Capital investment, new car designs and rising machine tool orders have solidified the market for tool steels.

By Myra Pinkham,
Contributing Editor

Demand for tool steels has remained strong in North America throughout 2005, and suppliers believe that is likely to remain true for much of 2006. At the same time, raw material costs appear to be stabilizing.

“Demand for tool steel this year is not quite at the level that it was in 2004, but last year was a recovery year after perhaps the three worst years ever for the industry,” says Sherm Ackermann, general sales manager for Precision-Marshall Steel Co., Washington, Pa. Last year, both service centers and tool-and-die makers were building up their steel inventories to beat out mill price increases. Tool steel prices have nearly doubled since 2003, notes Dave Murray, vice president of sales and marketing for Timken Latrobe Steel, Latrobe, Pa.

This year, the inventory overhang has dissipated while consumption continued at a good pace, Ackermann says.

Market indicators for tool steel are generally strong, says Christopher Plummer, managing director for Metal Strategies Inc., West Chester, Pa. Machine tool orders were up 13.7 percent through May after rising 48 percent during 2004. Real industrial capital spending (excluding computers and transportation) rose 8.7 percent during the first half, after rising 4.8 percent in 2004.

Demand for machine tools should continue to rise by double digits in 2006 in light of capital investment being “on a roll,” predicts Patrick McGibbon, vice president of the Association for Manufacturing Technology, McLean, Va.
Michael Withey, president of master distributor Tool Steel Service Inc., Bridgeview, Ill., says demand over the last few years has not changed dramatically, despite the peaks and valleys of the market.

Comparing today’s consumption level to 18 months ago, it’s actually up more than 10 percent, says Thomas Bell, vice president-business development for Bohler Uddeholm Corp., Rolling Meadows, Ill. From mid-2000 to late 2003, demand was extremely low. Many users were welding, repairing or shimming their dies in order to avoid replacement costs.

When the economy improved last year, the turnaround for tool steel began. In addition to replacing older tools and dies, manufacturers came up with model changes and new part designs, both cosmetic and structural, resulting in the need for new tooling, and more tool steel. (Auto manufacturing accounts for 60 percent of tool steel demand, Bell says.)

“For instance, advanced high-strength steels in automotive frame parts are widely being specified to increase fuel efficiency and improve driver safety,” he says. “These materials are thinner, stronger, but much more difficult to form and trim in stamping dies. The result is more wear and tear on dies,” which boosts demand for new steel grades in stamping and trimming tools.

Harry M. O’Brien, vice president of sales and marketing for Crucible Specialty Metals, Syracuse, N.Y., expects that demand will continue to be strong.

“There is no reason for it to decline,” agrees Jeffery Bartusek, president of Drill Rod & Tool Steels, Franklin Park, Ill.

“Our customers are busy, even with (Big Three) auto sales down,” says Murray at Timken Latrobe.

Big 3 vs. New Domestics
Although the Big Three cut back production slightly this year, they need to come up with new designs, which require new tooling, in order to compete with the New Domestics (German, Japanese and Korean carmakers with plants in the U.S.), says Dudley Merchant, vice president of sales and marketing for Universal Stainless & Alloy Products Inc., Bridgeville, Pa. The New Domestics tend to shift, or refresh, their auto models more often than the Big Three.

The New Domestics keep building new manufacturing and assembly facilities in the United States, notes AMT’s McGibbon, pointing to Toyota’s new plant in San Antonio, Hyundai’s new factory in Alabama, and the Global Engine Manufacturing Alliance—an engine joint venture of Mitsubishi, DaimlerChrysler and Hyundai—which is building a second plant, also in Alabama.

Bell argues that most of the New Domestics’ tooling is still imported. “We would like to see our customers—the toolmakers—get more involved in those tooling programs. But so far, U.S. toolmakers have seen these doors as closed.”

O’Brien insists that will change. “While they aren’t purchasing their tooling domestically, there has been a shift, especially at the Japanese-owned companies.”

Marc J. Wells, president of Tremblay Tool Steels Inc., Macedonia, Ohio, says his company receives no orders directly from the New Domestics, but does receive orders from some large tool-and-die shops that sell to them.

Bell worries about the future health of the Big Three and their Tier I suppliers—some of whom are under Chapter 11 bankruptcy protection. “Many of the Tier 1 suppliers are having financial difficulties due to the pressure to reduce costs, or at least not pass on any cost increases. This results in financially weak suppliers. Long term, we need to have more stable companies driving the tooling programs that we have today.”

Base prices, surcharges
Tool steel prices have increased in the past 18 months, driven by skyrocketing raw material prices. Just this year, Plummer says, suppliers issued two separate price increases on tool steels totaling about 10 percent.

About 80 percent of tool steels are supplied to users by service centers, whose replacement costs have risen continually over the last 18 months, Bell says. “I think that distributors are being selective in selling their stocks” in light of this trend.

“The price of tool steel is still going crazy,” asserts Arnold Erwin, president of Southern Tool Steel Inc., Chattanooga, Tenn. Prices for alloying materials, particularly molybdenum and vanadium, remain “ridiculously high.”

Molybdenum, which reached a high of $41 per pound earlier this year, retreated to $36 per pound in August—still far above the $4 to $5 per pound cost in 2003, according to Murray. Vanadium, which reached almost $60 per pound earlier this year, was selling at about $30 per pound in August, vs. $5 to $6 per pound a few years ago.

Though alloy pricing has softened recently, there is still a lot of high-cost tool steel sitting in warehouses that was purchased in late 2004 and early 2005, Bell says. Should demand decline sharply, some distributors could be stuck with high-priced stock, Murray adds.

Some experts expect another spike in alloy prices. Withey at Tool Steel Service says his European mill sources are just about unanimous in their opinion that commodities will go up again, “but I’m not getting the same consensus from U.S. mills.”

Virtually every producer and distributor is passing on their raw material costs to customers. “No one wants to pass on prices, but we’ve had to do it,” Bartusek says.

Murray believes that if tool steel prices do come down, they will come down slowly. “Demand is still strong across the board. In fact, a number of service centers say that August was the best month ever. While surcharges are down $10 to $15 a pound, base prices are holding.”

Ackermann says base prices have risen cumulatively about 30 percent since December 2003, and that more increases could be expected as long as the market stays strong.

While raw material surcharges were at their peak, mill lead times early this year were greatly extended, up to 50 weeks in some cases, Murray says. But in the last couple of months, delivery times have returned to a near normal 20-25 weeks.

“I don’t know if demand worldwide has softened or if, because prices increased so much, people are holding off purchases,” Murray wonders. “It is confusing because domestically, I don’t see demand dropping as much as lead times.”

He thinks tool steel suppliers will look back on 2005 “as one of the golden years.”

While tool steel will take momentum from 2005 into 2006, “next year is not going to be a gimme,” Bell warns. “The biggest concern is the financial health of the Tier 1 [auto] suppliers. This group really sets the pace and their behavior effects our direct customers, the toolmaker.”