Rise of the Coal-Based Sponge Iron Sector in India and Some Issues in

Conservation of Resources

Authors: S. K. Saluja & Suchitra Sengupta (ERU, JPC)

1. AN OVERVIEW
Capacity and production of sponge iron in India has grown at a frenetic pace in
the last half decade. Today with a production of nearly 19 million tones, it is the largest
producer of sponge iron in the world. Growth of this sector is an evidence of the growing
resilience of the Indian steel industry and its ability to adapt its workings to changing
dynamics of the input and products markets. In this case, rise of the sponge iron industry
has helped the Indian steel industry – especially the electric steel producers – to
overcome a crippling shortage and spiraling price of scrap feed for steel making. The
primary push for the growth of this sector has come from the rapid expansion of
secondary steel making in India in the last decade and a half.

The secondary sector steel-makers, as they are defined in India, consist of two
very dissimilar groups of producers. On one hand, there are small-scale electric steel
producers, both EAF and IF, with capacity levels ranging between 0.1 and 0.5 million
tonnes per annum. At the other end of the spectrum, there are large-scale EAF units with
capacities exceeding 1 million tones per annum. The small sized Induction Furnace (IF)
units producing mild steel made their first appearance in the mid-eighties located in and
around traditional industrial centres – in close proximity to the market for steel output
and with easy access to their primary feed material of industrial scrap. After deregulation
of the steel sector, the early nineties witnessed the emergence of large scale state-of-the-
Art EAF steel making units – known as the ‘New Majors’ in the current parlance. These
units were located in the Western part of the country – once again near the market for
finished steel and also close to the source of Natural Gas for DRI production. In the
latest phase of growth post- 2001, small scale IF units have once again burgeoned to cater
to the rising demand for non-flat products and thereby fill in the supply gaps created by
the very slow pace of capacity expansion in the large scale integrated producers – both
BE-BOF based and large scale Secondary steel makers. Helped by very short gestation
period, low capital costs and an enormous flexibility in scheduling of production – the

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small scale IF producers not only helped fill the supply gap but also in reaching steel to
remote corners of the country.
2. GROWTH IN COAL-BASED SPONGE IRON UNITS DRIVEN BY RAPID RISE IN IF
STEEL- MAKING
The most noteworthy development has been the change in the input consumption
pattern of small sized IF units of both the older and the more recent vintage. Shortage of
scrap coupled with steeply rising prices of both domestic and globally sourced scrap led
to the substitution of scrap by sponge iron in the charge and this is possibly the single-
most important factor leading to the rapid growth of the coal-based sponge iron units
heavily concentrated in the iron ore belts of India. The recent growth in the Indian sponge
iron sector has been at the behest of the coal-based sponge iron units as shown in Table 1
below. This table also shows the correlation between the growth in coal-based sponge
iron sector and increased capacity and production in the IF units – especially over the last
5 years.
Table 1: Production of Coal-based and Gas-based Sponge Iron and Crude Steel
through Electric Routes
2000- 2001-02 2002- 2003- 2004-05 2005- 2006-
01 03 04 06 07
Total Sponge Iron 5.481 5.443 7.858 9.877 12.54 14.825 18.345
CAGR (%) 22.3%
Gas-based Sponge Iron 3.453 3.180 3.624 3.976 4.643 4.545 5.265
% Share in total 63% 58.4% 46.1% 40.3% 37.0% 30.7% 28.7%
CAGR (%) 7.3%
Electric Arc Furnace 5.418 4.377 5.297 6.324 7.994 8.569 10.033
CAGR (%) 10.8%
Coal-based Sponge Iron 2.028 2.263 4.234 5.901 7.897 10.280 13.080
% Share in total 37% 41.6% 53.9% 59.7% 63% 69.3% 71.3%
CAGR (%) 36.4%
Induction Furnace 8.043 8.253 9.014 10.477 13.193 13.493 15.390
CAGR (%) 11.4%
Source: Joint Plant Committee

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3. USAGE PATTERN OF SPONGE IRON IN IF CHARGE – A PRONOUNCED RISE IN THE

SHARE OF SPONGE IRON IN CHARGE MIX

It can be seen from Table 1 above that while production of crude steel in the IF
units registered an average annual growth of 11.4% in the 6 years between 2000-01 and
2006-07, the production of coal based sponge iron grew at the average rate of a whopping
36.4%. This more than proportionate rise in the production of Sponge Iron can be
explained by a pronounced shift of IF units to Sponge Iron in the Charge –mix away from
scrap. In January 2007, the Economic Research Unit of JPC had conducted a techno-
economic study of the Indian IF sector in order to estimate total capacity and production
of crude steel in that sector. In all 150 IF units dispersed all over India in different IF
clusters were surveyed for the study to arrive at important techno-economic norms and
operating parameters. The sample survey has revealed the rising preference of the IF steel
makers for sponge iron vis-à-vis scarce and high priced scrap.

Remaining within the technical limits to substitution of scrap by Sponge Iron, the
proportion of Sponge Iron in the IF charge-mix will be determined by the balance
between the costs saved because of low price of Sponge Iron and the extra costs incurred
due to higher power consumption, lower yield etc. associated with high percentage of
Sponge Iron in IF steel making. The ERU has observed the following general pattern of
Sponge Iron use in different regions of the country depending on the differential between
the delivered costs of Heavy Melting scrap and Sponge Iron borne by the producers in the
regional clusters. 1 The variation in operating practices of SI use in the burden as observed
in the region-wise sample survey done by the ERU is summarized in Table 2 below.

1
Base Paper on Assessment of roduction and Capacity of Induction Furnace Sector in India – Economic
Research Unit, JPC, New Delhi, January 2007

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Table 2: Regional Practices in Usage of Sponge Iron in IF units (Sample of 150 IF
Units Covered in the ERU Survey)

Percentage Use of Sponge Iron Possibilities/Underlying Economics

More than 60% While some units have reported using nearly
100% sponge iron, the higher use of sponge
iron is accompanied by higher per tonne
consumption of power and refractory

Lower price of sponge iron should compensate

for these factors as well as for the loss of yield
and overall production. While this may be
possible in some situations, it is not the general
practice.

However, the economics of using higher

percentage of sponge iron works out well for
integrated units with captive sponge iron
units and with facilities for using the off –gas
for captive power. The integrated units
located in Eastern region use a much higher
percentage of Sponge Iron.

IF units situated in states where unit price of

power is low, can afford to use higher
percentage of Sponge Iron. At times higher
percentage of Sponge Iron is reported to have
been used out of compulsion due to non-
availability of scrap.
40-60% This is the most common practice. Most of
the units visited by ERU in the Northern region
were using sponge iron in this range. Since
power rate in most of the states is more than Rs
4/- per unit, usage of sponge iron beyond 60%
is not optimal.
15-40% At certain locations, the difference in
delivered/landed price of sponge iron and scrap
was less than Rs 1500 (2005-06). This is
especially true of the coastal states in Southern
India, where access to imported scrap is easy.
Moreover, certain IF clusters have advantages
of easy availability of local scrap due to the
presence of manufacturing industries in the
surrounding areas. In such cases, the effective
price of Sponge Iron (after adjusting for
wastages and other associated costs) works out
to be comparable to that of scrap. Some of the
units in the Southern region were reportedly
using nearly 90% scrap.

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 To summarize, the ERU has noted the following regional trend in the practice of
SI used by the IF units surveyed in the sample :
• IF units in Northern and Eastern regions tended to use higher percentage of SI
with the average price differential between scrap (HMS-I and HMS-II) and coal-
based SI remaining at levels higher than Rs 2000/T (for the months covering July
2003 to October 2006). This was especially true for the units located in the
Eastern states in close proximity to the coal-based sponge iron units or those with
captive SI units located in the mining belts. Landed price at works of SI is low in
these regions because of freight advantage.
• On the contrary, the average price differential between coal-based SI and scrap in
the Western and Southern regions was around Rs 1000/T only. The conditions
prevailing in these two regions were, therefore, not conducive to higher usage of
SI.
• After taking into account the inter-regional variation in share of Sponge Iron in
the burden of a typical IF units, it is estimated that the national average would be
around 55-60%.

4. OUTLOOK FOR PRODUCTION OF CRUDE STEEL THROUGH THE IF ROUTE AND

IMPLICATIONS FOR THE COAL-BASED SPONGE IRON SECTOR

It is now well established that demand for steel in India has entered a high growth
trajectory logging 10-12% growth each quarter for the last couple of years. This is a far
cry from the decades of moderate and slow growth averaging 5-6% per year. The new
growth momentum comes from a number of structural changes which look to be
changing the face of the Indian economy in the years to come. The factors contributing to
the heightened optimism are – the promise of maintaining an accelerated GDP growth
rate of around 9% over the medium run, quantum increase in the investment ratio to
around 35% from 24-25% a few years back, manufacturing growth breaking the barrier
of 10% annual growth for the first time in 6 to7 years. More directly, steel demand is
likely to get a boost from increased spending on steel intensive activities like construction
of physical infrastructure, capacity expansion programmes of the industrial sector
requiring manufacture of plants and machinery, growing income levels of an young

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population leading to growth in demand for consumer durables and the possibility of
India emerging as the international hub for Automobiles and Auto components etc. It is
also projected that these structural changes will continue over the long run as well.

The Working Group on Steel for the 11th FYP projected domestic demand for
steel in India to reach 70 million tonnes by 2011-12. The data used for the projection
have been revised upwards since then. On the basis of the new data showing higher base
consumption levels between 2000-01 and 2006-07, ERU has revised projected demand
for steel to be between 73 million tonnes (in the base case scenario) and 79 million tonnes
(in the best case scenario) by 2011-2012. 2

Long-term prospects for domestic demand for steel in India are equally
promising. There are strong indications that the strategic goal of 110 million tonnes of
steel production by 2019-2020 will be surpassed by around 60% on the back of a very
strong growth in domestic demand. Lat but not least, the very low level of per capita
consumption of steel in India and the low steel intensity of GDP indicate the slack in steel
consumption that needs to be filled if India wants to develop into a mature economy. The
GDP-elasticity of steel demand has been increasing over the short term and if this upward
movement continues it bodes well for domestic demand for steel in the long run too.

Expansion of steel supply had been lagging in the past, but is expected to gather
momentum with large scale capacity expansion plans envisaged by leading steel
manufacturers. It is estimated by ERU that supply of steel will reach a level between 87
million tonnes (base case) and 97 million tonnes (best case) by 2011-12 2 . The CAGR in
steel supply at 14-16% per annum in that case works out to be much higher than that
recorded in the past. It is to be noted that apart from the Mega projects and large scale
units, it is visualized that the small and medium sized IF/EAF units will also grow –
though not at the rate seen in the last few years. As has been discussed before, the high
rate of growth witnessed in the last 5 years can be attributed to the supply void created by

2
Adequacy of Infrastructure for Proposed Expansion in Steel Capacities in the 11th Plan – Economic
Research Unit, JPC, New Delhi, September 2007

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lack of capacity expansion projects undertaken in the large scale segment. Segment wise
supply by 2011-12 as estimated by ERU on the basis of the progress of the projects on
the ground (in term of procurement of equipment, raw material linkages secured, logistics
back-up and financial closures etc.) is placed at Table 3 below:
Table 3: Likely capacity and Production of Steel in India, 2011-12 (Base case**)
(Million Tonnes)
Year Large Units (All Small/Medium Units Total
Routes) (EAF/IF Units with
or without backward
integration of Sponge
Iron)
2006-07
Existing Capacity 34 18 52
2011-12
Intended Capacity 78 33 111
Realizable Capacity$ 70 23 93
Note: **In the Best case an additional 12 million tonnes of capacity has been estimated
$ The realization ratio has been assumed to be 90% for large scale brown-field expansion
projects and green-field projects of credible investors with the necessary linkages secured
and 70% for the small and medium EAF/IF units.
Source: Adequacy of Infrastructure for Proposed Expansion in Steel Capacities in the 11th Plan –
Economic Research Unit, JPC, New Delhi, September 2007

5. PROJECTED REQUIREMENT OF SPONGE IRON AND IRON ORE TO SUPPORT THE

ENVISAGED GROWTH IN SMALL/MEDIUM CAPACITY IN THE EAF/IF UNITS

The steep rise in the price of steel scrap between 2001 and 2007 has been shown
in the Graph 1 below. Price of scrap has gone up from $80/T to $300/T in the six years
between 2001 and 2007 – a near quadrupling of price levels. The World Steel Dynamics
(WSD) has predicted continued tightness in world steel market till 2015. Generation of
scrap, especially of low residual scrap, slowed down in CIS and the USA – the two
largest exporter of scrap to the world market.

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 According to the WSD, global scrap exports have fallen from a level of 94.274
million tonnes in 2004 to 91.184 million tonnes in 2005. Moreover, it has been observed
that price elasticity of scrap supply/generation has come down over the years. In the case
of return/new / process scrap this lowering of elasticity has been due to improvement in
process technology leading to lower wastage and also due to inflexibilities in the
production systems. As far as obsolete scrap is concerned, the WSD feels that the
recovery rates have already touched 95% on a global basis and as a result the so-called
‘scrap reservoir’ that is 10-40 years old. In other words, higher price of scrap has not led
to the expected increase in supply of scrap from the existing sources – old and new. The
WSD predicts that during 2007 - 2015, price of HMS –I (delivered cost in USA) will
vary between a low of $180 per tonne in shake-out times and $330/T in boom times 3 .

The factors influencing the feasibility of substituting scrap by Sponge Iron has
been discussed in section 3 above. According to the estimates of ERU based on the
sample survey of IF units, the industry average of share of coal-based SI in the charge
mix of a typical IF is around 55%-60% currently. However, considering the projected

3
Steel Strategist, World Steel Dynamics (August 2007)

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scarcity and high price of scrap in the medium to long term in the global and local
markets an even higher share cannot be ruled out. The typical usage pattern of different
raw materials used in both the BF-BOF and DRI-EAF/IF routes are shown in Table- 4
below.
Table 4: Specific Consumption of raw Materials in Steel Units
(Tonne/Tonne of Crude Steel)
Raw Material BF-BOF DRI-EAF/IF*
Iron Ore (Gross) 1.7 1.4
Coal for steel making 1.1 1.3
Thermal Coal for Power 0.35$ 0.5$
(direct+ indirect)
Others (limestone, 0.6 0.6
dolomite, Ferro-alloys etc.)
Total 3.85 3.8
Note: * Assuming 80% sponge iron in the burden
$ Partly replaced by Waste Gases for integrated plants.
Source: Adequacy of Infrastructure for Proposed Expansion in Steel Capacities in the 11th Plan –
Economic Research Unit, JPC, New Delhi, September 2007

Using the norms of specific consumption shown in above, gross requirement of

iron ore to support a production level of around 23-25 million tonnes of IF steel
output will be in the region of 30 – 32 million tonnes of iron ore per annum by 2011-
2012. The actual requirement may vary according to the quality of the iron ore and
its Fe content.

6. CONCERNS REGARDING CONSERVATION OF HIGH GRADE IRON ORE LUMPS – USE OF

PELLET FEED REPLACING CLO IN COAL-BASED DRI PRODUCTION
Currently, the established and commercially viable technologies i.e., the BF/BOF
and DRI/EAF, both provide technological flexibilities to use fines in the total burden.
However, the actual choice between lump ore and agglomerated fines will be determined
on one hand, by techno-economic factors such as the cost and price relatives between

9
lump ore, fines and agglomerates, the productivity gains through use of agglomerated
fines and operational convenience. On the other hand, it will also depend upon the
resource endowment of the economy both in terms of quality and quantity and the policy
regime guiding the access of various stake-holders to such resources.

At the current configuration of prices of fines, lumps and pellets in the country
majority of the coal-based small and medium sized Sponge Iron producers (integrated
and stand-alone) find it economical to use Calibrated Lump Ore (CLO) of high Fe
content (65-67%) as their basic feed-material. Therefore, if the current operating
practices of using high grade CLO continues then for producing the projected crude steel
output of 23-25 million tonnes by 2011-2012 through the coal-based DRI-EAF/IF route
around 30-32 million tonnes of high grade lumpy iron ore annually would have to be
depleted. This would not only accelerate the rate of depletion of high-grade iron ore
lumps but will also generate large quantities of iron ore fines. Since conservation of iron
ore resources for domestic value-addition has become a major domestic policy pre-
occupation, it seems prudent to look for ways to increase utilization of iron ore fines in
this segment of the Indian steel industry. Large reserves of high- grade iron ore and non-
coking coal have spurred the growth coal-based Sponge Iron production in India. This is
a special feature of the growth of the Indian steel industry unlike that in China where the
BF-BOF route is the predominant route of steel production.

In India the relative abundance of good quality indigenous iron ore and the
relatively low prices prevailing so far have also led to a very high percentage of lump
ores being used in steel making compared to its peers elsewhere in the world. It has been
estimated that in 2005-06, the Indian steel industry as a whole has used only 51% of fines
in the total ore burden compared to more than 90% fines used in China 4 . However, the
steep hike in iron ore prices in the last few years and the general shortage of steel scrap
has created a new awareness about the need to conserve iron ore resources for future use.
This awareness needs to be translated into optimal use of mined resources – both lumps
and the co-generated fines. Conservation of iron ore resources takes on an added

4
Iron Ore Fines Utilization in India – Economic Research Unit, Ministry of Steel, September 2007

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importance in view of the extremely low levels of per capita consumption of and steel
intensity of GDP in India and the projected high rate of growth in steel consumption over
the medium and the long run.

As has been pointed out earlier, the resource use pattern of the steel producers in
a free market environment will be determined by a host of techno-economic factors
including relative prices of competing inputs (e.g., fines, lumps and agglomerated fines),
gains in productivity and cost benefits vis-à-vis associated losses and other
disadvantages. In the Indian context, over the years the large scale integrated plants of all
technological combination (e.g., BF-BOF, Corex/BF-BOF, Gas-based DRI/EAF etc.)
have increased the share of fines in their charge-mix by way of captive sintering or
pelletization of fines. This move towards greater use of fines in this segment is further
accentuated in all future plans of capacity expansion by this group of producers. The
emerging scenario of technology choice by the large-scale integrated producers shows a
clear preference for larger use of agglomerated fines (both sinters and pellets) driven
purely by compulsions of profit maximization over a long time horizon and a desire to
maximize the life of the captive ore reserves.

On the other hand, use of agglomerated fines remains very low in the coal-based
DRI sector. While the large scale integrated gas-based DRI plants have increased the
share of fines in their charge-mix by way of captive briquette-making or pelletization of
fines, the smaller coal-based DRI plants are constrained primarily by non-availability of
merchant pellets in the market. As far as the small sized DRI plants are concerned, the
option of putting up a pelletization plant through backward integration does not appear to
be financially viable under current cost and price situations. Reportedly, the small-scale
coal-based DRI producers are discouraged to set up captive pelletization facilities
because of the high capital cost of pellet plants of the required capacity (the minimum
economic size). Replacement of lump ore by agglomerated iron – pellets for coal-based
small scale SI plants – will take place once price of lump ores rises high enough to
neutralize all disadvantages associated with use of pellets. However, in larger national
interest the state might think of expediting the process by adopting policy measures

11
to create pellet capacities at the mine-head by independent miners, or, by
supporting captive pelletization by coal-based SI plants through well-directed
R&D/technical help and appropriate fiscal and policy measures.

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