Indian sponge iron producers cut output as prices fall

Indian sponge iron producers are reducing output as a sharp fall in prices over the past couple of months erodes profit margins.

Sponge iron, also known as direct-reduced iron (DRI), is made by directly reducing iron ore through the use of a reducing gas or thermal coal in an electric arc furnace. Most of India's gas-based sponge iron production is consumed captively as an input for processed steel products, while merchant sales of sponge iron largely come from coal-based units. India has total DRI production capacity of 46mn t/yr.

India's construction sector is struggling because of tighter availability of funds, with banks cutting back lending as they try to manage a heavy load of bad debts. Payments to contractors have stalled, even for state-funded infrastructure projects. India's latest federal budget last week did little to alleviate liquidity concerns, as it mostly laid out a roadmap for long-term growth rather than provide concrete measures to boost short-term liquidity and economic activity.

Prices of sponge iron have fallen by nearly a third over the past couple of months as demand for steel in the spot market has been hit by a slowdown in housing and infrastructure projects, said Deependra Kashiva, secretary-general of the Sponge Manufacturers Association of India.

The average price of sponge iron from coal-based units in the central Indian state of Chhattisgarh has fallen to 16,000 rupees/t ($234/t) from Rs23,000/t two months ago. Production has likely fallen by 5pc in the last 15 days.

"Some producers are idling capacities due to the slow demand. So if a producer has two furnaces, he is probably running one at the moment," said Kashiva.

Higher prices of raw materials, such as iron ore, have also eaten into profits at producers. But Kashiva expects these price increases to soon moderate in the key producing state of Odisha, as demand for iron ore from steel mills slows down. "Demand is a bigger concern than raw material prices," he said.

Sponge iron producers will have to make sharp cuts in raw material purchases if the current slowdown in demand continues, something they have avoided doing so far. "Imports of thermal coal from South Africa will fall for sure if the slowdown persists," said Kashiva.