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With the import of ferrous scrap coming to a standstill, demand for sponge iron is expected to revive in the coming weeks, once existing stocks of scrap are exhausted.
In the new Foreign Trade Policy (effective April 1), the government made mandatory videography of loading of scrap containers in the source country; importers, however, say this isn’t possible. As such, the entire quantity of about 10 million tonnes (mt) of steel scrap import is likely to be affected.
“The steel sector uses scrap as a blend to manufacture steel. But sponge iron can be used in place of scrap. This means demand for sponge iron would rise but the quality of steel will not be hit due to lack of scrap,” said Nitin Johri, chief financial officer of Bhushan Steel.
India’s sponge iron production is estimated at 18 mt a year.
Weak demand from domestic steel mills has hit the profitability of sponge iron producers. After falling to Rs 20,000 a tonne early this year, sponge iron is now being quoted at Rs 21,100 a tonne. “Sponge iron prices remained subdued for the past couple of years due to weak demand from steel mills. Now, with reports of scrap scarcity, sponge iron demand and, consequently, prices will pick up,” said Anand Choudhary of the Chhattisgarh Sponge Iron Manufacturers’ Association.
Sources say the sponge iron sector’s sales are estimated to have increased 24.3 per cent in 2014-15 due to a stellar performance by large-scale manufacturers. Sponge iron is primarily used to produce long steel, used in the construction sector. It is expected the steel sector will grow 6.2 per cent in 2015-16, against 4.3 per cent in April 2014-February 2015.
The government has announced many projects in the infrastructure sector, which will drive steel demand. Owing to this, production of sponge iron is likely to grow 6.4 per cent in 2015-16.
Iron ore and non-coking coal are used to produce sponge iron. Globally, the prices of these commodities have fallen sharply since 2013. Iron ore prices have fallen from $152 a tonne in 2013 to $50 a tonne. Though domestic prices were considerably higher compared to international prices, these have seen a sharp fall in the second half of 2014-15. Domestic producers of iron ore are reducing prices to compete with cheaper imports. As this is expected to continue, raw material expenses are expected to rise 11.9 per cent, a tad slower than sales.
Operating profits of the sponge iron sector are estimated to have risen sharply in 2014-15. The sector’s operating margin is likely to have doubled to 11.1 per cent. During 2015-16, it is likely to remain flat. At the net level, the sector is estimated to have turned around in 2014-15, reporting a net profit equivalent to 2.1 per cent of total income, against a loss equivalent to three per cent of total income in 2013-14. In 2015-16, the net profit margin is likely to expand by 25 basis points to 2.4 per cent.
In the new Foreign Trade Policy (effective April 1), the government made mandatory videography of loading of scrap containers in the source country; importers, however, say this isn’t possible. As such, the entire quantity of about 10 million tonnes (mt) of steel scrap import is likely to be affected.
“The steel sector uses scrap as a blend to manufacture steel. But sponge iron can be used in place of scrap. This means demand for sponge iron would rise but the quality of steel will not be hit due to lack of scrap,” said Nitin Johri, chief financial officer of Bhushan Steel.
India’s sponge iron production is estimated at 18 mt a year.
Weak demand from domestic steel mills has hit the profitability of sponge iron producers. After falling to Rs 20,000 a tonne early this year, sponge iron is now being quoted at Rs 21,100 a tonne. “Sponge iron prices remained subdued for the past couple of years due to weak demand from steel mills. Now, with reports of scrap scarcity, sponge iron demand and, consequently, prices will pick up,” said Anand Choudhary of the Chhattisgarh Sponge Iron Manufacturers’ Association.
Sources say the sponge iron sector’s sales are estimated to have increased 24.3 per cent in 2014-15 due to a stellar performance by large-scale manufacturers. Sponge iron is primarily used to produce long steel, used in the construction sector. It is expected the steel sector will grow 6.2 per cent in 2015-16, against 4.3 per cent in April 2014-February 2015.
The government has announced many projects in the infrastructure sector, which will drive steel demand. Owing to this, production of sponge iron is likely to grow 6.4 per cent in 2015-16.
Iron ore and non-coking coal are used to produce sponge iron. Globally, the prices of these commodities have fallen sharply since 2013. Iron ore prices have fallen from $152 a tonne in 2013 to $50 a tonne. Though domestic prices were considerably higher compared to international prices, these have seen a sharp fall in the second half of 2014-15. Domestic producers of iron ore are reducing prices to compete with cheaper imports. As this is expected to continue, raw material expenses are expected to rise 11.9 per cent, a tad slower than sales.
Operating profits of the sponge iron sector are estimated to have risen sharply in 2014-15. The sector’s operating margin is likely to have doubled to 11.1 per cent. During 2015-16, it is likely to remain flat. At the net level, the sector is estimated to have turned around in 2014-15, reporting a net profit equivalent to 2.1 per cent of total income, against a loss equivalent to three per cent of total income in 2013-14. In 2015-16, the net profit margin is likely to expand by 25 basis points to 2.4 per cent.
