Indian sponge iron at two-year high, boosted by costly coal imports, domestic shortages

New Delhi witnessed a surge in India's benchmark sponge iron prices to a two-year high in August. The increase was attributed to higher prices of imported coal and constrained domestic supplies of the fuel, which raised production costs, according to traders and analysts. India is the world's largest sponge iron producer, with around 336 plants generating approximately 50 million metric tons, primarily utilized as a raw material by secondary steel producers.

The steel and sponge iron sector is the biggest consumer of imported coal in India, consuming about 40% of it, traders claim. Consequently, India's thermal coal imports by steel and sponge iron makers declined by 19% in July, decreasing 11% in June, as reported by iEnergy Natural Resources, a coal trader based in Gujarat, India.

Vasudev Pamnani, a director at the trader, stated that rising Middle East tensions led to higher bunker and insurance costs, elevating landed costs into India. Despite remaining low inventories, sponge iron makers have largely distanced themselves from stockpiling coal due to the increased expenses. While the industry traditionally favors imported coal, domestic coal is used as a substitute.

However, domestic coal has been scarce since May, with priority supplies being allocated to the power sector due to heightened electricity demand during the summer months. Monsoon rains disrupted coal supplies from mines and rail transport, causing a critical depletion of fuel inventories at several power generators. Rahul Mittal, chairman of the Sponge Iron Manufacturers Association, mentioned that multiple countries, including Vietnam and South Korea, are increasingly relying on South African coal to address their growing power demands.

Several Asian countries have shifted to South African coal to meet the heightened power requirements. Higher demand for coal has resulted in an 18% to 20% rise in Indonesian coal prices, while Russian and South African coal prices have increased by 14% and 19%, respectively, since May. Mittal noted that Indian coal is being used as a substitute, but monsoon rains hampered dispatches, leading to the spike in sponge iron prices.

Despite the elevated prices, demand for sponge iron remains robust, analysts and industry experts anticipate that prices will continue to remain elevated for at least a few more months.