Indian sponge iron, pig iron price spread hits record high

• Spread rises over INR 22,000/t
  
  
• Healthy export bookings push up pig iron prices
  
  
• Slow finished steel sales weigh on sponge iron
  
  
• Delta may narrow on likely resumption in global pig iron supply
  
  
• Domestic sponge prices may find stability on demand-supply dynamics and firm thermal coal rates.
  
  

Morning Brief: The price gap between Indian domestic pig iron and sponge iron has continued to widen lately and has now reached unusual levels.

SteelMint's assessment on 11 April 2022 reveals that domestic sponge iron (P-DRI) prices stood at INR 34,150/tonne (t) DAP (delivered at plant) Durgapur and those of pig iron (steel grade) at INR 56,300/t exw-Durgapur levels. The price spread between the two has increased to a record INR 22,150/t.

Last year, during the same period (12 Apr'21), the spread was at INR 10,100/t with pig iron prices at INR 38,800/t and sponge iron (P-DRI) at INR 28,700/t.

The gap between the two substitute materials has been widening over the past few months. In mid-October, 2021, the spread was seen at INR 10,900/t while towards mid-January, 2022, the same stood at INR 9,900/t.

Factors behind widening spread between sponge iron and pig iron

• Healthy export bookings for pig iron
  
  

Indian pig iron producers have recently concluded some export deals of sizeable volumes to western countries, with the highest share of exports bound for the US, as per latest information available with SteelMint. Over 300,000 t of pig iron export deals have been concluded by Indian producers since mid-February.

Interestingly, India increased pig iron exports by over 50% y-o-y to 1.3 million tonnes (mnt) in 2021 from 0.86 mnt in 2020.

• Slow finished offtake weighs down sponge iron
  
  

Demand for finished steel, especially from the construction sector, took a hit since late-March as end-users were hesitant to lift the material at high prices; this led to weak semi-finished demand amidst rising production costs.

Billet prices also fell sharply by nearly INR 3,000/t from end-March to INR 53,200/t (DAP Durgapur), as on 11 April 2022.

Hence, weak finished steel offtake weighed down domestic sponge iron prices.

• Tight pig iron supply in domestic market
  
  

Domestic pig iron prices remained largely supported by the supply shortage in the domestic market. A few private pig iron plants have undertaken shutdown due to scheduled maintenance.

As per SteelMint reports, a prominent domestic supplier, Kajaria Iron and Steel, temporarily shut down its plant since February and is expected to resume operations from mid-April.

Likewise, a major foundry-grade pig iron producer, Kirloskar Ferrous, suspended operations at its mini-blast furnace no.2 at Koppal in Karnataka for 105 days. The furnace has a capacity of 0.18 mnt per annum of hot metal production.

Another producer, Jai Balaji, based in Durgapur, put its furnace in maintenance mode for a couple of weeks in mid-March.

Short-term outlook

Indian domestic pig iron prices, going forward, are expected to come down as global supply tightness is likely to ease. As per latest reports, Ukraine's leading steel producer, Zaporizhstal Iron and Steel Works, (owned by Metinvest) has announced it will partially resume operations. Also, ArcelorMittal had announced to restart production at its Kryvyi Rih steel plant by 11 April.

Furthermore, pig iron export bookings are less likely to remain supported amidst resistance at higher prices.

Global pig iron trade prices weakened last week amidst bid-offer disparities and increased offers in the market. Pig iron export prices from Brazil and the Black Sea moved down by $15-30/tonne (t) w-o-w. An increased number of offers from India have lowered the bids.

On the other hand, domestic sponge iron prices are more likely to remain range-bound amid less chances of a sharp correction in coal prices in the near term.

Hence, the price gap between sponge iron and pig iron prices in the domestic market may narrow down in the coming months, SteelMint notes.