Sponge iron gains as steel imports fall

Domestic sponge iron industry grew 7 per cent in FY20

The double-digit drop in India’s steel imports in the financial year 2019-20 (FY20) has augured well for the domestic sponge iron industry, which saw a 7 per cent rise in production.

“Since sponge iron is used as an alternative to steel scrap in several consumption segments, a drop in scrap imports last year helped domestic sponge iron industry benefit,” M Chinnasami, director at Tamil Nadu-based sponge unit company Agni Steels, told Business Standard.

According to Joint Plant Committee data, steel imports declined 14 per cent in FY20 to 6.7 million tonnes (mt). Meanwhile, the domestic sponge iron industry witnessed a 7 per cent year-on-year (YOY) growth in production at 37.14 mt in the period under review. Scrap steel is part of overall steel imports.

“Also, due to the economic slowdown, consumers preferred to keep costs low and, hence, opted for sponge iron over scrap last year,” Chinnasami added.

Imported scrap is usually available at a premium of ~4,000-5,000 a tonne over domestically produced sponge iron. The premium is mainly because of higher yield in scrap, which is around 95 per cent, compared to sponge iron, which is about 79-82 per cent.

“Steel scrap has better quality than sponge and, hence, is used in both long as well as flat steel consuming segments,” said an official with Adhunik Metaliks, speaking on condition of anonymity.

There are around 950 sponge iron units across the country of which about 750 are currently operational. Sponge iron units are either coal-based or gas-based and quality is better in the latter. However, coal-based production is higher because of better availability of domestic coal.

While the sustainability of sponge iron demand remains a question in FY21 amid the Covid19 outbreak and economic slowdown, industry officials say the time is right for a vehicle scrap policy to address availability.

“Since the flow of imported scrap is weak at present, a vehicle scrap policy can help domestically produced scrap make inroads, helping it develop a market share in the consumption segment,” said the Adhunik Metaliks official.

According to Sponge Iron Manufacturers Association, coalbased sponge iron production in FY19 stood at 21.3 mt, up 31 per cent from last year, while gasbased units produced 8 mt, up 6 per cent over last year.

“Domestic vehicle scrap would serve as better raw material than sponge iron or imported scrap as it would be good quality auto steel. Moreover, sponge iron does not meet BIS (Bureau of Indian Standards),” said Sushim Banerjee, director general at Institute of Steel Development & Growth (INSDAG).

Union Minister Nitin Gadkari said last month that the government would introduce a vehicle scrappage policy, under which recycling clusters might be established near ports. The policy also has the potential of creating fresh demand for the automobile industry, he had said.

Though a scrappage policy seems like a solution, an alternative market for labour intensive sponge iron industry is also needed as demand for the produce might drop with the availability of domestically produced scrap.

“Sponge iron producers could look at exports to Bangladesh, Sri Lanka, and Nepal and plug themselves to the export market from the current focus on domestic,” Banerjee said.