India: IF-route wire rod conversion spread falls by up to 9% in Nov’21

The margins for converting steel billets into wire rods (also called conversion spread) in the major supplying centres of Raipur (in central India) and Durgapur (western India) reduced by 4% and 9% respectively m-o-m in Nov’21 as per SteelMint’s assessment.

The monthly average conversion spread was recorded at around INR 4,200/t in Raipur and the same was at around INR 3,400/t in Durgapur throughout the month.

Central and eastern regions are major supplying hubs and usually cater to demand across consuming regions. Roughly, daily production stands at around 10,000-11,000 t and 6,000-7,000 t, in central and eastern regions, respectively.

Why is the spread narrowing?

Sluggish domestic demand: Diminished demand in the domestic market urged wire rod mills to cut capacity utlisation to around 70-80% and, to liquidate material, they explored export options. Consequently, wire rod exports increased by 26.6% to 86,343 tonnes (t) in Nov’21 against 68,205 t in Oct’21. The figures included both routes, induction furnace (IF) and blast furnace (BF).

Falling raw material prices: Regular price corrections in raw materials like coal and sponge iron disrupted the fundamental sentiments. Trade channels were not willing to actively participate in daily transactions amid high fluctuations in trade discounts, especially in the central region.

Volatile trade discounts: Wire rod mills usually float trade discounts, particularly in the central region. The range does not have any fixed parameters and fluctuated from INR 500 to INR 3,000/t depending upon trade dynamics.

Outlook

Trade channels remained cautious in an erratic market where volatility has widely played out over the last few days and demand is not supportive enough to sustain current levels for the near term.

The recent price hike did not see much market acceptance and very few transactions were concluded for future deliveries and these were also not up to the mark.

Most of the trade participants feel the conversion spread may remain range-bound and is less likely to contract beyond 8-10% in the near term.