300 sponge iron units close on fund crisis

Lack of working capital has forced around 300 small sponge iron manufacturers to shut shop in the last four months. With an installed capacity between 30,000 and 60,000 tonnes per annum each, these manufacturers are mainly spread in the mineral-rich states of Chhattisgarh, West Bengal, Jharkhand and Orissa.

While a majority of them have applied for fresh loans mortgaging their factory assets, others are defaulting on their past credits.

Now, with this fresh bout of closure, the domestic sponge iron industry has lost about 25 per cent of its installed capacity which has led to about 10,000 direct job losses.

However, what is more shocking is that this problem of shortage of capital is spilling over into mid-size units because of the huge inventory pile-ups. The demand for sponge iron is seen to have dried up perhaps due to the 20 per cent production cuts announced by steel mills. Sponge iron is a major raw material in steel-making.

“This is a big blow to both the sponge iron and steel industries as these plants may not resume their operations even if the financial crisis eases in the months ahead,” an industry official said.

It all began on August 7 this year when global steel prices began to melt down. As a repercussion, sponge iron prices also started falling. In the last four months, the prices have eroded by over 50 per cent to Rs 14,000 a tonne on Tuesday as compared to Rs 28,500 a tonne on August 7.

Sponge iron, however, recovered Rs 1,500 from the pre-Diwali level of Rs 12,500 a tonne on scattered need-based demand. During the past four months, the prices of iron ore fines with 63 per cent of iron content have slumped over 35 per cent to $55 a tonne while ore with 65 per cent iron content declined by 25 per cent to $65-70 a tonne.

Given the fact that India’s economic scenario is recovering with prime lending rates (PLR) starting to ease already and government positive stance on infrastructure projects, banks may relook their funding decisions to industrial units, especially steel and infrastructure.

However, there is little hope for the situation to improve in the next six months, an official said. In this process, sponge iron units may see another round of closure, which may cut the industry’s overall capacity further, he noted.

In September 2006, the sponge iron units had faced similar crises and hundreds of units across the country had stopped operations. But the crisis is deeper this time, another industry official said, with the many job cuts and capacity dwindling.