Specialty Report:
The State of Stainless

Global demand for stainless products was almost too good to be true in 2004. Can the boom continue in 2005 and beyond?

By Tim Triplett,
Editor-in-Chief

In spite of a weakening dollar, the U.S. price of stainless is now the highest in the world. Low nickel stocks, along with stronger demand from China and continued strength in the U.S. market, promise to keep stainless prices high, predicted Markus A. Moll, senior market analyst with Steel & Metals Market Research (SMR), Ehrwald, Austria. Moll was a featured speaker at last month’s Metals Service Center Institute Specialty Metals Division conference in La Quinta, Calif.

From 1950 through 2004, stainless production grew at an annual rate of 6 percent, to 27 million tons. SMR forecasts the stainless market will continue to grow at a healthy 5 percent rate through 2010, to 36 million tons.

Demand in the United States grew by about 8 percent last year. Eastern Europe led the world with a whopping 25 percent growth in demand, followed by Asia at around 13 percent. Growth in Western Europe was a sluggish 3 percent in 2004, Moll reported.

China, though a relatively small stainless player today, will become more of a factor in the next five years. Its production of cold-rolled sheet and strip has jumped 42 percent since 1995, while its consumption rose 24 percent, and exports have climbed 60 percent. Chinese growth rates are high, but also highly erratic, Moll said, forecasting 13 percent average annual growth for the Asian giant’s stainless market through 2010.

Moll urged distributors to think of themselves as part of the global supply base for stainless, but they should also encourage investment in their home market. Don’t be shy about traveling down the value chain to offer services, and invest only in state-of-the-art processing technology to meet customers’ growing expectations for quality. “Fix it now, even if it ain’t broke yet,” he advised, “while you have the money.”

Stainless Sheet
and Strip Panel
Mixed Results, Positive Outlook
Since the late 1980s, stainless consumption has grown at a 6.5 percent rate in North America, from 11 pounds to almost 20 pounds per capita. The market has recovered slowly, however, since the disastrous year of 2001, said panelist Brian Leslie, director of marketing for the Specialty Steel Industry of North America, a Washington, D.C., trade group.

Hot-rolled sheet shipments showed a downward pattern from 2000 through 2003, but recovered in 2004 to about 75,000 tons. Hot-rolled strip shipments rebounded to 2002 levels, around 13,000 tons, but remain well short of 2000’s 23,000-ton level, he reported.

Similarly, domestic cold-rolled sheet shipments recovered to around 85,000 tons in 2004, up from less than 80,000 in 2003, but still well short of 2000’s 95,000 tons. Cold-rolled strip shipments approached 50,000 tons, up from about 42,000 tons the previous year, and on par with 2000 levels.

Key markets for stainless in the first six months of 2004 included service centers, at around 330,000 tons; automotive, at 200,000 tons; and converters (such as tube mills), around 110,000 tons. Service center sales have grown steadily since 2002, while conversion saw a nice jump in 2004, and automotive has remained relatively flat, Leslie said.

Construction led the end-use markets for stainless in the first half of 2004, showing moderate growth over 2003, while the commercial equipment segment also showed modest improvement. But most other markets—including appliance, machinery, electronics, utensils, oil and gas, mining and containers—all saw flat or declining results, according to SSINA data.

Steven Wasil, national sales manager for Mexinox USA, a Mexican mill owned by German parent ThyssenKrupp AG, predicts it will be another six months before the frenzy of activity spurred by the closure of Slater Steel Inc.’s Atlas holdings and the acquisition of J&L Specialty Steel by Allegheny Technologies Inc. has subsided.

Despite the changes at the supplier level, underlying demand and the economy remain strong, he said. “So while there appears to be a little [excess] inventory in the market, end-user demand is still signaling a positive outlook for 2005 in North America.”

Panelist Dave Yundt, director of stainless products for Main Steel Polishing Co. Inc., Tinton Falls, N.J., is also optimistic about 2005. As a toll processor, Main Steel does not inventory product, but it does pay close attention to activity among its customers. “What we see is that inventory levels are up, which has created the perception that the market is slowing. But we really don’t think that is the case, based on what we hear from the end-users and consumers. Most people tell us this inventory situation should be corrected in 30 to 60 days.”

Product substitution is an ongoing concern among stainless suppliers, on a couple different levels, SSINA’s Leslie said. For one, some marketers are substituting grade 304 for grade 201, which has less nickel and chrome content, and is thus cheaper. “201 is a good product for many applications, but if you put it in the wrong place, one where you should be using 304 for corrosion resistance, [it can fail],” he said.

Suppliers in China and India have seen big growth in 201 sales and have not been very discriminating about where they push it. “Most people don’t know there are 160 different grades of stainless steel,” Leslie said. “If they see an application that has rusted and failed, it can create the impression that stainless has a corrosion problem. That just makes it harder to promote stainless steel in legitimate applications.”

Another area of concern is the use of faux stainless finishes by appliance makers, which allows them to sell—at a steep discount—a product that appears to contain stainless. “If people get it into their minds that what they are buying is stainless, and it is not [and performs poorly], that can become a problem,” Leslie said.

High-end markets, where stainless has traditionally been strong, have been relatively unaffected so far by low-price oriented product substitution, Yundt said. If alloy prices stay at such lofty levels, however, even high-end customers could begin to seek lower cost alternatives.

“The industry needs to help customers move from a 304 to a 201 in applications where it is appropriate,” Yundt said. “That takes the variability of the nickel price out of the equation somewhat.”

Mexinox is making resources available to help service centers research various customer applications to see if an alternative grade can be safely substituted, Wasil said. “While we have to be careful, there is a tremendous opportunity to convert quite a few 304 users to an alternative alloy that would be suitable to their requirements and offer a cost savings.” This may lessen the attraction of alternative materials and prevent them from leaving the stainless family.

According to SSINA figures, stainless imports grew from a 20 percent market share in January 2004 to nearly a 34 percent share in December, averaging about one-quarter of the U.S. market for the year—the highest level in 20 years, Leslie said.

Trade penalties imposed on imports from Germany, Taiwan, Italy and Korea five years ago are up for sunset reviews in April, he noted. “If there is a finding that a continued subsidy by these countries could damage the domestic industry, they could renew it for five years.” If not, SSINA is concerned that imports (some unfairly subsidized by foreign governments) will continue to erode the market share of domestic suppliers—a trend that threatens America’s security.

“If imports become half or more, as they have in tool steel and other markets, the specialty steel industry may not survive here. If it does not survive, there will be trouble sourcing material for the defense industry,” Leslie said.

Noting the lag time between orders and shipments, Wasil pointed out that the high import figures late in the year were likely the result of orders placed months earlier when supplies were tight. Imports are pulled into this market by domestic buyers as much as they are pushed into it by foreign mills, he added.

“The people in this room [service centers] drive these imports. You are the ones responsible. We [Mexinox] have to compete like any other importer or domestic for your business.”

Among emerging applications for stainless, Leslie touted its use in structural projects, such as bridge construction. “Structural engineers are very interested in using stainless steel strictly for its strength-to-weight ratio, in addition to its corrosion resistance, which we think offers us a tremendous opportunity.”

Other areas of opportunity include the growing popularity of “outdoor kitchens” (fancy high-end grills), electronics, and even agricultural equipment, Leslie said.
Mexinox is launching a brand-awareness campaign highlighting the hygienic properties of stainless. The goal is to expand its use beyond restaurant and food service equipment to achieve greater penetration of residential appliances.

“Why do restaurants use stainless? Because of safety and security,” Wasil said. “The barrier to stainless growth in home appliances has been the price point that manufacturers put on their products. They take an $800 refrigerator, slap $50 worth of stainless on it, and turn it into a $1,600 refrigerator.” If the industry can convince appliance makers that stainless is not just a high-end niche product, “we feel there is a large opportunity for growth.”

Mexinox is also providing its service center partners with additional information and collateral materials to help them intensify the use of stainless by existing customers, as well as to promote the alloys in new applications.

Mills and service centers are banking on the fact that stainless is not simply trendy, but rather has performance properties that buyers will continue to value for the long term. “If stainless is a color choice, we are dead, because tastes in fashion change,” Wasil noted.

Stainless Bar Panel
Global Supply
in State of Flux
Long-product makers enjoyed excellent margins in 2004. “All over the world, profitability increased significantly,” reported analyst Markus Moll of Steel & Metals Market Research.

Setting the stage for the stainless bar discussion, Moll provided a breakdown of the $12 billion global market. Of the 4.3 million net tons of long products produced worldwide, 770,000 tons are semifinished products going to forging shops; 1.975 million tons are bar, about half of which is bright bar and half hot-finished bar; and 1.575 million tons are wire rod products.

U.S. apparent consumption of stainless bar was 240,000 tons last year. “The whole American continent consumes only about half of what is consumed in Europe and Asia,” Moll noted.

The NAFTA market has performed well below both Europe and Asia in terms of demand. “We have a market volume in Europe and Asia that is almost 40 percent bigger than in 1995, while in North America the market is 10 percent lower than 10 years ago,” Moll said. “There seems to be a turnaround trend since last year, when we had healthy growth. I can only hope that this continues for a year or two, and you can get back to the market volume you had in 1995 here in North America.”

Supply normally follows demand in a market, but in the United States, demand for stainless bar has followed supply. In other words, producers here have focused on high-end products rather than on commodity grades, causing the overall growth rate to lag other parts of the world, Moll explained.

The top 10 bar producers in the world are Ugitech, Valbruna, Cogne, Carpenter Technology, Rodacciai Group, Roldan, Aichi, Viraj, EWS and North American Stainless. They control about 50 percent of the long products market. American and European producers lead the bar market, with surprisingly few Asian companies in the mix, Moll said.

Recent investments by bar producers in the United States and other parts of the world will alter the supply outlook. North American Stainless is ramping up its new billet caster, which will enhance its competitive position. Universal Stainless & Alloy Products is upgrading a bar mill, while Allegheny-Outokumpu is completing a $46 million upgrade of its Richburg mill.

“In America, there is some investment, after many years in which no investments were made on long products,” Moll said.

In Europe, Sandvik is building a new bar mill, Valbruna a new warehouse and Cogne is installing new finishing equipment. “The investments in fresh capacities in Europe are close to zero,” Moll added, “with the exception of Sandvik’s bar mill.”

In China, Shanghai No. 5 has built a new bar mill to expand its size range, and Dongbei Specialty Steel expects to expand output to 400,000 tons of stainless long products, which Moll called “a very ambitious plan.”

Among other initiatives in Asia, the Zhejiang Zhongte Steel group of nine induction furnace producers plan to join hands and build one massive long and flat products mill with up to 400,000 tons of bar and wire rod capacity.

Italy saw the biggest gain in U.S. import penetration, jumping from 19 percent in 2003 to 27 percent in 2004. Canada’s share took a sharp dip after Slater Steel closed. Most other countries saw their share decline moderately

“China is still a small supplier of long products into the U.S. market [with a 2 percent share], but there will be more Chinese material coming this direction in the future,” Moll predicted.

Forecasting the trends affecting bar sales, Moll noted the clear correlation between industrial production and service center activity. U.S. industrial production is expected to grow at 3 percent per year through 2009, topping Japan and Europe. “[Forecasters] expect a slowdown over the next few quarters into 2006, but then the U.S. has the potential to remain the most dynamic economy in the world. That provides a lot of reason to invest in this market,” Moll said.

The dollar is expected to appreciate vs. the yen, but weaken vs. the euro and remain weak though stable until mid-2007. “That means the U.S. manufacturing industry will remain competitive. On the other side, the U.S. market will be of limited interest to exporters,” Moll said, adding that the party will end in 2007 when the euro loses value due to the entrance of new Eastern European states into the union.

SMR forecasts that U.S. market volume will continue to grow, with a possible leveling in 2007. Bar production in the U.S. will increase from 160,000 tons to well over 200,000 tons by 2008, forcing some foreign product out. “The ramp-up of the NAS long-products facility will take its toll on imports into this country,” Moll said.

Meanwhile, stainless bar exports from the United States could reach record levels near 50,000 tons in the next four years, he added.

Panelist Dennis Oates, senior vice president of specialty alloys for Carpenter Technology Corp., Reading, Pa., described the domestic aerospace market as “overheated” today, but he was optimistic about a genuine upturn in demand in 2006 or 2007.

Truck production appears strong well into 2006, but the automotive sector is starting to slow, he said. Budgets have increased among energy-market customers, which holds promise for future sales, while inquiries from the semiconductor industry have “dried up,” he said. “Overall, it’s still a very robust climate within the U.S.”

Panelist Frank Travetto, vice president of merchandising for EMJ, Lynwood, Calif., is encouraged by forecasts for a continued weak dollar, which will “dry up a lot of the imports coming into those distributors that are primarily imports-only.”

Travetto was critical of “master distributors” who aggravate the price competition by providing a source of supply to second-, third- and fourth-tier distributors, who can then push steel into the market with little or no inventory investment.

“I don’t understand the logic of service centers that choose to give away their purchasing leverage to a master distributor for the sake of an extra couple week’s inventory turns. It just doesn’t make a whole lot of sense to me,” he said.

The panelists agreed that stainless products will continue to carry surcharges from the mills for the foreseeable future. “Surcharges are a reflection of the raw materials market,” said Oates, who expects the price of scrap and other inputs to fluctuate at high levels for the balance of the year.

The surcharge is irrelevant to service centers, unless they play the fool’s game and try to speculate on stainless prices, Travetto remarked. “You just buy what you need.”

“I am very encouraged that there does not appear to be a great risk of a quick devaluation of our inventories,” he added.