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Multi Commodity Exchange of India Ltd

Sponge Iron Report

Introduction

Sponge iron is a metallic product produced through direct reduction of iron and iron ore pellets in the solid state. It is a substitute for scrap and is mainly used in making steel through the secondary route. The process of sponge iron making aims to remove oxygen from iron ore. When that occurs, the departing oxygen causes micro pores in the ore body making it porous. The final product, when observed under a microscope, resembles a honeycomb structure looking spongy in texture, hence the name sponge iron.

High Quality

The quality of sponge iron is primarily ascertained by the percentage of metallization (removal of oxygen), which is the ratio of metallic iron to the total iron present in the product.

Sponge iron manufacture is highly sensitive to raw material characteristics. Therefore, it is essential to examine the chemical and physical characteristics of raw materials, both individually and in combination. The basic raw materials for the production of sponge iron are iron ore, non-coking coal and dolomite. Several tests are conducted in the company laboratory to ascertain their suitability in a rotary kiln.

Coal

Important factors determining coal quality are:

Chemical properties such as fixed carbon, ash content, volatile matter, etc.: & Physical properties viz., reactivity and ash fusion temperature.

TSIL sources its entire coal requirement from the subsidiaries of Coal India Limited, which is known for their high quality coal reserves.

Iron Ore

In sponge iron making, iron ore is reduced in solid state. Unlike in the conventional steel melting processes, the gangue content of iron ore cannot be separated as a slag. Therefore, it becomes imperative to select an ore with a high Fe content and a low gangue content, to optimize yield during steel making. Apart from this, to ensure a better kiln campaign life and output, the iron ore is made to undergo a series of other tests viz. shatter, tumbler & abrasion indices, reducibility etc. By virtue of its location, TSIL enjoys the proximity of good iron ore reserves, suitable for sponge iron making, in the Northern part of Orissa. TSIL sources its iron ore from the Khondbond Mine of Tata Steel, which has one of the finest quality iron ore in the region.

Dolomite

Dolomite acts in the process as a desulphuriser, removing sulphur from the feed mix during the reduction process. It is mixed in small proportion along with other raw materials before charging into the kiln. TSIL’s entire requirement of dolomite is obtained from Tata Steel’s Gomardih dolomite quarry.

Domestic Scenario

WITH the domestic steel industry picking up during the past year and prices moving up in leaps and bounds, India, for the first time, has emerged as the world's largest producer of sponge iron for the year 2002, accounting for around 12 per cent of the global output.

In 2001, Mexico occupied the numero uno position with India a close second. Mexico has moved down to the third place this year with Iran slipping to the second position, according to global production figures made available by the US-based Midrex, global consultant and technology supplier for sponge iron production.

Sponge iron is used to make steel by all Indian steel producers and is a substitute for steel melting scrap. Midrex controls around 93 per cent of the world's sponge iron production by its technology.

With 6.53 million tonnes production in 2002, India has become the world's largest producer in this category. It recorded a 16.87 per cent increase in production from 5.59 million tonnes to 6.53 million tonnes in 2002. Out of this, 3.416 million tonnes were produced by the gas-based units while the remaining 3.116 million tonnes were produced by the coal-based units.

India is followed by Iran with 5.3 million tonnes production, Mexico with 4.8 million tonnes and Venezuela with 4.8 million tonnes of production, according to Midrex.

Together, these four countries account for around 40 per cent of the global sponge iron production.

Healthy demand growth in steel sector is also pushing sponge iron demand. Apart from declining availability of steel melting scrap, sponge iron demand has also gone up considerably and is likely to continue.

Quantum of units

It’s hard to reach a particular figure, which indicate the total number of sponge iron units exist in India because 60 percent of the sponge iron units are coming from small-scale industries. Many

of them are from unorganized sector too. There is certain unreported fly by night companies. Hence, it is quite impossible to ascertain the total number.

Output

The installed production capacity of sponge iron in India has increased from 1.52 MTPA in 1990-91 to over 7 MTPA in 2002-03. Sponge Iron production by secondary producers between April 2003-February 2004 stood at 7,301 thousand tons compared to that of 6,287 thousand tons in the same period the last year. Thus, the industry grew approximately at the rate of 30 per cent. Overall growth in production in 2002-03 has been about 22 per cent over the previous year. While the coal-based units have shown an impressive growth of 32 per cent in production in 2002-03, gas-based units recorded a growth of about 40 per cent. The small producers of sponge iron have registered a growth of about 28.75 per cent. All these point out to the substantial growth in the demand of sponge iron in the country.

Need for Sponge Iron Futures

Although the sponge iron prices have appreciated by 100% from the previous years’ level, on back of favorable business dynamics, a firm trend in realization per unit can be expected. Realizations are expected to remain firm, mainly due to persistent shortage of scrap and no major capacity additions going into production in the near future. Mounting cost of basic inputs and high price volatility in the raw material prices increases the need for price risk management.

About 45% of the domestic output is through EAF route. However, going forward this is slated to increase. Thus steel production is likely to grow at 6%-7%, the demand for sponge iron is likely to grow at more than 10 percent till the year 2007 and then expected to stabilize at 8 percent after than. Domestic industry is showing improved performance on back of higher volume, improved realization, increased operating efficiency and financial restructuring.

Sponge Iron Production Figures. (in lakh tones) Year Production

Gas Based Growth %

Production Coal Based

Growth % Production Total

Growth %

1990-91 NA NA NA NA 8.6 NA 1991-92 NA NA NA NA 13.00 51.2 1992-93 8.97 NA 4.69 NA 13.66 5.08 1993-94 15.23 69.8 8.09 72.5 23.32 70.07 1994-95 21.89 43.7 12.21 50.9 34.1 46.2 1995-96 29.58 35.1 12.84 5.1 42.42 24.4 1996-97 33.34 12.7 16.87 31.4 50.21 18.3 1997-98 36.42 9.2 17.36 2.9 53.78 7.1 1997-98 36.42 9.2 17.36 2.9 53.78 7.1 1998-99 34.48 -5.3 17.80 2.5 52.28 -2.8 1999-00 34.62 0.4 18.78 5.5 53.40 2.1 2000-01 34.62 0 20.19 7.5 54.81 2.6 2001-02 NA NA NA NA 56.58 3.22 2002-03 NA NA NA NA 69.09 22.11 2003-04 (p) NA NA NA NA 80.85 17.02

Sector-wise Demand of Scrap and DRI/HBI (in lakh tones) Period Sector Melting Scrap DRI/HBI 2001-02 EAF (Electric Arc furnace) 31 43 IF (Induction Furnace 55 17 2006-07 EAF 45 60 IF 73 35 2011-12 EAF 64 82 IF 76 56

*HBI = Hot Briquetted Iron

Monthly Prices of Sponge Iron (in 2004-05) Month August September October November December January Price (Rs./ton)

12,500 11,700 12,000 12,750 13,000 12,000

Variation - (6.4%) 2.5% 6.25% 1.9% (8%)