Sponge Iron Report

Multi Commodity Exchange of India Ltd

102 A, Landmark, Suren Road, Chakala,
Andheri (East), Mumbai - 400 093
Tel: 022 66494000 / 26836016, Fax: 022 66494151
Email - info@mcxindia.com www.mcxindia.com
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 Growth Production Growth % Production Growth %
Gas Based % Coal Based Total
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 12,500 11,700 12,000 12,750 13,000 12,000
(Rs./ton)
Variation - (6.4%) 2.5% 6.25% 1.9% (8%)