Conversion spread for billet slips below break-even cost

Operating margin for induction furnaces to produce billet by using sponge iron as an input has fallen in central and east India due to seasonally sluggish downstream demand of billet and rising cost of sponge iron.

The margin for converting sponge P-DRI to billet, also called conversion spread, has fallen to below INR 10,000/t in Raipur and Durgapur, according to Steelmint assessment, which market participants said is below break-even cost for most mills. These margins were around INR 11,600-800/t in Durgapur & INR 11,200-400/t in Raipur on 11 July.

Typically, mills make profits on spreads above INR 11,500/t, levels not seen since mid July.

High input cost and shrinking spreads have led to shut down of a few steel mills in central & eastern regions this month, SteelMint learned from market sources.

"As of now we have curtailed production by up to 50% due to high production cost and comparatively lower selling price of billet," said a Raipur-based billet manufacturer.

Market participants expect lower output of billet due to full and partial mill closures to support prices in the near-term.

Causes for falling margins

• Higher input cost: Sponge iron prices have risen by around INR 3,500-4,000/t in Aug'20 due to seasonal shortage and increased iron ore & pellet prices.
  
  
• Limited Demand: Major proportion of re-rollers in central & eastern India have reduced production by 30-40%, which is typical for the monsoon season, limiting billet demand. Localized lockdown in some states and social distancing-related measures have also affected downstream demand.
  
  
• Less exports: Export of billet and wire rod are being done mostly by the large and mid-sized mills which has resulted in additional billet supply in the domestic market, especially from smaller players.