KAMDHENU ISPAT LIMITED - Securities and Exchange Board of India

Price trend
Sponge iron prices primarily depend on:
· Scrap prices, as scrap can be substituted to an extent to manufacture steel
· Demand for steel
· Prices of iron ore and coal, as they are the key inputs in the manufacture of sponge iron.
Higher scrap prices may lead to increased usage of sponge iron in the input mix of the secondary route of steel
making. The buoyancy in the steel industry has resulted in scrap prices touching an all time high of 300-325 USD/
MT.
The Indian market
(a) Demand
The demand for sponge iron in India has been growing at 8.25% CAGR over the last eight years (1996-2004). The
demand has been primarily driven by the following factors:
· Increase in steel production via the secondary route accounting for 42-43% of the total steel output. This is
expected to grow further due to shortage of coking coal, a key raw material for steel making via the primary route
based on blast furnace.
· Proportion of sponge iron in secondary production is also likely to go up, with low domestic availability and high
international prices of scrap, a marginal substitute for sponge iron.
· Availability of scrap will be constrained in the context of regulations relating to imports of low quality scrap to
India.
Indian Sponge Iron Demand (Mn Tonnes)
(b) Supply
India has emerged as the top most sponge iron producing country on the supply front in the last few years.
Indian Sponge Iron Production (Mn Tonnes)
(c) Outlook
1. Sponge Iron is an attractive investment option since entry barriers are very low with short gestation periods, low
initial capital, indigenous technology and equipments, an assured market, early payback, a modular system and
an excellent growth potential. On the other hand, demand for sponge iron is expected to create an incremental
demand of 1.3 Mn tonnes compared to 2.5 Mn tonnes of capacity additions. Thus, industry fundamentals of the
sponge iron industry are expected to weaken over a few years, after which it would consolidate and stabilize at
a higher level.
2. As per industry analysts, the upturn in the global sponge iron industry is expected to continue and is pegged to
grow at a CAGR of 6-7%. This growth is at a back of an increase in steel production and continuous substitution
in demand for scrap.
3. Significant additions in capacities are expected with a buoyant demand scenario. However, all capacities generated
will not be able to function at an optimum operating rate due to scarcity of iron ore and coal. As per industry
estimates, the Indian coal requirement for 2004-05 was approximately 405 Mn tonnes against the availability of
370 Mn tonnes. As a result, the players are forced to use E and F grade of coal, resulting in lower yield. Therefore,
players with captive raw material sources would emerge successful in long run.
Since sponge iron substitutes scrap, scrap prices work as a cap for sponge iron prices. Unavailability of scrap
globally and import restrictions would maintain the prices of scrap at higher levels, resulting in increased sponge iron
prices.
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