Stainless Slows,
But Remains Solid

Though demand for stainless has eased in automotive and other sectors, and imports are on the increase, order activity and pricing should remain at healthy levels for the second half.

By Tim Triplett,
Editor-in-Chief

While carbon steel prices have declined sharply from last year’s record highs, stainless has seen more modest softening. Most experts view this as more of a normal seasonal slowdown, however, than a harbinger of weakness in the second half.

Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa., points to the widely publicized turmoil in the automotive sector as one source of weakness. Automotive exhaust systems consume one-third of all stainless sheet, he notes.

Automotive has been negatively affected by the surge in inventories of carbon, and to a lesser degree, stainless steels, weighing down the profitability of automakers and their parts suppliers. “An excess of material has been a problem,” Plummer says.

The high price of oil and gas has “caused a bit of a shock to the manufacturing sector in the past six months,” he adds.

The high cost of energy has been a drag on operating rates and capital investment in many manufacturing sectors. Operating rates for U.S. manufacturing have hovered around the 77 to 78 percent level, yet capital spending has lagged at 5 to 6 percent.

“Heavy manufacturing has been slow in this business cycle to make investments,” Plummer says. “There is definitely pent-up demand for investment, slowed by general uncertainty, the higher oil price, and issues with China.”

He points to signs of a rebound in commercial and office construction as a bright spot for the economy in the second half. Metal Strategies forecasts 5 to 7 percent growth for nonresidential construction in 2005.

Housing construction “continues to defy logic” and looks to remain robust this year and next, Plummer says, which is good news for appliance makers and their stainless steel suppliers.

China’s efforts to slow down its economy promise to worsen the global inventory overhang and create problems for producers of both carbon and stainless steels, he says.

China, not historically a leader in the stainless market, is in the midst of a major expansion in stainless steel production capacity. “They are going to be, by far, the world’s largest stainless producer by 2010, which will cause some big shifts in the production and trade flows,” Plummer notes

Today, stainless steel is roughly a $63 billion market, with flat products accounting for $51 billion and long products $12 billion, says Markus Moll, senior market analyst with Steel & Metals Market Research, Ehrwald, Austria. SMR forecasts healthy average annual growth of 5 percent for the global stainless market through 2010, to 36 million tons.

However, stainless steel flat products have reached the peak of the cycle, he says, predicting that 2005 will be a consolidation year for the global industry, with slower than average growth (1 to 3 percent) and de-stocking amid falling base prices.

Stainless steel long products, though affected by fears of falling nickel, chrome and molybdenum prices, will remain relatively strong, he adds, because they are used more in process equipment driven by the current strong investment in oil and gas, power generation and other process industries.

The International Stainless Steel Forum forecasts that global stainless steel production will grow by 5 percent, to 25.8 million metric tons, in 2005. Stainless crude steel production in the first quarter totaled 6.5 million metric tons, an increase of 7.4 percent compared to the same period in 2004—which suggests slower growth for the remainder of this year.

Not surprisingly, ISSF reports that growth was strongest in the Asia region with production reaching 3.3 million tons in the first quarter, a 14.2 percent increase over first-quarter 2004. Driving forces were China and India, where new capacities are in the commissioning phase.

Meanwhile, production in North and South America declined by 1.1 percent to 700,000 tons in the first quarter, due partly to the cessation of stainless crude steel production in Canada. The market is still sorting through last year’s closure of Slater Steel’s Atlas holdings in Canada, and the acquisition of J&L Specialty Steel by Allegheny Technologies Inc.

On the import front
Imports continue to gain a greater share of the North American stainless market, much to the chagrin of domestic mills. The Specialty Steel Industry of North America, the domestic industry’s trade association, reports a 37 percent increase in import tonnage in first-quarter 2005, while consumption grew by only 7 percent. Three-month import penetration was 29 percent, a six-percentage-point increase.

According to SSINA first-quarter figures, by segment, U.S. consumption of stainless steel sheet/strip grew by 7 percent, while imports jumped 34 percent. In stainless steel plate, U.S. consumption declined by 5 percent, while imports increased by 19 percent. In stainless steel bar, U.S. consumption grew 31 percent, while imports increased 82 percent. In stainless steel rod, U.S. consumption grew by 11 percent, while imports increased by 42 percent. In stainless steel wire, U.S. consumption declined by 5 percent, while imports increased by 11 percent.

The domestic industry won a major victory last month when the U.S. International Trade Commission voted to extend antidumping and countervailing duty actions against foreign suppliers of stainless sheet and strip in six countries.

The ITC action comes under the five-year sunset review process. The initial and successful unfair trade action filed by the domestic industry in 1999 requested that antidumping duties be levied on imports from France, Germany, Italy, Japan, Korea, Mexico, Taiwan and the United Kingdom. The industry charged that these imports were priced at less than fair value, causing injury to U.S. producers. France, Italy and Korea additionally were found to be providing excessive government subsidies to their stainless steel sheet and strip producers, prompting the imposition of countervailing duties.

International trade rules require that the Department of Commerce revoke an antidumping or countervailing duty order after five years unless Commerce and the ITC determine that such an action would likely lead to the continuation or recurrence of dumping or subsidies that would cause material injury to the U.S. industry. The ITC determined to revoke duties on imports from France and the United Kingdom. However, orders will remain in place against Germany, Italy, Japan, Korea, Mexico and Taiwan.

The domestic industry enjoyed another sunset review victory recently when the ITC announced the continuation of countervailing and antidumping duty orders on stainless steel plate in coils from Belgium, Italy, Korea, South Africa and Taiwan.

“The countervailing and antidumping duty orders that remain in place will allow us to continue to compete with imports that are fairly priced under World Trade Organization and U.S. trade rules,” says SSINA Chairman Jack Shilling, executive vice president of corporate development and chief technical officer at Allegheny Technologies, Pittsburgh.

In recent testimony before the U.S.-China Economic and Security Review Commission, Shilling warned that China’s entry into the production of specialty metals, coupled with the U.S. government’s lack of attention to the critical role they play in national defense, poses a threat to our nation’s security. U.S. government policies may weaken America’s defense capability by enabling the transfer of significant technology and manufacturing capability to China, he argued.

“While this disregard for the importance and health of the specialty metals industry may not yet have materially damaged our research and development, the handwriting is on the wall,” Shilling said. “If the DOD does not stand up and support the specialty metals industry as being critical to national defense, and if the U.S. government does not create a climate that encourages investment in our industry, there is a very good chance that, over time, this industry could move offshore, both from a manufacturing as well as an R&D standpoint.”

Meanwhile, service center executives report that stainless sales remain solid. Wayne Ferguson, president of Ferguson Metals Inc., Hamilton, Ohio, says 2004 was his best year ever, and 2005 will be his second best. “We can’t complain too much, but we have definitely seen a slowdown,” he adds.

Demand is mixed, with some markets weaker than others, especially automotive, he says. The channel still is burdened by excess inventory from last year’s buying frenzy, though supply is getting more in sync with demand. The current softening is the typical seasonal slowdown, he says. “The market’s returning to its normal behavior.”

The economy in Europe is down, which means more imports are on their way to the United States. China is building capacity to take care of its own needs and will import less stainless, diverting more global exports toward North America.
Stainless pricing has declined roughly 6 to 7 percent since the beginning of the year, Ferguson says, “and we’re waiting to see some lowering in the surcharges.”

Commenting on stainless long products, Frank Travetto, vice president of merchandising for EMJ in Schaumburg, Ill., describes the market as “surprisingly steady, given the volatile conditions for other products. Stainless has been a stronghold for most distributors.”

Service centers serving users of commodity grades of stainless may see some softening, but demand from EMJ’s customer base in aerospace, oil and gas, and power generation markets remains healthy, he says.

Pricing is fairly stable. Mills have been successful at getting the market to accept small increases in the base price of premium grades, but not commodity grades. Alloy surcharges remain near historic highs, keeping transaction prices at elevated levels. “Every time I get the surcharge summary, I am amazed, given the state of metallics in the world market,” Travetto says. “Nickel, chrome, moly have all held up very well.”

Mills are reporting an increase in imports, though mostly in products other than stainless bar. “Import orders placed at the height of the manic situation at mid-year 2004 are now just starting to hit. Some people are a little panicked at what they bought,” he says, which could cause some pressure on spot pricing.

Much of the U.S. market’s prosperity in the second half will depend on whether the dollar continues to weaken or strengthen vs. the euro. But Travetto is confident in his company’s position for at least the remainder of 2005: “I don’t expect aerospace or energy or power gen to take a hit in the next six months.”

The owner of a Midwestern distributor of stainless steel strip concurs that base prices on some stainless products have declined by as much as 10 percent, but surcharge increases have more than made up the difference. Though demand may have softened slightly, inquiry activity from all over the country is robust, he says, speculating that fabricators and stampers may be quoting jobs for parts being manufactured outside the country.

“Until recently, the euro was so strong against the dollar, we think people were looking at bringing jobs back to the U.S., because of the high prices in Europe. We have seen a lot of activity, quoting jobs that look like new business.”

Stainless prices could slip a bit in the coming months, but not drastically, he says, predicting it will be “steady as she goes” for the second half. “The big gorilla out there is China,” he adds. “What they do will have huge impact on the rest of the world.”