Sponge iron industry gains on double-digit drop in FY20 steel imports

Lower scrap imports could pave way for vehicle scrap policy

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

"Since sponge iron is used as an alternate 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 Limited told Business Standard.

According to the Joint Plant Committee data, the country’s steel imports declined 14 per cent last year to 6.7 million tonne. Whereas, on the other hand, the domestic sponge iron industry witnessed 7 per cent year-on-year production growth at 37.14 million tonne in the period under review. Scrap steel is one of the items in overall steel imports.

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

Imported scrap is usually available at a premium of over Rs 4,000-5,000 a tonne over domestically produced sponge iron. The price premium is mainly because of higher yield in scrap, which is close to 95 per cent as against sponge iron that is about 79-82 per cent.

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

There are close to 950 sponge iron units across country of which about 750 units are currently operational. Sponge iron units are either coal-based or gas-based with quality of sponge iron derived from the latter being better.

However, coal-based sponge iron production is higher compared to gas-based units mainly due to the better availability of domestic coal.

While the sustainability of sponge iron demand remains a question in FY21 amid the Covid-19 outbreak and economic slowdown, industry officials are of the view that the time is right for a vehicle scrap policy in the country to address the scrap 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 official with Adhunik Metaliks.

According to Sponge Iron Manufacturers Association (SIMA), coal-based sponge iron production in FY19 stood at 21.3 million tonne, up 31 per cent from last year, while the gas-based units produced 8 million tonne, up 6 per cent from last year.

“Domestic vehicle scrap would serve as a better raw material over sponge iron or imported scrap as this scrap 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 last month had said the government would introduce a vehicle scrappage policy, under which recycling clusters may be established near ports. The policy also has the potential of injecting life into the automobile industry due to fresh demand, he had said.

Though a vehicle scrappage policy seems like a solution to trigger fresh demand for auto in the country, an alternate market for labour intensive sponge iron industry is also needed as demand for the produce may drop post 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.