Operating margins for induction furnaces to produce billet by using sponge iron as an input has fallen in central and east India due to improved supply of billet in the domestic market and sluggish downstream demand of billet.
The margin, also called conversion spread, has shrunk by INR 800/t, around 7%, in Durgapur and fallen by INR 1,400/t, around 12%, in Raipur on an m-o-m basis so far this month.
Currently, the margin for converting sponge P-DRI to billet is around INR 11,600-800/t in Durgapur & INR 11,200-400/t in Raipur. Monthly average margins were around INR 12,500-700/in June for these two cities, according to SteelMint’s assessment.
Causes for falling margins
- Improved supply: Billet supply has increased in the spot market as dull rebar demand has slowed offtake. Most of the hot-charging mills are offering billet from their inventories in the merchant market rather than selling rolled products to maintain inventory.
- Lower Demand: Most rolling mills in central & eastern India have reduced production by around 20-60%, which is typical for the monsoon season, limiting billet demand.
- Healthy furnace production: Ingot/billet production remains healthy as manufacturers in the key producing region of Raigarh in central India have lifted output rates to 100% as Covid 19-related restrictions have been eased.
- Higher input cost: Sponge iron prices rose by INR 400-500/t in major locations due to seasonal shortage.
- Limited exports: Export demand remains limited for mid-sized mills as Nepal, a major buyer of Indian billet & wire rod, has reduced orders. Nepal’s steel demand across product categories has fallen sharply due to off season for construction & coronavirus-related restrictions.
What may happen?
Billet producers are waiting to see if margins improve in the near-term, otherwise they may start cutting production to shore up margins.
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