India's sponge iron production rises 12% in Jan-May'23 to nearly 20 mnt

• Output rises edges up on higher crude steel production
  
  
• Cheaper DRI finds acceptance over scrap
  
  
• Price decline, narrowing margins likely to weigh on production
  
  

Morning Brief: India's sponge iron production has witnessed a noticeable upswing in January-May, 2023 showcasing a steady y-o-y increase of around 12%. The uptick in production comes at a time when the country's overall sponge iron capacity is estimated to have increased to around 62-63 million tonnes (mnt), as per SteelMint estimates.

DRI output rises

During the first five months of 2023, total production of sponge iron in India reached over 19 mnt, reflecting a substantial rise compared to 17.03 mnt in the same period of 2022. This represents a notable y-o-y growth rate of 12%. The growth momentum continued into April and May, as both months registered an increase of over 8% in production as against the year-ago months.

In FY'23, India's sponge iron production reached an impressive 42.75 mnt, marking a 9% rise compared to the 37.55 mnt in FY'22. This growth demonstrates the resilience and strength of the Indian sponge iron industry.

Factors supporting production

Domestic sponge iron production increased on the back of several factors. Key ones are mentioned below:

• Rise in crude steel production: India's crude steel production increased by 12% y-o-y in the January-April period, as per SteelMint data. Crude steel production inched up to 42.14 mnt during the period from 37.82 mnt in the corresponding period of last year. This provided support to higher sponge iron production.
  
  
• Slowdown in scrap imports: The import of ferrous scrap to India witnessed a slowdown in the period between January and April this year. In January, import volumes stood at 1.52 mnt, which gradually decreased to 0.75 mnt by April. However, in February-March, imports had been recorded at 0.87 mnt and 0.83 mnt, respectively. Moreover, total imported scrap arrivals at Indian ports in the first two weeks of May dropped 61% to 123,790 t compared to 316,416 t seen in the same period in April, as per vessel line-up data maintained with SteelMint. This necessitated higher sponge iron usage-cheaper compared with scrap-and, therefore, higher production.
  
  
• Sponge iron exports escalate: After rising 125% y-o-y in April 2023, sponge iron exports continued to increase in May, reaching approximately 80,000 t, almost double compared with 40,000 t recorded in May 2022, as per SteelMint data. The surge in exports was primarily due to the increase in Nepal's melting capacity. Nepal is increasing DRI consumption while, at the same time, curtailing billet imports. The country's mills have been increasing their melting capacities and, as a result, seem to be according more preference to manufacturing billets using sponge iron rather than importing semi-finished steel.
  
  
• Impact on billet production: With the decrease in scrap imports and the corresponding rise in domestic sponge iron production, furnace owners have adjusted their practices to rely more on sponge iron as a substitute for scrap in billet production. The increased usage of sponge iron in billet manufacturing showcases the adaptability and flexibility of the industry to cater to changing market dynamics.
  
  

Price picture

Sponge iron prices have slowed down m-o-m in May. Monthly average prices of sponge iron, specifically pellet-based DRI (PDRI), experienced a slowdown. Prices fell by INR 1,500-2,500/t in Durgapur and Raipur, key induction furnace-based steelmaking hubs in India. The conversion spread from PDRI to billets in Raipur fell by 3%, while in Durgapur it increased by 2%.

However, in April, the conversion spread from sponge iron to billets had increased by 9% m-o-m in Raipur, central India, while it had remained stable in Durgapur. The monthly average conversion spread from pellet-based DRI to billets in Raipur stood at around INR 16,176/t, and in Durgapur, it was INR 15,812/t in April, as per SteelMint.

So, higher spreads till April-amid declining coal and iron ore prices-had kept production volumes supported, SteelMint understands.

Outlook

Sponge iron prices have dropped 4-5% m-o-m in May in key locations in eastern and central India, as per data. Amid declining iron ore and global coal prices, as well as sluggish domestic demand, it is expected that metallics prices are expected to remain subdued. So, narrowing spreads may weigh on domestic sponge iron production in the near term.