What is Sponge Iron?
Sponge Iron is formally called Direct Reduced Iron and is produced by way of the direct reducing of iron ore. India is the global leader of sponge iron output with an annual capacity of 16 million ton. Iran, Venezuela and Mexico are the other leading producers.
Uses of Sponge Iron
Sponge iron has no real use on its own however, it can be processed to create wrought iron. The sponge product is removed from a furnace and beaten with heavy hammers and folded over in order to remove the slag, oxidise any carbon or carbide and weld the iron together.
Risks of Sponge Iron
Like trading any futures contract, there is always the possibility that the underlying asset i.e. sponge iron, will move in the opposite direction to which you anticipate. For example, you take a long position expecting the price of lead to rise and instead, it falls.
With any commodity, supply and demand will affect the price. This risk should be monitored on a regular basis and adjusted to suit your risk parameters.
Mining of metals has an inherent risk with the level of costs associated with extracting the product from the earth. This can include, but not limited to: the cost of oil to fuel machinery, cost of labour or new tax regulations being implemented.