The conversion spread (margins) from sponge iron to billets rose by 4% in Raipur and Durgapur month-on-month (m-o-m) in Apr’21 and further by 5-7% in May’21 for both locations.
As per data maintained with SteelMint, the monthly average conversion from sponge P-DRI to billets in Raipur (in central India) stood at around INR 12,400/tonne (t) and in Durgapur (eastern India) at INR 14,270/t during May.
On a daily basis, today, (2 Jun’21), the price gap was recorded at INR 12,150/t in Raipur and at INR 13,000/t in Durgapur.
Reasons for the rise in conversion spread
A fall in the production of standalone furnaces (billet-making units) as well hot rolling mills due to supply shortage of oxygen, resulted in the rise in prices of billets in the spot market compared to that of sponge iron.
As per data maintained by SteelMint, the monthly average prices of billets gained sharply by INR 800-1,100/t, while, on the other hand, there was only a slight increase in the monthly average prices of sponge iron by INR 200/t in Raipur and by INR 125/t in Durgapur, in the past one month. Hence, a rise in billet prices resulted in a widening conversion spread.
Analysis
SteelMint, while speaking to standalone furnaces in central India, learned that the prevailing margin is not satisfactory as a conversion spread of at least INR 14,000/t from P-DRI to billets is required due to the recent hike in power costs, w.e.f 1 Apr’21 as well as the significant surge in raw material prices of pig iron, scrap and silico manganese.
Outlook
Sources feel, prices of sponge iron are likely to remain strong due to higher raw material costs(iron ore and pellets) along with seasonal supply shortage and lower production volumes.
Thus, with strong sponge prices, margins of furnaces (billet makers) are likely to remain stagnant. Moreover, seasonal limited demand for finished products is less likely to push up billet prices vis-a-vis sponge iron.
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