The margins for converting billets into wire rod (also called conversion spread) dropped by 6% and 26% in Raipur and Durgapur respectively in Jun’21, as per SteelMint’s assessment.
The monthly average conversion spread was at around INR 3,500/tonne (t) in Raipur and INR 3,210/tonne (t) in Durgapur throughout the month. However, in May’21, the conversion spread gained by 10% in Durgapur whereas in Raipur it fell by 6% m-o-m.
Today, (7 Jul’21), the conversion has been recorded at INR 4,350/t in Raipur and INR 3,200/t in Durgapur.
Analysis
Low demand, coupled with higher production volumes and a constant surge in raw material costs, led to a huge gap between the costs of production and selling prices of billets and wire rods.
The monthly average domestic billet prices declined by INR 2,000-2,700/t in both central and eastern regions. Similarly, wire rod prices recorded a drop of INR 1,100-3,000/t in both the markets. This led to a fall in the conversion of wire rod makers as well.
Wire rod demand was also stagnant with dull rebar demand in the domestic market.
Reasons behind falling margins
High raw material costs: The margins (conversion spread) registered a fall due to increased iron ore and pellet prices. Thus, this has also kept billet prices high as mills incurred higher expenses in booking raw material.
Less demand: Most of the major re-rollers in central and eastern India reduced production. However, downstream demand was also limited amidst the monsoon and lockdown measures.
What may happen?
As per industry leaders, the prevailing conversion spread of wire rod makers is lower than expected. Hence, if it moves down further, capacity utilisation of manufacturers will come down in order to sustain margins and supply-demand balance.
Leave a Reply