Nepal's sponge iron imports surge over 75% in Jan-Jun. Know why?

• Billets imports drop over 50% in H1
  
  
• Indian mills have enough DRI for exports
  
  
• Nepal's DRI imports to be on higher side in foreseeable future
  
  

Morning Brief: Nepal's sponge iron (direct reduced iron) imports have risen a whopping 77% in the first half (January-June) of 2023, reveals data maintained with SteelMint. Volumes touched 0.45 million tonnes (mnt) in these first six months (H1) compared to 0.25 mnt in the same period last calendar.

On a m-o-m basis too, June imports are up 25% to almost 95,000 tonnes against 76,000 tonnes in May.

Factors driving up Nepal's sponge iron imports

Focus on increasing domestic melting capacity: Nepal is predominantly an imports-dependent country, which results in huge foreign exchange drain-out. At the same time, there has been a concerted effort by the government to build infrastructure, which has resulted in a growing demand for steel. However, the country, in attempts to stem forex outflow amid a sliding currency, has encouraged its domestic mills to opt for backward integration and develop their own melting capacities which have led to huge imports of sponge iron as a feed, mainly from India because of the geographical proximity and hence logistics viability. The focus has been on using sponge iron to make steel rather than importing costlier billets. Resultantly, Nepal's own melting capacities, from a modest 0.3-0.5 mntpa a few years back, crossed 2 million tonnes per annum in 2022.

Lesser dependency on billets: SteelMint's data also reveals that concomitantly billets imports from India dropped 53% y-o-y to 0.15 mnt in January-June, 2023 from a more robust 0.32 mnt in the same six months in 2022 to make way for sponge iron. Earlier, especially around 2019-2020, billets imports to Nepal comprised a major portion of India's longs exports. These were subsequently re-rolled into rebar by the Nepalese mills as their melting capacities were limited.

Indian mills focus more on domestic markets: Another key reason for the lesser billet imports lay in Indian mills' weaker focus on longs exports. With the overall global export market being subdued in the last six months, Indian mills preferred to sell domestically where realisations were higher. This tight supply in billets also created further room for Nepal's higher sponge iron imports.

Increased DRI production in India: India has lived up to its fame as the largest sponge iron producer globally. Production witnessed a growth of around 12% in FY23 to over 43 mnt from 38.60 mnt in FY22, with the country emerging as a key player in the global market. Thus, Indian sponge producers had enough material for export allocations even after satiating domestic demand.

Pre-Budget booking spree: Nepalese mills were apprehending a duty on sponge iron imports ahead of the national Budget (which was placed in end-May) that led to a booking spree for the material ahead of the announcements. However, no duty was imposed but the mills were already well-stocked up. This also inflated sponge iron imports in H1.

Excise duty increase in some long products: However, the government introduced adjustments in the excise duties on several long products in the last Budget. There was an additional NPR 1,800/t excise duty on wire rods and high-carbon wire rods, along with an NPR 1,000/t increase on TMT rods. This was done to stimulate domestic demand for finished steel. It may be noted that Nepal is facing severe liquidity crunch and the additional excise levy will generate revenue that can be diverted towards funding infrastructure, which, in turn, will whip up domestic finished steel demand. Hence, the higher demand for sponge.

Outlook

Nepal's imports of sponge iron will remain on the higher side in the foreseeable future since the factors impelling this demand will sustain for some time. Mills will continue to expand melting capacities as the government tightens the noose on letters of credit (LCs) and forex outflow. In this scenario, importing sponge iron is more viable than costlier billets.

SteelMint hosting joint global conference on DRI, coal, & iron ore in Kolkata

SteelMint is hosting a joint international conference on sponge iron, iron ore and coal from 24-26, Aug, 2023 at the JW Marriott, Kolkata. Over 20 esteemed speakers and 500 participants will gather to discuss key issues challenging the steel sector. And thrash out ways to navigate through the current scenario. It is an ideal platform for miners, pellet and sponge iron makers, steel manufacturers, traders, equipment suppliers, and technology providers to network under a single roof. Hope to see you there. Register fast.