India: Sponge iron units reel under high input costs

Sponge iron manufacturers in Central India are reeling under pressure due to higher costs of production compared to the selling prices.

The margins are low from raw pellets to sponge P-DRI for standalone manufacturers. SteelMint analysed that standalone sponge iron plants are experiencing a gap of INR 2,000-3,000/tonne (t) between costs of production and the selling prices in the domestic market.

With regards to costs, it is being observed that the sponge P-DRI production costs in Raipur are not lower than INR 33,500/t, but these are currently trading at INR 30,800/t on ex-plant basis.

Similar trends are being noticed in eastern and southern India .Sponge P-DRI is trading at INR 1,500-2,500/t lower in Durgapur and Bellary than the cost of production at standalone plants.

Similarly, the margins of induction furnace dropped by about 2% in Raipur and 9.5% in Durgapur in Jun’21 on account of poor offtake of finished steel products due to the lockdown restrictions in the country.

The standalone billets producers in the Raipur region said they require a conversion of around INR 14,000/t from sponge P-DRI to billets, which is currently hovering at INR 11,650/t on a daily basis, while the monthly average in Jun’21 (till 15 Jun) was at around INR 12,100/t.

Why the low conversion spread?

Low demand, coupled with higher production volumes and a constant surge in raw material costs, led to a huge gap between the cost of production and selling prices of sponge iron and billets.

• During May-Jun’21, domestic iron ore and pellets prices rose significantly by INR 1,000-2,000/t, while in the same timeframe, the monthly average domestic sponge prices gained by INR 900-1,800/t and billets by INR 500-700/t in the central and eastern regions.
• Sponge iron plants’ capacity utilisation remained strong compared with the electric-arc or induction furnaces. Hence, a poor off-take of sponge iron by domestic smelters led to piling up of inventories, putting pressure on prices.
• Billets demand was also stagnant with demand for finished steel subdued in the domestic market.

Outlook

Sources believe, if prices of sponge iron and billets continue to remain under pressure, the producers will not be left with any option but to reduce production as currently, supply is better than demand.