India’s benchmark sponge iron prices surged to a two-year high in August as higher prices of imported coal and tight domestic supplies of the fuel push up production costs, traders and analysts said.
The world’s biggest producer of sponge iron, India has about 336 plants turning out about 50 million metric tons, mostly used as a raw material by secondary steel producers.
The steel and sponge iron sector is India’s biggest consumer of imported coal, accounting for about 40% of consumption, traders say.
As a result of higher prices, India’s thermal coal imports by steel and sponge iron makers fell 19% in July after declining 11% in June, according to iEnergy Natural Resources, a coal trader based in the western state of Gujarat.
“Middle East tensions pushed bunker and insurance costs to multi-year highs, lifting landed costs into India,” said Vasudev Pamnani, a director at the trader.
Higher costs have dissuaded sponge iron makers from stockpiling coal, even though their inventories remain low, Pamnani added.
The industry has long preferred imported coal but uses domestic coal as a substitute. However, limited domestic coal has been available since May as priority supplies went to the power sector amid higher electricity demand during the summer.
Seasonal monsoon rains have disrupted coal supplies from mines and rail transport, with fuel inventories at several power generators falling to critically low levels.
“Coal is in short supply,” said Rahul Mittal, chairman of the Sponge Iron Manufacturers Association.
“Multiple countries are taking South African coal, which is used by the sponge iron industry.”
Several Asian countries, such as Vietnam and South Korea, are currently turning to South African coal to meet higher demand for power, traders said.
Higher demand has pushed up coal prices across key markets.
Indonesian coal prices have risen 18% to 20%, while Russian and South African prices have jumped 14% and 19%, respectively, since May.
Mittal said Indian coal was the substitute, but monsoon rains slowed dispatches, pushing up sponge iron prices. Demand for sponge iron remains robust, however, he added.
Benchmark Indian sponge iron prices rose in August to a two-year high of 29,700 rupees ($313) a ton, commodities consultancy BigMint says. Analysts and industry expect prices to stay elevated for at least another couple of months.
($1=94.81 rupees)
(Reporting by Sethuraman NR and Neha Arora; Editing by Mayank Bhardwaj and Clarence Fernandez)
