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Sponge iron makers shutting shop on heavy losses

Nearly 20 out of 70 sponge iron producers in India’s largest hub Raipur have shut shop since January due to massive losses.

The conversion margin from iron ore to sponge iron has turned negative over the last four months on continuous rise in raw material prices. Producers of sponge iron, the key raw material for steelmaking, however, have failed to pass on the increase to consumers. As a consequence, producers, especially standalone units, have incurred huge losses.

Since the beginning of this year, sponge iron prices have been Rs 20,000-20,500 a tonne. The demand has been fluctuating, especially from long steel producers, as the growth in their user sectors - construction and infrastructure - has come to a standstill.

Against the general trend around the same time in earlier years, construction activities are very low on Friday, which has a cascading affect on the sponge iron industry. The demand of long steel, which generally moves at least 1.5 times of GDP growth in the country, is currently below the estimated economic growth of 7.5 per cent. Hence, the long steel sector has to pick up for a change in the fortunes of the sponge iron industry, said Mr. Amitabh Mudgal, vice president, marketing and corporate affairs, of Monnet Ispat, one of the largest sponge iron producers.

For the sector to grow at a healthy pace, the demand has to grow at least 11-12 per cent, which is not happening. As a consequence, many small producers that had mushroomed in the last couple of years have gradually started shutting down, leading to consolidation in the industry, he added.

The landed cost of iron ore in Raipur from the nearby NMDC mine costs Rs 7,300 a tonne. Since 1.9 tonnes of iron ore is required for one tonne of sponge iron production, the total cost of iron ore comes to Rs 13,870. Similarly, coal prices have gone up to Rs 5,500 a tonne. Considering the thumb rule of 1.6 tonnes of coal for one tonne of sponge iron, the total price of coal comes to Rs 8,800. With the dolomite cost at Rs 1,500 and other miscellaneous (including labour charges) at Rs 400 a tonne, the total cost of one tonne of sponge iron production comes to around Rs 24,500 a tonne. This means producers have been incurring losses between Rs 3,500 and Rs 4,000 a tonne.

To survive, sponge iron mills are using inferior quality iron ore and coal, which generates poor quality of sponge iron. But it helps in cost savings. Mills with captive raw material sources like iron ore, coal and captive power are somehow managing to run their plants, said an official with a large producer.

Meanwhile, sponge iron units have started setting up forward integration plans for steel ingot and billet manufacturing. This will help protect some margins to run the plants for some more time, said the official.

Standalone producers are those who do not have linkages of raw material, including iron ore and coal. Hence, sponge iron producers depend for their raw material procurement on miners, who revise prices frequently.

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