BY MYRA PINKHAM,
CONTRIBUTING EDITOR
 |
| Crucible
Specialty Metals President David Yates says that with the
economy slowing, no one is building or rebuilding equipment,
so the capital goods market is weak. Shown: Steel is poured
into an argon-oxygen decarburizer vessel for refining at
Crucible. |
While the stainless steel market is clearly weaker than it was
a year ago, service centers and producers are starting to see
some light at the end of the tunnel. Inventories are declining,
imports are abating and some pundits are predicting that second-half
demand will revive a bit.
Globally, demand for stainless has weakened, with the United
States showing one of the steepest declines alongside Asia, says
Mark Parker, principal consultant for Brook Hunt, London. He attributes
the decline to two factors: Manufacturing has slowed and substantial
destocking has taken place throughout the supply chain since the
fourth quarter, especially at the distribution level.
The root of the inventory buildup can be traced to early 2000,
when the market was hot and everyone in the supply chain believed
this to be the start of a robust cycle, says Horace Kephart, president
and CEO of G.O. Carlson Inc., Thorndale, Pa., and chairman of
the Specialty Steel Industry of North America, Washington, D.C.
With original equipment manufacturers anticipating strong
demand, parts manufacturers--seeing material lead times move out
and prices rising 10 percent--purchased more than they needed,
just to be sure, explains Ed Blot, president of Ed Blot &
Associates Inc., Canton, Ohio. Service centers and mills compounded
the expectation, ultimately padding available supply by 20 to
40 percent, and that excess material had no final destination.
At the service center level, the average supply of stainless
inventories fell to 3.96 months by March after peaking at 5.79
months in December. A comfortable level would be about 3.5 months,
says Christopher Plummer, managing director of Metal Strategies
Inc., West Chester, Pa. Consensus is that service center inventories
will be back in balance midway through the second half.
"Service centers were hit hard by prices that fell 15 to 20
percent," says Bill Fagan, specialty metals liaison for the Steel
Service Center Institute, Chicago. "That has hurt margins. They
definitely need to run fast to get rid of higher priced inventory.
But they are being more disciplined now. Ordering has stopped
and inventories are dropping."
Mill lead times have shortened, which makes service-center
operators feel more secure about product availability. "With the
greater availability of metal, there is less risk, especially
for standard products. Most can be bought on a spot basis," says
Phil Parsche, vice president of nonferrous flat-roll purchases
for Metals USA Inc., Houston.
Mill depot stocks have also come down considerably, Brook Hunt's
Parker says. He estimates that stainless mills had accumulated
about 100,000 metric tons in the past two years and that roughly
half of that had been cleared by the second quarter of this
year.
Bright spots remain
From a historical standpoint, stainless steel demand is not
necessarily depressed, according to Michael Stateczny, vice president
of sales and marketing for plate and pipe at AvestaPolarit Inc.,
Schaumburg, Ill. Yet there is no doubt that the short-term growth
rate has leveled off.
Some end-use markets remain strong, most notably the energy
sector in light of the power crunch. Utilities are rushing to
install land-based gas turbines for electricity generation. These
units primarily use nickel-based superalloys, but also contain
stainless steel, says Andrew McElwee, vice president of sales
and marketing at Carpenter Technology Corp., Wyomissing, Pa.
Aerospace demand has also been quite good. Now that inventories
are coming more in line, stainless suppliers are gauging the requirements
of aerospace more accurately, Stateczny says.
Car and light truck sales, which Plummer says account for
about one-third of all stainless consumption, slowed dramatically
from a year ago.
"By the end of January, there were 102 days of inventories
sitting on [dealership] lots compared with a normal inventory
level of 60 to 65 days," McElwee says. This prompted carmakers
to aggressively reduce inventories, which meant stainless orders
tailed off.
"They have reduced their inventories considerably, and auto
sales have rebounded somewhat since the beginning of the year."
Automakers are reporting that orders for autumn shipments are
coming in, McElwee adds.
 |
| With stainless
demand lower, some mills are refocusing their strategies.
Carpenter Technology Corp., for example, is trying to grow
markets where there is less global competition by developing
several new specialty grades. Here, an order of hexagon
bars is through the finishing mill and on its way to be
packaged for shipment. |
Frank Rizzo, national sales manager for stainless at Reynolds
Aluminum Supply Co. (Rasco), Richmond, Va., is less optimistic
about the timetable for increased transportation demand. While
there might be a minor recovery in the second half, it won't be
until the first or second quarter of 2002 before things really
turn around.
Capital goods has been another weak sector, says David Yates,
president of Crucible Specialty Metals, Syracuse, N.Y. "With the
economy slowing, no one is building or rebuilding equipment."
As companies have struggled to make strong returns on capital
employed, they have been holding off on big projects, Blot says.
"They are finishing projects already committed to, but they are
not adding any further capacity or replenishing equipment. They
are holding that off until next year."
Mergers and acquisitions, which are widespread, tend to dampen
capital spending as well. Instead of two companies with capital
spending plans, there becomes just one, Blot notes.
Stainless demand has also declined in a variety of other markets,
including housing, appliances, chemical processing, food processing,
agricultural equipment and truck trailers. Also, there seems to
be a significant slowing and shakeout in the high-technology sectors,
which could further erode stainless demand.
Even in the energy sector, "we have not yet seen a real pickup
for stainless in oil exploration or oil processing," Kephart says.
"It is expected that we would see an improvement in the next quarter
or two, but it hasn't happened yet."
Rizzo explains that as the sector is producing, refining and
shipping every drop of crude oil and cubic foot of natural gas
possible, producers are not shutting down to make repairs or
to add capacity.
Capacity issues
Excess supply has also been problematic for stainless, says
Bob Mraz, vice president of sales and marketing for TW Metals
Inc., Exton, Pa. "Imports were coming in at high volumes last
year for various product forms, and new domestic capacity has
come on line in the last year or so, bringing capacity up 15 to
20 percent in certain products. Existing mills improved their
productivity and throughput, therefore giving them greater capacity
to ship more metal at a lower cost," he adds.
Hot-end capacity exceeds demand, too, AvestaPolarit's Stateczny
says. "As new capacity is commissioned (including a new 800,000-metric-tons-per-year
melt shop at North American Stainless in Ghent, Ky.), there is
no question that the North American market will have more capacity
than it has had for some time," he says. Just how much impact
this excess will have depends on import levels, which have been
high for the last few years because of the strong U.S. dollar.
Kephart says that government help is needed to limit imports.
Even though imports have declined somewhat this year, due to reduced
demand and prices, many U.S. producers have been operating at
well below capacity for the last five to six months. Raw stainless
output from U.S. producers fell 25 percent to 495,000 tons in
the first quarter of 2000 from 657,000 tons a year earlier, according
to Plummer.
Several trade petitions have been filed, but when specifying
certain products and countries, imports seem to find a way around
the duties. "So we are asking for the trade laws in the United
States to be more consistent with World Trade Organization laws,"
Kephart says.
The problem with conventional antidumping cases is that when
seven countries are penalized, seven more take their place, agrees
Kent Billingsley, stainless commodity manager for Earle M. Jorgensen
Co., citing new imports from India and Finland, for example.
One victory has been the initiation of a Section 201 investigation,
which gives President Bush the right to take action, including
imposing trade quotas, following an investigation and recommendations
by the U.S. International Trade Commission. Congress is also debating
several pieces of trade legislation. "Profits last year were extremely
low because of the surge of imports," Kephart claims. "If it was
just demand [causing difficulties], we wouldn't be so concerned."
One question is where all the steel will go if it does not
arrive in U.S. ports. "Until countries come to a realization that
they shouldn't build mills just to export products, there will
be additional capacity worldwide," Blot says.
Some mills have been forced to refocus their strategies. Carpenter,
for example, is trying to grow specialty markets where there is
less global competition by developing several new specialty grades,
including: a stainless bar for the aerospace market; several new
powder metallurgy grades for medical applications; and a nickel-free
stainless for medical and jewelry applications.
Mills also are attempting to provide better customer service
in order to compete more effectively with foreign suppliers
who offer lower prices. "Domestic mills are doing a very good
job positioning themselves with distributors," McElwee says.
"They are shipping metal quicker, providing more flexibility
and actively promoting new applications for stainless. We don't
see importers doing that." He suggests prompt, quality service
may keep customers in the fold.
Effects of consolidation
Whispers of further industry consolidation have been heard.
"Whether we need it or not, consolidation will be a reality in
the stainless industry," Rasco's Rizzo says, because "the balance
sheets of service centers are not very robust and those of the
mills are depressing."
Stateczny agrees. Stainless production is far more consolidated
than carbon steel--the top 10 stainless producers account for
70 to 75 pe rcent of output, compared with 50 to 55 percent a
few years ago. But in another five years, the top 10 could account
for as much as 90 percent of the total as they realize the advantages
of economies of scale, he says.
One drawback of consolidation is it gives service centers fewer
choices of suppliers, so they will lose some control over pricing
to the mills, EMJ's Billingsley predicts.
Forecasts for 2002
Now that inventories are coming into balance, the stainless
market, which continues to be perceived as a long-term growth
arena, is expected to begin a turnaround, including eventual price
increases. But how long will it take?
"It could pick up as quickly as it fell off," McElwee says.
"With just-in-time programs, the faucet turns off very quickly,
but it also turns on quickly. Cycles are narrowing in length."
Although U.S. stainless demand will be down 3 to 5 percent
this year, Parker forecasts a modest recovery next year. Blot
was even more optimistic, at least for next year, predicting that
demand for flat-roll will grow 12 percent and long-product demand
will rise 9 percent.
Blot also anticipates price hikes. Even without the possible
upward push from the Section 201 investigation, flat-roll prices
will increase 10 to 15 percent by the end of 2002 with announcements
starting as early as the second half of this year. Long-product
prices, he predicts, will rise 5 to 10 percent by the end of
2002, but that process won't begin until late in fourth-quarter
2001 or early in the first quarter of next year.
World stainless steel production grew by 46 percent in the past
decade. The predicted decline in 2001 reflects stainless overproduction
and slowing economic activity in key world regions.
