Indian sponge iron units, especially located in the industrial clusters of Odisha, Chhattisgarh and Maharashtra prefer blending South African coal with the domestic variant in the ratio of 70:30 (70% imported, 30% domestic), given the high-calorific value (CV) , low volatile-matter (VM) and low ash content in the former.
However,increasing dry bulk freight rates and the rising API4 index, that have gone up by 120% (for capsize vessels) and 16% respectively between Jan-May’21 due to supply disruptions from Transnet, a South African transport company, have adversely impacted the functioning and profitability of sponge units in India.
The spread between the FoB and CNF prices of the South African RB2 5,500 NAR grade coming to India haswidened by 50% in the first five months of 2021 (CY’21) from $14/tonne (t) in Jan’21 to $21/t in May’21.
CoalMint’s market survey indicates that due to the above factors, the blending ratio (imported versus domestic) for the independent units (with no backward or forward integration) has changed from the preferred 70:30 to 50:50 or even 60:40 (60% domestic, and 40% imported), which is negatively impacting their yield per tonne as high-CV domestic coal is not available in desired quantities.
In the case of larger units which prefer using coal in the 70:30 ratio (imported: domestic) to maintain their yields are incurring losses.
Factors adding to the woes of sponge iron units
Tepid demand due to the ongoing second-wave of the pandemic in India, is making mills operate at reduced capacities alongside oxygen shortage with the same being diverted for medical use.
Rising iron ore and pellet prices NMDC’s iron ore fines prices increased by 36% between Jan and May’21 whereas pellet prices in the Chhattisgarh market rose by 33% during the above-mentioned period.
Surge in vessel freight rates and rising indices have kept majority of the importers at bay even as South African thermal coal stocks at the Haldia x and Paradip port are heard to be sold out.
What led to the freights surge?
The demand-supply mismatch that resulted in reduced availability of vessels exerted pressure on freight rates.
As manufacturing activities gained momentum globally post-2020, several countries, especially China, the US and Europe, stepped up commodity buying to rebuild stockpiles. With rising consumer demand, trading activity in key commodities like iron ore, coal, grains, etc gained strength. However, lockdown restrictions in some parts of the world due to Covid-19 led to shipment delays, increased waiting period, implementation of strict quarantine protocols. These factors are consequently leading to disruption in vessels availability and supply chain issues.
Outlook
Since last week, capsize vessel freights, especially from South Africa and Australia to India, have seen a downward correction of 30%, bringing some respite for Indian importers. However, its impact on landed cost of imports would be seen in June’s landing material.
With the API4 index continuing its rally, reduced availability of domestic coal before the upcoming rainy season and expected easing up of restrictions from 1 June’21 across various states, Indian sponge iron mills would be left with no option but to book imported South African coal, despite its high costs and ultimately pass on the same to end-users.
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