With over 400 units, India is the world’s largest sponge iron (DRI) producer, boasting an annual production of about 26-28 mnt against installed capacity of 46-47 mnt. The Indian sponge iron industry is highly fragmented in terms of production capacities. Top 20 producers contribute about 60- 65% of total production, whereas the rest contribute 35-40% of the production. Sponge iron contributes 25% of India’s total crude steel production of 90 mnt. While sponge iron production increased in FY16, it may as well be the reason for subdued prices in the ongoing fiscal.
According to SteelMint, sponge iron production which was recorded at 23 mnt in FY15, surged by 22% y-o-y to 28 mnt in FY16. The production is expected to reach 29.5 mnt in FY17. Of the total production in FY16, sponge iron (C-DRI) accounted for nearly 54% and pellet sponge (P-DRI) accounted for about 46%.
State-wise Sponge Iron Production in FY16
Odisha accounted for nearly 23% of India’s total sponge iron production making it the largest sponge producing state in the country. Other major DRI producing states of India are Gujarat (5.1 mnt), Karnataka (3.2 mnt) and West Bengal (2.7 mnt).
Factors Supporting the Rise in Production
1. Improved domestic iron ore supply
The increase in domestic iron ore production was absorbed by sponge iron units. India’s iron ore production increased by 20% y-o- y from 129 mnt in FY15 to 155 mnt in Fy16.
2. Major DRI producers raised iron ore sourcing
Jindal Steel & Power witnessed 31% growth in its yearly iron ore sourcing pattern in FY16. It sourced 7.6 mnt in FY16 compared to 5.8 mnt in FY15. Essar Steel raised its iron ore sourcing from 5.9 mnt in FY15 to 7.3 mnt in FY16. South India based manufacturer – BMM Ispat increased its iron ore sourcing from 1.1 mnt in FY15 to 2.3 mnt in FY16. Bhushan Power & Steel sourced 4.9 mnt iron ore in FY16 compared to 2.9 mnt in FY15, up by 69% y-o-y. Bhushan Steel also increased its iron ore procurement from 3.4 mnt in FY15 to 4.6 mnt in FY16.
3. Standalone pellet makers reduced iron ore purchases sharply
Standalone pellet manufacturers reduced their iron ore procurement by 23% y-o-y in FY16. They sourced 4.3 mnt iron ore in FY15, which declined to 3.3 mnt in FY16. Capacity utilization of these pellet plants also reduced drastically in last fiscal amid dull demand for pellets. Prime reason behind subdued demand for pellets was preference of sponge units towards lump because of its cost effectiveness.
4. Increase in pellet production by JSPL & Essar
JSPL’s pellet production moved up by 44% y-o-y, from 3.2 mnt in FY15 to 4.6 mnt in FY16. Essar Steel sourced 7.3 mnt iron ore in FY16 compared to 5.9 mnt in FY15. Also, based on iron ore sourcing figures, Essar Steel’s pellet production has moved up from 5.4 mnt in FY15 to 6.5 mnt in FY16.
5. Falling iron ore prices
India’s rising iron ore production and declining sponge iron prices forced miners to cut iron ore offers. Iron ore prices in Odisha and Chhattisgarh fell by up to 43% y-o-y in FY16.
6. Falling lump premium made imports cheaper for sponge manufacturers
Gujarat and South India based sponge units have maintained their iron ore imports at similar levels in last two fiscals. West and South India based units imported nearly 3 mnt iron ore in FY15 and 3.1 mnt in FY16. Prime reason behind imports was plunge in spot iron ore lump premium in last fiscal. In FY14, lump premium was mostly seen hovering in the range of USD 0.15-0.3/mt CFR China. While in FY15, it fell and was seen wavering in the range of USD 0.05-0.3/mt, CFR China. In FY16, it descended further to levels of USD 0.04-0.18/mt, CFR China.
Subdued Outlook for Domestic Sponge Iron Prices in FY17
Growing sponge iron production has put pressure on its domestic offers. With significant augmentation of iron ore production from states of Odisha, Karnataka, Chhattisgarh and Goa, India’s iron ore production is anticipated to increase by 18% y-o-y and touch 183 mnt in FY17. Increasing domestic iron ore production will boost sponge iron production in the country. It is expected that India’s sponge iron production would stand at 29.5 mnt in the current fiscal (up by 5% y-o- y). Steel 360 analyzed that weighted average prices of major sponge iron markets in India fell by about 30% y- o-y in FY16 amid quelled demand and increased production. While India’s sponge production is to get a boost over strengthening iron or production, demand for steel in the country has pulled finished steel prices down. If finished steel prices continue to decline and market remains unconducive, semi-finished steel market will be adversely affected, leading to thin margins.
A) 1.85 mt iron ore is consumed to make 1 tonne of sponge iron (C-DRI) in case of domestic raw material
B) 1.6 mt iron ore is consumed to make 1 tonne of sponge iron in case of imported iron lump
C) 1.1 mt iron ore is required to make 1 mt of pellet
JSW Steel Dolvi has been excluded from the study because of unavailability of data.
Source: Steel 360 Magazine July’16 Issue