With imports of ferrous scrap coming to a standstill, demand for sponge iron is expected to revive in the coming weeks once existing stocks are exhausted.
In its new foreign trade policy, effective April 1, the government has made mandatory videography of loading of scrap containers in the originating country, which importers believe is impossible. So the entire quantity of around 10 million tonnes of steel scrap import is likely to get affected.
“The steel industry uses scrap as a blend to manufacture steel. But sponge iron can be used in place of scrap. This means demand of sponge iron will rise,” said Nitin Johri, Chief Financial Officer of Bhushan Steel.
India’s sponge iron production is estimated at 18 million tonnes annually. But weak demand from domestic steel mills has hit the profitability of sponge iron producers. After falling to the level of Rs 20,000 a tonne early this year, sponge iron is currently quoting at Rs 21,100 a tonne.
“Sponge iron prices remained subdued for the last couple of years due to weak demand from steel mills. Now, with reports of scrap scarcity, sponge iron demand and thereby price will pick up,” said Anand Choudhary, Chhattisgarh Sponge Iron Manufacturers’ Association.
Industry sources estimate sponge iron sales to have grown by 24.3% in 2014-15 due to the stellar performance by large steelmakers. Sponge iron is mainly used to produce long steel which is used in construction. Steel production is expected to grow 6.2% in 2015-16 as against a 4.3% rise in production during April 2014-February 2015.
The government has announced a number of infrastructure projects, which are expected to drive demand for steel. Owing to this, production of sponge iron is also likely to grow by 6.4% in 2015-16.
The prices of iron ore and non-coking coal, which are used to produce sponge iron, have fallen sharply since 2013. Iron ore prices have fallen from $152 per tonne in 2013 to $50 per tonne currently. Although domestic prices were considerably higher compared to international rates, they have witnessed a sharp fall in the second half of 2014-15. Domestic producers of iron ore are also reducing prices to compete with cheaper imports. Therefore, raw material expenses are expected to go up by 11.9%, a tad slower than sales.
Operating profits of the sponge iron industry are estimated to have grown drastically during 2014-15. Operating margin of the industry is likely to have almost doubled to 11.1%. During 2015-16, however, operating margins of the industry is likely to remain flat.
At the net level, the industry is estimated to have turned around in 2014-15 by reporting a net profit equivalent to 2.1% of total income as against a loss equivalent to 3% of total income reported in 2013-14. The net profit margin of the industry is likely to expand by 25 basis points to 2.4% in 2015-16.
Source:business-standard.com
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