Indian sponge iron prices fall to 9-month low. Will this downtrend continue?

Indian domestic sponge iron prices have been falling over the past one month. SteelMint's latest assessment shows sponge iron prices hitting a nine-month low.

The benchmark sponge P-DRI (FeM 80%) prices in Raipur stood at INR 26,800/tonne (t) exw on 4 Dec'21. Similar price levels were last seen in Mar'21.

It is important to mention that India's sponge iron capacity stands at around 57 million tonnes (mn t) per year. Production in FY'21 was recorded at 35 mn t. With an estimated monthly rate of roughly 3.2 mn t, it is anticipated that India's sponge iron production may touch 38-40 mn t this fiscal year (Apr'21-Mar'22).

Factors weighing down sponge iron prices

• NMDC's prices slump to 8-month lows:PSU miner NMDC cut iron ore prices sharply for Dec'21 deliveries. Lumps prices saw a sharper correction compared to fines. After the price cut, the miner's lump offers hit an eight-month low, data maintained with SteelMint shows.
  
  

NMDC's Baila iron ore fines prices were down by INR 200/t to INR 4,560/t while 10-40mm DR-CLO lumps were down by INR 870/t to INR 6,040/t. Prices are on FOR basis, excluding royalty, DMF and NMET. Competitive pellet offers, dull response at recent auctions, and declining prices in Odisha resulted in lowering of offers.

• Pellet prices in Raipur at 1-year low:
  
  SteelMint's bi-weekly domestic pellet (Fe 63%) index, PELLEX, was recorded at INR 9,500/t DAP Raipur on 3 Dec'21, hitting a one-year low. Prices were lower by INR 150/t against the last assessment of INR 9,650/t on 30 Nov'21. Domestic pellet prices have been under pressure amidst lower realisations in exports along with limited bids from sponge players.
  
  
• Fall in coal prices:
  Indian thermal coal prices continued to remain under pressure amidst bearish global sentiments caused by rising Omicron cases in Europe which have raised concerns of a potential lockdown there. In China, the NDRC's announcement with regard to controlling rising coal prices are also having a downward pressure on coal.As per CoalMint reports, portside prices of South African (SA) RB2 (5500 NAR) grade corrected by INR 2,300/t w-o-w, tracking an 18% w-o-w fall in imported South African thermal coal prices. RB2 prices, as on 2 Dec'21, were assessed at INR 10,000/t ex-Gangavaram.
  
  
• Scrap prices continue to remain low
  
  

India's domestic as well as scrap import prices have seen a downtrend in the past few weeks. Imported prices are under pressure due to drop in bids as mills turned inactive since the last one month. Mills are preferring domestic material over imported since the landed costs of latter are higher compared to former.

SteelMint's assessment for HMS (80:20) was recorded at INR 35,800/t ($474/t) DAP Mumbai, down INR 200/t ($3/t)w-o-w while prices in Jalna were at INR 35,500/t DAP ($473/t), down INR ($5/t).

Meanwhile, price indications for Dubai-origin HMS (80:20) stand at around $475-480/t, CFR Nhava Sheva whose landed cost to Mumbai comes to around INR 38,000/t ($478/t), which makes it costlier by around INR 2,000/t ($27) compared to the domestic material.

On the other hand, domestic scrap prices were hit by subdued demand and dull finished steel sales.

Will mills increase sponge feed?

As per SteelMint analysis, prices for 100% metallisation of sponge P-DRI are at INR 37,000-37,200/t while the same for HMS scrap stand at INR 38,000/t DAP Mumbai. Hence, the spread between sponge iron and scrap prices is merely INR 500-1,000/t, showing no significant difference, which hints that steel mills may not sharply increase sponge feed over scrap.

Will sponge prices correct further?

Around 65% of the feed comprises sponge iron and 35% scrap in EAF/IF steelmaking. Consequently, if sponge prices remain lower, then the mills would prefer it over scrap. Accordingly, scrap prices may also remain under pressure.

With iron ore and pellet prices, the key raw materials for sponge-making, falling consistently over the last few months, there is further scope of sponge prices correcting in the near term.

However, importantly, when China resumes buying pellets from India, possibly Mar'22 onwards, when the Lunar Holidays and Winter Games would be over, prices of the same could increase, which, in turn, would support sponge price.