Nepal's demand to support India's sponge iron exports in 2022

India's sponge iron export volumes are likely to rise this year owing to increasing bookings from neighbouring Nepal.

Nepal is a top importer of Indian steel products. However, in the past few months, its imports of sponge iron from India have spurted.

India's sponge iron exports to Nepal increased by a whopping 59% y-o-y to 0.27 million tonnes (mnt) in 2021 compared to 0.17 mnt recorded in 2020, according to customs data maintained with SteelMint.

However, India's total sponge iron exports in 2021were recorded at 0.61 mnt as against 0.63 mnt seen in the previous year.

Bangladesh stood as the largest importer with 0.3 mnt. But, the volumes declined by 7% y-o-y compared to 0.32 mnt in 2020.

Nepal was the second-largest importer followed by Bhutan with 0.03 mnt.

Factors to support Nepal's higher sponge demand

There are a few factors that will support Nepal's demand for sponge iron and, in turn, India's exports of the same.

• Rise in melting capacities: This Himalayan kingdom has substantially increased sponge iron sourcing from India in recent years. Volumes will only grow with the rise in melting capacities in the country. At present, Nepal's installed melting capacity is about 500,000-600,000 t per year, an increase from the 400,000 t earlier. Currently, Nepal mills melt roughly about 80% of sponge iron and, for the remaining 20%, scrap and other metallics, to produce one tonne of hot metal.
  
  
• Customs duty removal: It may be noted that, last year, the Nepal government removed customs and excise duty on sponge iron imports for financial year 2021-22 (FY'22) from the existing 5%, citing the need to facilitate domestic manufacturing growth. This encouraged induction furnace steel producers to import more sponge iron.
  
  
• Mills in expansion mode: To take advantage of the duty removal, several steel producers in Nepal either came up with expansion plans or considered setting up their own induction furnaces to reduce production costs.
  
  

Notably, Nepal's current steel demand is about 2-2.5 mnt pa.

• Indian sponge players shift towards pellet-based DRI - Nepal imports pellet based as well as iron ore lump based sponge iron, unlike Bangladesh which imports only lump based. In last few years most of the sponge plants have shifted to pellets over lumps owing to more consistent supplies and quality. Pellet based sponge would be 65-70% of India's total sponge iron production.
  
  

Increase in India's sponge iron production

India's sponge iron production saw an 8% increase y-o-y in 2021 at 37.06 mnt compared to 34.25 mnt in 2020, as per SteelMint data.

In Jan'22, the country's sponge iron production was recorded at 3.5 mnt, an increase of 7% y-o-y. However, on a m-o-m basis, production rose by 6%.

It is important to mention that India's sponge iron capacity stands at around 57 mnt per year.

Outlook

India's sponge iron exports are expected to remained supported this year on rising demand from Nepalese IF-route steel makers. However, this will negatively impact India's billet export volumes as a major share of it goes to Nepal, SteelMint understands.