Coal block deallocation to affect already troubled sponge iron industry

After the SC's order for cancelling blocks' allotments, there is uncertainty, with the cost of import raising issues of viability

The domestic sponge iron sector, already grappling with increased scrap import and shortage of iron ore, might have another challenge to face on coal supply. A section of the industry, depending upon outside supply, is seen getting affected after the Supreme Court’s decision to de-allocate captive coal blocks.

Of the 218 captive blocks, 69 were allotted to the iron and steel sector. Of these, nearly 80 per cent were with sponge iron entities.

In the year ended March 2014, India produced about 18 million tonnes of sponge iron, of which 15.5 mt came from coal-based units.

“The unit set up in the mining area is part of the block which is de-allocated,” Lalit Beriwala, director at Kolkata-based Sova Ispat, told Business Standard about his own case. “So, we are losing not just the captive coal block but also the unit.”

Sova Ispat runs a 108,000-tonne sponge iron unit in West Bengal. The company has in the past five years invested Rs 300 crore in developing infrastructure at the block. As on September 30, it had debt of Rs 200 crore and is concerned on repayment, given the current conditions.

“There is uncertainty. We were in losses in FY13 and managed to somehow break even in FY14. It was this year (FY15) that we were to make a profit. But with this coal block de-allocation, we do not really know the fate of our plant,” said Beriwala.

In total, there are about 350 coal-based sponge iron plants across the country. Of these, nearly 40 were allocated captive non-coking coal blocks, while the rest are dependent on linkages from Coal India.

“Importing coal is an expensive option. Our cost of production will shoot to Rs 4,000 a tonne if coal is imported,” said Beriwala.

In CARE Ratings’ report on coal de-allocation, the captive coal cost per tonne of sponge iron was Rs 1,977, indicating import of the fuel would raise the cost to Rs 5,450 a tonne,  which  in turn will hurt the profitability of sponge iron players.

More, for power plants or steel or sponge iron units in land-locked areas, coal import might not be viable and all of them might not even get e-auction coal, said the CARE report.

Despite the challenging environment, industry officials feel the current situation will not lead to any major damage to the sponge iron sector. “There will be only temporary disruption in the supplies of sponge iron on account of de-allocation of coal blocks,” said Essar Steel sources. The company is among the large sponge iron manufacturers and runs a 5.5-million tonne gas-based plant.

“There is some concern since captive blocks have been de-allocated but the situation is not alarming,” Deependra Kashiva,  executive director of the Sponge Iron Manufacturers Association, told Business Standard. “These units can certainly turn to coal linkages from Coal India if they do not get back their captive blocks at e-auctioning.”

However, CARE’s analysis says there is no clarity on the possible relief to these sponge/steel manufacturers through coal linkages, which charts out a rather uncertain path for these entities. Higher costs also raise concerns about the project viability of many small and medium-size sponge iron manufacturers.

In the year ended March, India produced about 18 million tonne of sponge iron, of which 15.5 million came from coal-based units.