India: Conversion spread from sponge P-DRI to billets slips by up to 12% m-o-m in Jun'21

The margins for converting sponge P-DRI to billets (also called conversion spread) dropped by 5% and 12% in Raipur and Durgapur respectively in Jun’21, according to SteelMint’s assessment.  The monthly average conversion spread was at around INR 11,820/tonne (t) in Raipur and  INR 12,530/t in Durgapur during  the month.

However, in May’21, the conversion spread   had gained by 5% and 7% m-o-m in Raipur and Durgapur.

Today, (6 Jul'21), the conversion has been recorded at INR 11,850/t in Raipur and INR 12,400/t in Durgapur.

Analysis

Low demand, coupled with higher production volumes  and a constant surge in raw material costs, led to a huge gap between the costs of production and selling prices of sponge iron and billets.

The monthly average domestic sponge iron prices gained by INR 700-1,200/t in both central and eastern regions.  However, billet prices recorded a drop of INR 500/t in the eastern region. This, in turn, led to a fall in the conversion of furnaces.

Billets demand was also stagnant with dull  finished steel demand in the domestic market.

Reasons behind falling margins

• Higher input cost: The margins saw a fall due to increased iron ore and pellet prices.
  
  
• Limited demand: Most of the major re-rollers in central and eastern India reduced production by 20-30% due to limited demand amidst the monsoon. Lockdown measures also affected downstream demand.
  
  

What may happen?

SteelMint, while speaking to standalone furnaces including hot rolling mills in central and eastern India, learned that they have cut down production by 20-40% due to high production costs and comparatively lower selling prices of billets. Hence  the margins of furnaces should remain stagnant with a balanced supply-demand chain.