Production cuts in central India drive billet conversion spreads to new high in April

The high cost of power and frequent outages had a  considerable impact on furnaces production by almost 30-40% in central India. Raipur experienced unscheduled power cuts ranging from 10-12 hours in April 2022, which affected production of furnace operators and drove the margins of billet producers higher during the month.

Power tariffs in Raipur increased by INR 15 paise/unit y-o-y in April, which is not only hampering production but also increasing the cost of production.

The conversion spread from sponge iron to billet rose by 18% m-o-m in Raipur, while margins rose by only 4% in Durgapur, eastern India, in April. In March, the conversion spread had surged 20-30% in both regions.

The monthly average conversion spread from sponge P-DRI (pellet-based DRI) to billet in Raipur stood at INR 19,150/t, and in Durgapur at INR 19,350/t in April, as per data maintained with SteelMint.

On 4 May, the conversion spread was recorded at INR 19,700/t in Raipur and INR 19,500/t in Durgapur.

Reasons behind the surge

• Billet supplies in central India’s spot markets continued to tighten as production at most of the plants was disturbed due to unscheduled power cuts.
• On an average, the daily power cuts were for 10-12 hours, which has led to supply shortage in the spot market.
• Due to seasonal power shortage, a few plants have shut their furnaces due to better price realisation obtained from selling power.

Analysis

• The monthly average price of billet fell in the range of INR 1,200-1,700/t in Raipur and Durgapur in April.
• However, the monthly average price of sponge iron witnessed a sharp fall of INR 2,500-4,100/t in the locations mentioned.
• Finished steel demand continued to remain moderate throughout the month, although a slight fluctuation was seen in coal prices resulting in volatile prices of semis.

Outlook

Power shortage and seasonal curtailments in production of furnaces are likely to keep the conversion spread firm. Sponge iron availability is healthy in the spot market which is likely to keep sponge prices under control.