DRI), is being used as basic raw material by the secondary steel sector, which is based on the low technology intensive electric arc furnace or induction furnace. These steel units can also use metal scrap to produce steel.

The share of secondary sector in steel production has been on the rise. According to K S N Murthy, director of Hyderabad-based Sponge Iron and Power Consultancy, the share of secondary sector rose to 41.54 per cent in 2003-04 from 37.64 per cent during the previous year.

"The industry has a very bright future as the overall demand for steel and the share of the secondary sector in steel production were remarkable," he said adding that even according to the Joint Plant Committee's analysis, which predicted a correction in the near future, the prices may not go back to the level prevailing earlier but will reach a level somewhere in between. The other key constraints such as coal availability are already impacting the expansion of the industry.

There are just three to four players among the 30-odd secondary steel units operating in the state, who have their own sponge iron plants now.

"If the coal supplies were ensured locally, most of them would have upgraded themselves as integrated steel plants with captive sponge iron production facilities," Kedia told Business Standard.

The association of secondary steel mills has already appealed to the chief minister to consider sponge iron as part of core sector on par with cement and power generation so that they too get similar treatment in coal allocation.

According to him, dependence on high-cost imported coal will make their units unviable as these mills are already facing a huge input cost on account of growing iron ore prices.

"The industries department has given clearances to sponge iron plants without taking note of the actual ability of SCCL to meet the demand of that particular sector. Now, we have requested the department to consult the Singareni Corporation before issuing any fresh licences," Rao said adding that SCCL has increased the coal supply to sponge iron and secondary steel manufacturing industry to about 70 per cent from the 60 per cent level of the total firm allocation despite demand-supply constraints.

About 12 out of 16 applicants have received licences for setting up sponge iron units this year and six units have already commenced production.

S Divakar Reddy, managing director of Sajjala Iron and Steel Private Limited, who is setting up a 100-tonne per day capacity sponge iron unit along with a 4-mega watt co-generation power plant near Bellari, explains the reason behind this sponge iron rush.

"The outlook for the sponge iron industry is not going to change in the next 10 years. Major players in the primary steel sector like Vizag Steel have started using sponge iron in small quantities in steel production creating additional demand for the produce," he said.

As per the current prices, the production cost for one tonne sponge iron ranges between Rs 5,000 and Rs 6,000 while the price for the same ranges between Rs 1,300 and Rs 1,600.

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Forging ahead

• Industry estimates put the existing production capacity of sponge iron units at around 2,000 tonnes per day
• Production capacity of another 1,000 tonnes per day is expected to be added in the next 7-8 months time
• The share of secondary sector in steel production rose to 41.54% in 2003-04 from 37.64% during the previous year