Stainless Still StrongRapidly rising prices for nickel and other commodities have sent surcharges spiraling, but service center executives remain positive about prospects for the specialty metals market.

By Dan Markham,
Senior Editor

Sidebars and Tables:

• Top 15 Stainless Steel Flat Products Mills 2005

Optimism about the strength of the stainless steel market is high among service center operators, though not quite as high as the price of the product’s components.

Since the start of the year, the price of nickel has skyrocketed by more than 50 percent, causing surcharges to nearly double from below 50 cents per pound to above 80 cents in early June. This has translated into a jump of 15 percent or more in the price of various stainless alloys this spring.

“We have the same concerns as everybody else, as far as pricing of the commodities that go into stainless steel, whether it’s iron, scrap, energy, nickel, chrome or molybdenum,” says John Zemon, stainless steel product manager for Atlas Steel Products Co., Twinsburg, Ohio. “I’ve been doing this for a long time, and I’ve never seen what we’re seeing right now as far as nickel pricing and availability of material.”

Demand for nickel is outpacing supply, constraining production of stainless steel and other alloys. “The nickel market story is very straightforward—it’s all about supply and demand fundamentals—but it’s unfolding even faster than we expected this year,” says Peter Goudie, Inco Ltd.’s executive vice president of marketing. (Editor’s note: At press time, Inco was the target of a $40 billion takeover offer from Phelps Dodge Corp., along with Falconbridge Ltd., another nickel miner, which could alter company projections.)

Inco, a leading nickel supplier with operations in Canada and the U.K., reported record earnings for the second quarter and forecast strong performance for the rest of the year. Inco expects to produce 295 to 300 million pounds of nickel in the second half of 2006, compared with 275 to 280 million pounds in the first half. But it still can’t keep pace with demand.

“Previously, we forecast a supply deficit of 5,000 to 20,000 metric tons for the full year,” Goudie says. “We are now increasing our deficit projection for 2006 to 30,000 tons.”

Goudie points to the continuous drawdown of London Metal Exchange nickel stocks, which have fallen by over 22,000 tons this year to less than 14,000 tons. “There are no significant stocks of nickel out there, and available stocks to meet demand are falling,” he notes.

Meanwhile, he says, a number of key indicators show that nickel demand should remain robust through the remainder of the year. “Stainless steel inventories are at low levels globally; stainless steel mills are booked past the third quarter; stainless steel production across all regions has been stronger than anticipated; LME and producers’ nickel inventories are falling rather than rising; and the stainless steel scrap market is very tight. All the key facts add up to a strong second half for nickel.”

Gregg Mollins, president and chief operating officer of Reliance Steel & Aluminum Co. in Los Angeles, says the nickel surcharge is the biggest concern in an otherwise stellar market for stainless. Similarly, Joe Piela, vice president at Skorr Steel, Brooklyn, N.Y., says his greatest fear is that the surcharges may ultimately “choke the market.”

Adds Piela, “It has to give some customers pause to say, ‘Can I afford this project at this time or do I put it on the back burner and wait until prices moderate.’” Service centers, too, may have second thoughts about placing orders. “Eventually, it will have a chilling effect. I’m not going to pay an 80-cent surcharge just to find out in August or September it’s going to drop down to 70 or even 50 cents. I’d be left holding the bag on high-priced materials and never recover my costs,” Piela says.

Additionally vexing for those in the supply chain is the feeling that investor speculation, rather than actual demand, is driving the higher prices of metal commodities. “A lot is driven by demand, but there’s also the LME factor for nickel and moly,” says Tony Amabile, general manager of marketing and business development for TW Metals, Exton, Pa.

“Do the commodity traders have a hold of it?” asks Zemon. “We have to live it and breathe it and buy it and sell it. Everybody else is trying to make money on speculation.”

The recent spike in the price of stainless caught many executives by surprise. “I’ve been talking to a lot of customers and other service centers, and nobody can honestly say they saw it coming,” says H. Wayne Ferguson, president and CEO of Ferguson Metals, Hamilton, Ohio.

The price of 304 stainless, which had been relatively stable for roughly 20 months, jumped three times in the past few months. But that trend won’t last, says senior market analyst Markus Moll of Steel & Metals Market Research based in Ehrwald, Austria. Moll projects prices will peak in the third quarter.

Availability of product is another concern, particularly in the aircraft grades that TW Metals, a subsidiary of O’Neal Steel, handles extensively. Lead times on vacuum-melt products, which normally are only 6 to 12 weeks, now go out 40 to 50 weeks. Strong demand from aircraft manufacturers is a significant cause of the tightness in the market, Amabile says.

Other market conditions contributing to concerns about stainless availability are less easy to spot, says Atlas Steel’s Zemon says. “Business is good, but business isn’t like it was in 2004. We’re trying to figure out why the material is so tight.”

Some of the tightness could be due to a decrease in worldwide stainless production last year, the first since 2001. Though the International Stainless Steel Forum projected an increase to 25.8 million tons in 2005, actual production dipped 1 percent to 24.3 million tons.

The production drop was even more pronounced in the Western Hemisphere, as crude stainless production fell 8 percent to about 2.7 million tons in the Americas. Much of the production decline occurred relatively recently, in the third and fourth quarters of 2005.

That condition is not expected to become a trend, however. At its annual conference in May in Louisville, Ky., ISSF forecast an 8.6 percent increase in worldwide production in 2006 to 26.4 million tons. Production in the Americas was projected to increase 6.0 percent to nearly 2.9 million tons.

In the United States, all eyes are on North American Stainless, the region’s largest stainless producer, which plans to increase its capacity even further in the next several years. Acerinox, parent company of NAS, recently announced $270 million worth of upgrades to its Ghent, Ky., mill. The upgrades will increase melting capacity from the current 1 million tons to over 1.4 million tons. The investments include a second A.O.D. converter, a fourth annealing and pickling line, a fifth ZM cold-rolling line and finishing equipment.
NAS plans to bring the upgrades on stream by late 2008. By 2010, when the facility is at full capacity, the company anticipates a 78 percent production increase vs. 2005.

Acerinox, which ranks just behind ThyssenKrupp as the world’s largest stainless producer, also announced plans to further penetrate the North American distribution market with the planned construction of a service center in Guelph, near Toronto, Ontario. This is the first NAS service center in Canada, joining facilities in Minooka, Ill.; Riverside, Calif.; and Pendergrass, Ga.

Industry executives say imports have not had a significant impact on the North American stainless market this year, numbers backed up by monthly reports from the Specialty Steel Industry of North America, a Washington, D.C., trade association. Total stainless steel imports in the first three months of 2006 were down 1 percent from the same period in 2005.

While many have speculated that more imports will be arriving in the second half of the year to help meet the product shortfall, Mollins says price concerns may slow orders with foreign producers. “There’s not enough spread to risk locking into imports and see nickel go down,” he says. “Everybody’s nervous as heck about the nickel surcharges. They could come down as fast as they went up. It’s better to play it close to the vest.”

Moreover, Moll predicts that demand will slow in North America in the second half along with the economy, but remain strong in Asia and Europe. Long-term, however, per-capita consumption of stainless is on the rise in North America and China, while falling in Europe and Japan.

Despite the surcharge concerns and availability issues, inventory levels at Reliance and other service centers remain fairly steady.

“We try to turn inventory as quick as we can in good times and bad times,” Mollins says. “There probably was a little hedging (by customers) in May, so our volume may go down in June. But not enough to carry beyond June.”
Moll’s figures suggest that service centers are carrying significantly less inventory than in previous years. His numbers show stock levels of 105 days for North American service centers, a 30 percent drop from May 2005.

In the face of tight supplies and long lead times, customers often seek out alternatives. While replacement materials are always a threat, their equally high prices have kept users from substituting them in place of stainless. “Titanium [orders are] two years out. Aluminum is also going through the roof. Any logical alternatives in metals at the moment are just as bad as stainless,” Piela says.

For stainless producers, marketing the product and finding new applications remains a constant challenge. In North America, that duty was once the province of SSINA, though individual producer members now shoulder most of that responsibility. ISSF, however, remains committed to market development.

At the Louisville conference, ISFF held the first meeting of its new Long Products Division. Long products represent 19 percent of worldwide stainless production. The committee determined its first priority is to develop a strategy for increasing the use of stainless rebar. Corrosion-resistant stainless rebar could significantly extend the life of roads and structures made from concrete, industry officials maintain. An action plan should be completed in time for the group’s fall meeting in Shanghai.

Victor Polard, president of Ugitech, an Arcelor subsidiary, told conference attendees that one of the foremost opportunities for expanding the presence of stainless long products is in water treatment applications.

Another conference speaker, Kazuo Hoshino, said one of the few areas where stainless has the opportunity to grow market share in both developed and non-developed countries is in automotive applications. “The dwindling oil reserves will intensify the carmakers’ pursuit of better fuel efficiency,” said Hoshino, director of Nisshin Steel Co. Ltd., Toyko. “This will result in their continued efforts to make cars as light as possible and develop hybrid engines.”

SSINA remains active on the legislative front. Several key measures in the works in Washington have the association’s attention. SSINA Chairman Jack W. Shilling, executive vice president at Allegheny Technologies, has spearheaded the effort to get Congress to recognize the importance of a strong domestic stainless steel industry to the national defense. Shilling and SSINA advocate stronger enforcement of the nation’s trade laws to protect the U.S. industry from unfair imports.

In early June, the U.S. International Trade Commission voted to conduct full five-year sunset reviews of antidumping duty orders on imports of stainless steel bar from Brazil, India, Japan and Spain. SSINA would like to see the duties remain in place.

Another regulatory issue facing the industry is the February ruling by the Occupational Safety and Health Administration that drastically lowers the permissible level of hexavalent chromium exposure in the workplace. The new limit of 5 micrograms per cubic meter is more than 10 times lower than the previous level.

Though hexavalent chromium is not a component of stainless steel, it is often a byproduct of processes involving stainless steel. Workers who inhale chromium particles that get into the air as they saw, cut, grind or otherwise process stainless are believed to be at greater risk of cancer. The new level went into effect at the end of May, and provisions of the rule (except engineering controls), must be in effect by Nov. 27.

SSINA, along with trade groups in other industries, is appealing the ruling, arguing that the new standard and its controls are unnecessarily restrictive and costly.

Despite any price, availability or legal concerns, stainless steel distributors remain positive about near-term market conditions.

Amabile of TW Metals notes that the market began to turn at the end of 2003, and has been on a steady incline ever since. “We’re having a great year. We’re aerospace driven, and aerospace is extremely strong.” Moreover, he adds, the forecast looks like aerospace should be strong for another two years.

“It’s pretty strong at the moment, comparable to last year, which was a real strong year for us,” says Ferguson, who also serves on the Metals Service Center Institute’s Specialty Metals Division council. “We’re hearing the same from pretty much everybody. Some are up by a good margin, some are up a little bit and some are about the same.”

Moll says stainless has clearly been a suppliers’ market, but he expects supply and demand to begin evening out in the fourth quarter. “Then you can negotiate with the mills again,” he adds.