Conversion spread (margins) of medium & small scale mills narrowed by 23% m-o-m in Jun’20 in the major producing markets i.e. Raipur & Jalna, as per data maintained by SteelMint.
Factors behind sharp decline in margins:-
Dull demand – Dull demand owing to limited construction activities and lack of workforce has affected procurement pattern of institutional as well as private projects.
Inventory pile up – Stock levels are constantly rising with medium /small scale mills across regions and the future bookings seems to be limited despite adjusted capacity utilisation as per market need.
Liquidity issues – Another major concern analysed is delayed payment from the entire cycle impacting the entire chain – that is manufacturer to distributor/stockist and retail counters.
Further, costs of existing projects are getting higher due to slow movement towards finishing projects and at the same time bank interest, fixed expenses are kept running with actual pace.
What may happen?
— Sources believe with falling margins, standalone rolling mills may cut production to maintain supply-demand & margins as well.
— Falling conversion spread of rebar mills may also put pressure on margins & sales of standalone furnaces as billet supply through the hot rolling mills may improve in the merchant market due to poor finished steel demand. It should be noted that conversion spread of furnaces has already moved down by 5-8% in Jun’20
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