Indian sponge iron production rises 8%, y-o-y, in January-July 2022

• Crude steel output up 8% in first 7 months of 2022
• Induction furnace steel output rises over 16% during same period
• Coal supply issues, steel export duty impact production

Morning Brief: Sponge iron production in India increased by 8% to over 24 million tonnes (mnt) in January-July, 2022 from a little over 22 mnt in the same period last year, SteelMint data shows. Monthly production too edged up marginally to 3.5 mnt in July as against 3.4 in the previous month.

The integrated steel producers with captive facilities have a share of roughly 25% in the country’s total monthly sponge production. For example, in July, the primary steel producers churned out around 900,000 t of DRI out of a total of less than 3.5 mnt.

India’s sponge iron production in FY’22 was recorded at 37.55 mnt, up 9% compared to 34.59 mnt in FY’21. The country’s sponge iron capacity is currently assessed at 59-60 mnt/year.

Factors supporting production

• Direct reduced iron (DRI) production increased, in the first instance, on higher crude steel production. Crude steel output in the first seven months of 2022 stood at over 73 mnt, as per Steel Ministry and SteelMint data. This is more than 8% higher than around 67 mnt recorded in the corresponding period of last year.
• Likewise, India’s induction furnace (IF) steel production rose by over 16% to around 22 mnt in January-July this year compared with 18 mnt in the year-ago period. SteelMint data shows that India’s electric route (EAF+IF) steel capacity addition since April 2021 stands at over 18 mnt. Higher IF steel production calls for higher sponge usage, as Indian electric route steel producers rely more on DRI rather than scrap steel in the absence of large-scale domestic availability of the latter.
• There has been an apparent shift towards higher production of DRI by means of iron ore pellets (PDRI) rather than lump ore. This is largely because of the depleting stocks of high-grade iron ore lump as well as increased domestic availability of low-grade fines that require value-addition through agglomeration. Higher production of PDRI is borne out by increasing volumes of pellet production. Pellet output rose to around 47 mnt in January-July this year from a little over 44 mnt in the year-ago period.

Coal availability issues

Coal supply issues and the historic surge in global and domestic coal prices since April this year impacted the sponge sector both in terms of production and spreads. Monthly output has fallen from April-May levels due to unviable production costs on record-high coal prices amidst domestic supply shortage and fast-falling steel and metallics prices after the government’s announcement of steep export tariffs on steel and steelmaking raw materials.

This has expectedly impacted merchant producers the most. Earlier, DRI players used only South African and domestic coal. However, of late, producers are sourcing from Mozambique, low-CSN Australian coal and a few players are also using Tanzanian coal amid global hyperinflation and high coal prices. Trials are being run on Russian coal to check suitability for sponge-making.

The sponge industry is highly dependent on imported coal due to high fixed carbon content (52-53% FC). While imported coal requirement for 1 t of sponge production is ideally 0.8 t, domestic coal requirement is around 1.4 t.

Outlook

India’s steel production outlook remains positive for 2022 compared to de-growth projected for major producing countries and regions such as China and the EU. Sponge production is, therefore, expected to remain supported.

However, going forward, greater steel capacity addition through the primary route may not see sponge production rising parallelly. While higher capacity addition though the primary route is essential to satisfy requirements of scale, sustainability concerns around India’s coal-based DRI sector may emerge as a major limiting factor.