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Spread - sponge iron to billet
What it is
The margin between the cost of sponge iron and the realisation on billets, which is the core economics of a secondary steel mill. Sponge iron is direct-reduced iron made from ore using coal or gas; billets are the semi-finished cast product re-rolled into bars
The spread compresses when ore and coal rise faster than finished steel, and widens when the reverse happens
Impact on industries
- A thin, volatile spread with no pricing power on either side - the mill buys and sells on published market prices set elsewhere
- Backward integration into sponge iron or captive power is the standard defence and the main differentiator between secondary mills
- Working capital is heavy relative to the margin, since inventory must be carried at prices fixed before the finished product sells
- It is the secondary-route equivalent of a refiner's crack spread or a converter's conversion charge - the whole business is one number