- Steel prices slip rapidly after export duty revision
- Sponge production costs unviable due to high coal prices
- Capacity utilisation to drop in Q3 2022
Capacity utilisation levels of coal-based merchant DRI producers in India are set to fall by 15-20% in Q3 2022, SteelMint understands. This is due to unviable production costs on record-high global 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.
India’s sponge iron production in the just-concluded fiscal (Apr’21-Mar’22) was recorded at 37.55 million tonnes (mnt), as per SteelMint data. Production volumes rose 9% compared to 34.59 mnt in FY’21).
The country’s sponge iron capacity is currently assessed at 59-60 mnt/year. About 20 mnt/year of capacity expansion proposals received government approvals between Jan’21 and Mar’22. Steel majors AM/NS India with nearly 8 mnt capacity and JSW Steel (including BPSL and Monnet Ispat) with 5.8 mnt capacity are the leading producers followed by JSPL and Tata Steel.
However, integrated producers with either gas-based DRI facilities or captive coal and iron ore mines are insulated from market volatility compared to merchant producers of DRI.
Cost pressure
Sponge iron producers in eastern and central India informed SteelMint that capacity utilisation has already been hit due to domestic coal supply concerns over the past couple of months. The sharp surge in global prices has lowered buying interest for imported cargoes. Now, with steel prices falling sharply, rising production costs have rendered DRI production unviable.
In addition, with the approaching monsoons, coal dispatches and steel production and demand are both set to fall, thereby impacting capacity utilisation further.
For example, in Odisha sponge iron capacity (excluding captive producers such as Tata Steel and BPSL) stands at 7 mnt per annum. Current capacity utilisation is around 70%, which is expected to fall by 15-20% in the coming days.
“DRI producers use 28-30% FC domestic coal for sponge production. The requirement of such low-CV coal for one tonne of DRI is 1.8 t*. Prices of this grade has increased to around INR 12,000/t at present from INR 3,500-4,000/t a few months ago,” a mill owner source told SteelMint.
The share of coal in the total production cost of one tonne of sponge iron stands at around 60-65% if mills use domestic coal and around 75% for imported coal, he informed.
Furthermore, Odisha producers who rely mainly on iron ore lump material for sponge production used to screen the fines present in iron ore and sell it in the market.
“Now low-grade fines availability will increase manifold with the government having imposed 50% duty on exports of all grades of iron ore. This is a financial blow to producers,” said another mill manager.
Producers with CIL linkage have greater assurance of supply than those that have to depend on the single-window auctions, he added.
In eastern India’s West Bengal sponge iron capacity is close to 13 mnt and the ratio in which imported and domestic coal are used by producers is 70:30. “When coal import prices were around $300/t FOB South Africa limited bookings happened. However, during a small window when prices dropped to $220/t FOB bookings took place. But prices are still high,” said a DRI producer.
In contrast, the landed cost of 6500-6600 kcal/kg GCV domestic coal from CIL subsidiary Eastern Coalfields Ltd. (ECL) is currently assessed at a record high of INR 18,000-19,000/t. “Mills only have stocks for 15-20 days left and the rainy season is approaching. Production will surely fall,” another source said.
Sponge iron capacity in Chhattisgarh, central India, stands at around 12 mnt and a majority of the mills are being forced to consider slashing production due to low availability of domestic coal amid high global prices. Capacity utilisation currently is around 60-65%.
“Dispatch orders for Jan-Feb’22 are now being delivered from South Eastern Coalfields Ltd. (SECL). However, the steel market is now sinking after the export duty announcement and demand is already down. Demand will dry up in the days to come. So, going ahead, more than coal shortage or high prices, low demand will emerge as the main problem,” contended a Raipur-based mill source.
Coal import market
Indian DRI producers use both imported and domestic non-coking coal. The preference for imports is due to the higher calorific value of coal. For example, while around 0.8* tonnes (t) of South African RB2 coal (5500 kcal/kg NAR) is needed to produce one tonne of DRI, domestic coal requirement is around 1.3-1.4 t*.
Logistical constraints in South Africa continue to weigh on coal exports from that country as shipments via railway remain affected due to poor maintenance, cable theft and vandalism, while miners have deployed trucks to speed up transport via road. South Africa’s rail operator Transnet’s force majeure on RBCT coal railings continues to remain in place further affecting supplies. As a result, India’s portside stocks, too, have depleted fast.
Coal tonnages railed to RBCT already dropped below 60 mnt in 2021 from an average 70 mnt the previous year. The port’s coal export capacity is around 91 mnt/year.
High premiums on supply squeeze
Single-window auctions held by CIL have seen allocations drop while prices rose to historic highs, thereby affecting the entire non-power sector consumers.
During the first 10 days of May’22, CIL subsidiaries SECL, MCL, ECL and BCCL have offered a total of 3.15 mnt of coal, up from 1.62 mnt in Apr. Indicating strong demand, the entire volume was booked at higher bid prices, due to the prevailing supply tightness as the coal companies are not conducting timely auctions amid strong demand.
In case of SECL’s recent auction, high-CV grades from G5-G8 fetched bids in excess of INR 10,000/t. Bid premiums rose almost 495% from the notified price. Premiums had risen by 390% in Mar.
A similar trend was also seen in case of ECL where bids rose sharply by over INR 15,000/t for a few lots that were offered for G4 grade. Bid premium for ECL was recorded at 350% over the notified price, whereas the premium in the case of MCL jumped 749% in the auction.
Outlook
Domestic market activity has suddenly stalled following the announcement of the new export duty structure and prices are falling fast. SteelMint’s steel billet index was assessed at INR 45,600/tonne (t) exw Raipur on 25 May’22, slipping to a four-month low.
Billet prices in central India have fallen by INR 5,000/t since the export duty revision. Prices have fallen to current levels from around INR 56,000/t in the beginning of May.
The rapid fall in steel prices weighs on capacity utilization of merchant sponge producers, although imported coal prices have started to drop quickly in the total absence of demand.
*correction
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