India: Sponge units reel under domestic coal shortage, surging imported prices

The sponge iron sector is reeling under lack of thermal coal supply. The units say it is the power sector that is starving them of domestic coal at present.

A sponge iron manufacturer, speaking to SteelMint, said: "The sponge iron industry is not getting enough coal for the last two months, due to lack of supply. We are not able to lift any coal. We are being told, the higher authorities have ordered collieries to supply only to the power plants."

Another sponge iron manufacturer said, "As it is, more than 90% of the entire volume of coal gets supplied to the power plants. Around 8-10% is lifted by the non-power sector, which comprises steel, aluminium, cement, fertiliser etc. So, even if you divert this mere 8% to the sector that is consuming the lion's share, it will not really satiate the latter's (power plants') appetite. So, why is the non-power sector being deprived of coal?"

Hit by rising imported coal prices

Sponge iron units consume around 40-45 million tonnes (mn t) of thermal coal per annum of which 10-15 mn t comprise domestic, procured through linkages with Coal India. Around 20 million tonnes are being imported from South Africa and the rest is bought from the spot market through traders and auctions. However, most of these plants have shifted to domestic coal over the past 2-3 months since the units are battling sharply rising imported coal prices. RB2 rates have spurted from average $84/t FOB in May'21 to the current $170/t FOB levels.

Since most of the sponge units have reduced their feed of imported coal, there is no option but to shift to the lower quality domestic variety. But their productivity has reduced by 15-20% over the last 2-3 months compared to what they would have produced using the higher grade imported variety. So it is expected that production will be hit to an extent in the short to medium term although they are operating at optimal capacity.

But, a marginally higher demand for sponge iron from the export market this week increased inquiries for thermal coal, thereby increasing the sourcing pressure on the sponge units.

"Domestic coal production remains weak and delivery via auction would also take another six months' time," a Raipur-based importer said.

Outlook

The cost of production from the sponge iron manufacturers will remain high. Additionally, their productivity will be impacted in the short to medium term on domestic coal usage.

SteelMint also feels domestic scrap demand or prices will remain firm or relatively high compared to the previous months supported by higher sponge iron prices and lower availability.

The coal crisis is likely to continue till the power plants' stock scenario stabilises. Sponge iron players feel CIL should hold more auctions for the power sector. Imported coal prices too may stay elevated due to strong Chinese demand. Both factors may prolong the coal pressure on sponge players.