Sponge iron prices up 3-5% on spurt in consumption by steel mills

The sponge iron production has suddenly turned profitable after remaining profitless for almost 6-7 months

After seven months of drawdown, the Rs 40,000-crore sponge-iron sector in India has seen a sign of revival, with its maiden price rise of three-five per cent in January. Producers have seen a spurt in demand from steel mills in a month.

The past seven months have seen the worst phase on non-availability of ore due to the mining ban in Goa and lower mining production in Karnataka. Used as a raw material for steelmaking, the demand for sponge iron has reduced due to fewer projects announced for construction. As a result, producers have reduced utilisation to 30-35 per cent in seven months. With 18.7 million tonnes of production, the sector recorded 50 per cent utilisation during FY13 compared to 20.6 million and 58 per cent of utilisation a year ago.

"But, demand has revived in a month suddenly. Therefore, makers have raised prices three-five per cent this month," said V R Sharma, president of Sponge Iron Manufacturers Association and deputy managing director of Jindal Steel and Power.

Sponge iron is quoted at Rs 20,500 a tonne. The price of pig iron, also used for steelmaking, also moved up to Rs 25,500 a tonne on Tuesday. While ore prices have been range-bound between $125 and $135 a tonne, coal and other energy costs have gone up.

Steel mills have decided to pass the rise to consumers with a proportionate increase in their product prices with immediate effect.

"With the lowering of capacity since June, sponge-iron inventory has dried completely. Any upsurge in demand will benefit makers with a proportionate increase in margins," said Amitabh Mudgal, vice-president, Monnet Ispat, a sponge-iron and steel maker. Steel consumption in a past month has risen seven per cent.  

"Many mills in the north have shut their plants due to lack of electricity. Now they have gradually started coming on stream with the restoration in power supply. So, sponge-iron demand will continue its rising momentum," said Sharma.

Meanwhile, the government has proactively intervened (through the Cabinet Committee on Investment) to clear major investment projects which is key to revive the investment cycle. With expected commencement of investments in industrial and infrastructure projects post general elections, Indian steel demand is expected to improve in FY15.