Impact of COVID-19 on the Indian Iron Industry

From the past months, India’s sponge iron industry, the largest in the world, is going through an acute shortage of labor that threatens to bring it to a halt. Apart from the labor issue, a slump in demand for the product and squeeze in the supply of a key raw material has added to the woes.

Sponge iron is produced from iron ore and used in steelmaking through what is called the ‘secondary route’ in industry jargon.

The largest producer of sponge iron, laid low

The crisis, because of the lockdown following the COVID-19 outbreak, has already shaved off up to 6 percent of the industry’s production in FY20. This is even though the steel sector has been kept under the essential services list. “Though the governments at the center and the states, and district officials, had made it clear that the sponge iron sector is also an essential service, labor has been in short supply,” Deependra Kashiva, Executive Director, SIMA (Sponge Iron Manufacturers Association), told Moneycontrol. Kashiva said the industry was expected to produce 33 million tons of sponge iron in FY20 but this will now fall by up to six percent. The fall has now tempered the estimates for the new fiscal year. The first target was 36 million tons for the FY21. “I’m very worried as 70 percent of the manufacturers are small. They are also going through liquidity issues”, said the senior SIMA official.

Scurvy Demand

Much of the demand for sponge iron comes from the steelmakers. But all of them, including JSW Steel, Tata Steel and AM/NS have cut production after the lockdown.  

“If there is no demand from the steelmakers then the sponge iron manufacturers will be impacted. All the manufacturers, in states like Odisha, West Bengal and Chhattisgarh, are closed,” said Kashiva. On the issue of labor, he pointed out that the shortage is a concern both at the plants, and in the transportation sector. “Movement of material has been impacted. Like everyone, the laborers also fear the virus. It has created a panic,” said the industry official. It has not helped that supply of coal, a key raw material, has suffered because South Africa – one of the biggest sources, is itself going through a lockdown. 

How lower steel imports might affect sponge iron market – An overview of the scrap-sponge connection. Source : Business Standard

The double-digit drop in India’s FY20 steel imports might augur well for the domestic sponge iron industry, which saw a 7 per cent rise in its production. “Since sponge iron is used as an alternative to steel scrap in several consumption segments, a drop in scrap imports last year helped domestic sponge iron industry benefit,” M Chinnasami, director at Tamil Nadu-based sponge unit company Agni Steels Limited told Business Standard.

India Steel Production in Financial Year 20. Source : IPC, SteelMint

According to the Joint Plant Committee data, the country’s steel imports declined 14 percent last year to 6.7 million ton. Whereas, on the other hand, the domestic sponge iron industry saw 7 percent year-on-year production growth at 37.14 million ton in the period under review. Scrap steel is one of the items in overall steel imports.

“Also, due to the economic slowdown, consumers preferred to keep their costs low and hence opted for sponge iron over scrap last year,” he added.

Imported scrap is generally available at a premium of over Rs 4,000-5,000 a ton over domestically produced sponge iron. The price premium is mainly because of higher yield in scrap, which is close to 95 percent as against sponge iron that is about 79-82 percent.

“Steel scrap has better quality than sponge and hence used in both long as well as flat steel consuming segments,” said an official with Adhunik Metaliks on condition of anonymity.

There are close to 950 sponge iron units across the country of which about 750 units are currently operational. Sponge iron units are either coal-based or gas-based with quality of sponge iron derived from the latter being better. However, coal-based sponge iron production is higher compared to gas-based units due to the better availability of domestic coal.

While the sustainability of sponge iron demand remains a question in FY21 amid the Covid-19 outbreak and economic slowdown, industry officials are of the view that the time is right for a vehicle scrap policy in the country to address the scrap availability.

“Since the flow of imported scrap is weak, at present, a vehicle scrap policy can help domestically produced scrap make inroads, helping it develop a market share in the consumption segment,” said the official with Adhunik Metaliks.

“Domestic vehicle scrap would serve as a better raw material over sponge iron or imported scrap as this scrap would be decent quality auto steel. Moreover, sponge iron does not meet BIS (Bureau of Indian Standards),” said Sushim Banerjee, director general at Institute of Steel Development & Growth (INSDAG).

Odisha playing a tough game

Odisha’s mining revenue has gone down by two-thirds in the last two months compared to what it was during the same period a year ago, underscoring the economic slowdown that the state is likely to face in 2020-21 fiscal. Officials in the mining department said between April 1 and May 30, Odisha’s earning from mining was about Rs 667 crore, about one-third than the same period of 2019-20 fiscal. Director of mining department, Deepak Mohanty said the decline in production and dispatch during lockdown has led to the decrease in mining revenue in the last 2 months.“As the fear of coronavirus still persists in the minds of workers, mining companies could not deploy workers even though mining is among the sectors that got relaxed during lockdown. The end user industries like steel companies and sponge iron industries too slowed down manufacturing in this period. The transporters of the minerals too could not get enough trucks and laborers that contributed to decline in the entire mining operations,” Mohanty said.A substantial part of the Rs 667 crore revenue that the state earned during the last 2 months was from royalty on ores.Though relaxations have been given to the mining sector in successive lockdowns, Odisha’s hopes of earning more revenue from the 21 mines that were auctioned 3 months ago, would have to wait at least a month before any operation can start. The 21-iron ore, chromite and manganese ore mines that were auctioned with over 105 per cent premium during the bidding, need to get a vesting order from the state mines department before starting operation.The lack of demand from end-users is also likely to affect employment in the mining sector. “The new merchant miners will use more automation in their operations affecting employment. The existing staff in mining companies may see salary cuts so that the companies stay afloat in a recession-hit market,” said a mining department official.