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The reasons for the success of Sponge Iron Industry in India

  • Why EAF contribute more than half of the crude steel production?
  • Scrap iron vs. Sponge iron.
  • The coal based Sponge iron plants in India.
  • What 2017 holds in terms of steel demand in India?

 

Iron and steel form the backbone of global infrastructure. Roads, railways, bridges, airports, industrial plants, buildings, automobiles, etc. use steel and allied products. China, Japan and India are the top three producers of crude steel and contributed ~62% to the total crude steel production in 2016. Crude steel is primarily produced through blast furnace (BOF) or electric arc furnace (EAF) and this accounted for 74.3% and 25.3% of the global crude steel production in 2016. EAF plants are typically low capital-intensive plants with lower gestation period. However, these contribute lesser to the global crude steel production as compared to BOF due to limited availability of primary raw material and non-scalability. In India, EAF plants gained prominence against the global trend and contributed more than 50% of the total crude steel production owing to low capital intensity, this led to blooming of small steel producers. The EAF steel contributed around ~57% to the total crude steel production in the nation (2016) in comparison to ~25% globally.

The EAF uses scrap iron as a primary input, but its availability is low and this led to the exploration of alternative raw materials. Thus, sponge iron prepared through the reduction of iron ore using non-coking coal or natural gas as reductant was developed as a substitute for ferrous scrap. The consumption of sponge iron by EAF typically range 60-80% as an input with the metallic scrap, hence, easing the demand for steel scrap. Sponge iron manufacturing gained prominence in India owing to short supply and high prices of scrap, low technology barriers and a high presence of EAF plants in the domestic market. Therefore, India became the largest producer of sponge iron in the world and accounted for ~24% of the global production in 2016. Furthermore, the coal based sponge iron plants found eminence in India despite low efficiency. This was due to less investment, lower gestation period, easy availability of coal and limited accessibility of gas. Presently, coal based units produce ~90% of the total sponge iron in India. 

Moreover, India’s crude steel production grew at a CAGR of 6.75% between 2006-16. The production of EAF steel as a share of total steel grew at a steady rate, from 57% (2006) to 68% (2012), thereafter, this declined to ~57% in the past four years, ending 2016.   

     

The domestic crude steel production buoyed between 2006-11, supported by sustained economic growth despite a global economic meltdown. Additionally, EAF steel production grew in line with crude steel, this translated to improvement in sponge iron manufacturing, which grew by 49% between 2006-11. In addition, as sponge iron is used as an alternative to scrap iron (EAF process), the demand for sponge iron is also dependent on prices and availability of ferrous scrap. The scrap prices increased between 2006-11 making this dearer for small steel producers and sponge iron production also increased. The only exception being 2008, when the ferrous scrap prices declined, however, the sponge iron production increased due to a healthy demand. The price of sponge iron depends on key input materials such as iron ore and non-coking coal since prices of these increased from 2006-08, the sponge prices also rose. However, the non-coking coal prices declined in 2009 and led to a fall in sponge iron prices despite a healthy demand scenario. 

     

The domestic crude steel production slowed down after 2012 due to cheaper imports from Korea and Japan. Subsequently, the EAF players were the hardest hit by the cheap imports and EAF plants were shut as these EAF producers were typically small. Thereby, leading to a decline in EAF steel production succeeding 2013. The EAF steel production share moderated to ~57% of the total crude steel production between 2013-2016. The slowdown in EAF steel production impacted domestic sponge iron production. Simultaneously, sponge iron production was also plagued with several issues such as the iron ore mining ban in India made it difficult to source raw material and the decline in steel scrap prices made scrap economically viable. The iron ore mining was banned in Karnataka (July 2011) and Goa (September 2012) because of environmental concerns, land use and other covenants. Consequently, the sponge iron production declined by ~23% between 2011-13. The price of sponge iron gained momentum during the period owing to demand-supply mismatch. The sponge iron prices increased at a CAGR of 22.5% from 2010-12. However, these moderated by ~9% in 2013 (still ~33% higher than 2010 levels) as the iron ore mining ban was eased. The mining ban was partially lifted from Karnataka (April 2013) and followed by Goa (April 2014) albeit with a production cap. The sponge iron production increased by 20% on a Y-O-Y basis in 2014 as the non-coking coal supplies improved. However, the sponge iron prices increased marginally by ~2% Y-O-Y owing to demand-supply mismatch. The EAF steel production grew 8% in the period as compared to a double digit growth in the production of sponge iron.

In the past 2 years, the domestic crude steel industry was in glut marked by stagnant steel production due to cheap imports from China, Korea and Japan. A sluggish steel market translated into stagnant demand for sponge iron and its production declined by ~20% (2015). Moreover, sponge iron prices also fell by ~11% (2015). However, as the price of scrap rose by ~47% (2016), the sponge iron demand as a substitute to scrap increased despite a stagnant EAF steel production. The sponge iron production grew by 22% (2016). Although, prices continuously declined as the end steel prices remained low. 

In 2017, the demand for steel in India is expected to recover ~15%, this will be supported by a rebound in the automobile and infrastructure sectors. The imposition of definitive anti-dumping duty on steel products until 2021 by the Government of India will safeguard Indian steel producers from cheap imports and is anticipated to assist in the recovery of domestic steel prices. An improvement in steel demand and its prices may lead to a rise in sponge iron demand. On the input side, the government plan to auction new coal blocks and gradually ease out production cap on iron ore, this will lead to easy supplies for sponge iron manufacturers. In 2017, the sponge iron industry is likely to witness better business atmosphere both in terms of volume and margins.  

Also Read:- Minerals and metals processing industry machinery, impact of volatility in metal prices

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