The sponge iron units in India are battling a double whammy – rising imported coal and iron ore prices.
“In the current market situation, the raw material costs (of both iron ore and coal) are very high whereas domestic demand is quite sluggish, making survival for standalone units quite difficult,” said a sponge manufacturer from Chhattisgarh.
Iron ore has been upwardly mobile since last year. Prices of the Odisha fines of Fe63% have almost doubled in late Jul’21 to INR 10,000/t ex-mines from a low of a little above INR 5,000/t levels in Mar’21. Lumps too showed a similar rise to INR 14,000/t levels from around INR 8000/t in the same period.
Similarly, the South African (SA) RB2 5500 NAR grade of coal surged a dramatic 50% over the last six months, sponge iron units have shifted to the domestic equivalents of G5-G6 (FC below 50%). From a 70:30 imported-domestic blending ratio, the units have moved to 50:50 of late, with the SA RB2, typically used by such units, rising from around $86/t CNF India in Jan’21 to $114/t CNF India in Jul’21. Portside prices, ex-Gangavaram, shot up from INR 5,500/t to INR 8,300/t in Jul’21.
Why are SA RB2 prices rising?
Prices of the RB2 have increased on account of the major chunk of the production getting diverted to China ever since the latter slapped a ban on Australian coal imports. Volumes from SA to China had ballooned from 165,000 tonnes in Jan’21 to 1.17 million tonnes (mn t) in Feb’21 and 947,000 t in May’21 but subsided to around 476,000 tonnes in Jul’21. That apart, civil riots leading to force majeure at coal terminals, Transnet’s maintenance work, derailments have all added up to restrict supply.
Productivity drop
However, ever since the sponge iron units started blending a greater share of domestic coal, their productivity has dropped by 20-25%, SteelMint understands. For producing every tonne of sponge iron, the units need 0.9 t of RB2 grade. In comparison, the domestic coal requirement is 2 tonne. For a 100 tonne kiln, the productivity has reduced to 80-90 t. Imported RB2 also offers the advantage of a longer maintenance period of 60 days compared to the domestic coal’s 40-odd days.
Sponge iron units consume around 30 mn t of coal per annum of which 10-15 mn t comprises domestic, the balance being imported. These elevated prices and higher domestic coal usage have already reduced the capacity utilisation of the sponge iron players’ by 30-40% of late.
Outlook
Production is expected to remain low in the coming months which will lend some support to prices. In fact, sponge iron prices have started rising from mid-Jul’21 by INR 1,000-2,000/t, and are hovering around INR 31,800/t, as per SteelMint’s data. However, if prices sustain the uptrend seen recently, then production volumes are also expected to bounce back to cash in on improving margins. Recent auctions of Coal India show considerable lifting of thermal coal by the non-power sector, in which sponge iron units were present, indicating that output will show an upward curve.
Prices as on 8:50 IST, 30 Jul. d-o-d changes indicated against closing price of 29 July
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