Sponge iron may cool down on lax demand

Prices of sponge iron, or direct reduced iron (DRI), are likely to cool down by at least Rs 200-300 a tonne next week due to slackening demand by steel mills.

Steel mills have started utilising inventories, a provision generally for two months. Fresh orders for two to three month deliveries have dampened in anticipation that prices would recede abnormally.

The trend, which started last fortnight, may result into a huge stockpiling with producers if it continues for another week.

The DRI price has stagnated at Rs 14,500 a tonne for two months as any hike may force steel mills to switch to shredded scrap, an alternative raw material which is scarce in the country. Understandably, steel mills' appetite for DRI has been stronger due to supply constraints of shredded scrap.

"Steel mills have been abstaining from fresh bookings for two-three month supplies. However, sponge iron is not likely to see any drastic price declines despite improvement in iron ore supply. We may see a small correction of Rs 200-300 a tonne for a very short time," said Amitabh

Mudgal, general manager, marketing and corporate affairs, Monnet Ispat.

The operating margin for sponge iron producers has squeezed tremendously because of high iron ore price, the only raw material for sponge iron production. In the last one year, the spot price of iron ore has almost doubled to $160-175 on reduced supply from mines and traffic congestions on Australian and Brazilian ports.

The price of HR coil and other steel products is also on the rise. Hence, sponge iron producers would not like to cut prices heavily and end with losses. Therefore, the anticipated correction of Rs 200-300 is not expected to exist for long. The price is likely to revert soon, said an analyst.

Meanwhile, sponge iron for December delivery on MCX has declined 1.80 per cent or Rs 300 in the last two days despite traded volume reported as nil on the exchange platform. NCDEX has deferred displaying prices of sponge iron since December 2006 on account of lack of trader interest.

India produced 16.28 million tonnes of DRI in 2006-07 of which gas based DRI manufacturers chipped in 5.27 million tonnes while coal-based producers contributed 11.02 million tonnes.

During monsoon, transport of iron ore from mines to processing units pose a major challenge for sponge iron producers. Hence, the price heads north. As the problem has eased, the industry is facing no major iron ore supply threat, said a steel analyst.