India: Billet makers' conversion spread down by up to 11% in May

The conversion spread from sponge iron to billets dropped by 11% m-o-m in Raipur, while Durgapur saw a dip of around 8% in May 2022. The conversion spread in April 2022 was up by 18% and 4% respectively in both markets.

The monthly average conversion spread from sponge P-DRI (pellet-based DRI) to billets in Raipur stood at around INR 17,050/t and in Durgapur at INR 17,720/t last month (May 2022), as per data maintained with SteelMint.

Yesterday, (2 June, 2022), the conversion was recorded at INR 13,600/t in Raipur and INR 14,300/t in Durgapur.

Why did margins fall?

Government imposed duties on steel, iron ore and pellets exports: The government imposed hefty export duties on steel and steelmaking raw materials.

• 50% duty on iron ore of all grades.
  
  
• 45% duty on pellets.
  
  
• 15% duty on steel products.
  
  

This imposition of duties on several commodities by the Indian government has created a lot of pressure on market participants, resulting in a significant drop in domestic steel prices.

Higher sponge iron production costs: Sponge iron producers in eastern and central India informed SteelMint that production has already been hit due to domestic coal supply concerns. With steel prices falling sharply, rising production costs have disturbed DRI manufacturers.

Sharp price fall in billets: The monthly average prices of billets fell sharply by INR 5,000-5,350/t in Raipur and Durgapur during May.

On the other hand, the monthly average prices of sponge iron dropped by INR 2,950-3,700/t in both locations during May.

The Raipur billet index hit a four-month low at INR 45,600/t exw in the latter half of the month which was similar to the prices which were reported in mid-January 2022, as per SteelMint's data.

Outlook

Participants believe the market will take time to find stability. Prices of sponge iron and billets are most likely to remain under pressure amidst the recent price reductions in pellets and iron ore. The ongoing volatility, subdued finished steel demand, and approaching monsoon may result in fluctuations in the conversion spread in June 2022.