Stainless steel’s performance over the past 12 months demonstrates that the material is not just corrosion-resistant, but price-resistant as well.

Demand for the specialty metal has stayed solid despite record-high prices resulting from astronomical nickel surcharges. Service center executives and their customers are still concerned about the surcharges, however, wondering how long stainless can remain so resilient.

 “Demand is pretty good, surprisingly, with the price of stainless as high as it is today,” says Gregg Mollins, president and chief operating officer of Los Angeles-based Reliance Steel & Aluminum Co. “You’d think there’d be some drop-off in demand, but our tons are up slightly in the first five months of this year compared to last.”

Stainless steel surcharges have skyrocketed over the past 12 months, nearly doubling to well over $2 per pound. The previous high-water mark had been closer to $1.30, while the surcharge historically has been well below $1. With the surcharge, the current cost of stainless is over $280 per pound for 304 stainless plate, which is close to double from a year earlier, according to historical data from American Metal Market.

Most steel analysts and executives anticipate that the nickel bubble eventually will pop and the stainless price will drop, but when and by how much is anyone’s guess.

“That’s the $64 million question,” says Jack Elrod, president of TW Metals, Exton, Pa. “We anticipate pricing will fluctuate within a band 10 percent either way off the current pricing.”

Service center executives’ primary hope is that the bubble experiences a slow leak rather than bursting with a bang, sending inventory values plummeting.

“That’s always an issue with us,” says Lawrence Burr, president of Atlas Steel Products, Twinsburg, Ohio. “With the potential for reversal, you’re sitting in a volatile situation.”

Mollins, whose company is among the industry leaders in inventory turns, agrees that controlling stock levels is imperative when dealing with such a high-priced, and potentially unstable, material.

“The drop you could get from stainless today could be significant,” says Mollins. “It’s an environment where the prices have gone up so far, so fast. The concern everyone has is they can go down as far and as fast. There is no way to completely combat that, but the best way is to have the least amount of inventory on the floor when prices are falling.”

Metals analyst Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa., says service centers shouldn’t be overly worried about a quick, dramatic plunge in prices. “It’s obvious we’re in a bubble situation in relation to the alloys. The debate is how long it will last and, when it starts to fall, how quickly and how far will it fall. In our view, the fundamentals suggest that alloy pricing, and stainless pricing, are not likely to collapse,” he says.

Plummer believes when the price does come down to earth, it will descend to a new baseline for nickel. Whereas nickel trended between $3 and $4 per pound in the 1990-2003 period, the new range should be between $5 and $6, he predicts.

The price of nickel suffered a 25 percent drop on the London Metals Exchange in late June, to a bit over $17 per pound.

One of the primary drivers behind the price for nickel is insufficient capacity, an issue the nickel companies have been in no hurry to address. Despite the surge in demand, very little nickel capacity has been added in recent years, and many of the projects scheduled for 2007 and 2008 have already been pushed back. In a presentation at the Metals Service Center Institute’s Specialty Metals Division Conference in April, analyst Markus Moll said only 20,000 tons of new nickel production capacity is planned for 2008.

Additionally, the industry regularly comes up short of utilizing existing capacity. “Between 3 and 10 percent of the capacity was not used as it should have been, as it was forecast. It will be the same this year,” Moll said.

Moreover, Plummer says, even the nickel that is being mined carries a higher price tag than it did in the past. “What a lot of people don’t realize, the nickel industry has shifted from a sulfide-based nickel to a laterite-based nickel for new deposits. Just by its nature, laterite nickel is a lot more expensive to get out of the ground and process into a finished product,” he explains. “A lot of our forecast is based on the reality of the new cost structure. The sulfide deposits are getting few and far between, and much harder to extract. The price of nickel will go up just as a result of that.”

Production of stainless steel is not expected to suffer. Recent projections from the Brussels-based International Stainless Steel Forum suggest worldwide crude production will increase 5.1 percent to 29.8 million tons in 2007.

“That’s a more normalized range. That’s really like the long-term trend average,” Plummer says, noting that stainless production saw a whopping 16.7 percent increase last year. The increase in 2006 was partly a correction from 2005, when worldwide production was actually down.

Stainless production in North America, however, is not expected to follow suit, with a forecasted decrease of 3.4 percent to 2.85 million tons this year. North American production was up 9.8 percent in 2006 to 2.95 million tons.

In the coming years, capacity in North America will expand dramatically with the announced plans by ThyssenKrupp to build a new stainless mill in Alabama. The mill, which is scheduled to begin production in 2010, will produce up to 350,000 tons of cold-rolled strip and 125,000 tons of pickled hot-rolled materials.

At the MSCI conference, North America was identified by Moll as one of the regions most in need of additional stainless capacity.

“When these big international stainless companies look around the world, their most logical spots for investing are either China and India or perhaps other places in Asia. But they’re constrained in those areas. They have huge growth, huge opportunities, but they can’t completely own the facilities. They see the U.S. as a safe country,” Plummer says.

In addition to its new stainless mill, ThyssenKrupp will also produce carbon steel at the same site.

“It’s probably needed, because consumption in the U.S. has gone up so dramatically in the last 10 years,” says Mollins. “We’re really dependent on North American Stainless [in Ghent, Ky., part of Mexico’s Acerinox Group] and offshore. I’m more excited about TK putting in the stainless than I am about the carbon flat-rolled.”

Plummer says the new ThyssenKrupp facility will likely take a large chunk out of the import market.

“Import share is in excess of a third of the market,” Plummer says. “Based on where they’re located, they’re not going to be in the heart of the market. They’re looking at blocking the imports, and going after both the automotive and energy/chemical sector down in the South. Just by their location, they should have much more of an impact on imports than some of the domestics.”

Imports have been a major factor in the domestic stainless market this year, up 9 percent through the first three months despite a 4 percent drop in consumption, according to data from the Specialty Steel Industry of North America. Stainless plate has been most affected, with a 90 percent increase in imports compared to the first three months of 2006.

SSINA has been particularly critical of China, which increased production of stainless by 68 percent in 2006 to 5.3 million tons, overtaking Japan as the world’s largest producer of stainless steel. The association claims that China has conferred preferential treatment on its stainless industry, providing it with a range of subsidies and other support that constitute unfair trade.

“The U.S. stainless steel industry is modern, efficient and competitive... [but] SSINA members recognize the importance of being able to address Chinese subsidies in the future should the need arise,” SSINA Counsel David Hartquist said at a recent AMM conference in Pittsburgh.

A minor threat to the stainless industry is the switch from the traditional stainless product to lesser ferritic grades of the material. Industry watchers agree that the change has had little effect on the market so far, though opinions differ on its impact going forward.

Burr says his company has seen some movement away from 300 grades to the other grades, and is willing to help his customers with the conversion. His company employs metallurgical specialists to help customers choose the metal with the right characteristics and price tag.

The biggest hurdle to any conversion is the time and cost that goes in the front end, though sometimes customers have no choice, Burr says.

“There’s an economic reality here. You can’t have runaway material costs and expect to keep customers happy,” he adds. “Our job is to help our customers stay healthy and profitable.”

Annette Tiesman, vice president of sales for Ferguson Metals, Hamilton, Ohio, says her company is seeing more customers willing to do more than listen. “We’re seeing a heavier call for 201, a more serious call,’ says Tiesman. “Before, people were looking at it. Now people are starting to purchase it.”

Tiesman says most of the substitution her company has seen comes from the appliance industry. That’s consistent with what TW Metals has witnessed.

“We’ve seen a little in kitchen wares, the legs of tables,” says Elrod, who also serves as chairman of MSCI’s Specialty Metals Council. “But we have not seen much substitution in our core industries due to the tighter specs involved.”

Plummer, among others, is skeptical about how much market share the lesser grades will ultimately take, particularly in more developed countries such as the United States and the Western European nations. “It’s going to be difficult to qualify the product to perform as others. The substitution factor will have moderate impact at best.”

That’s also the opinion of Mollins, whose company only stocks the lesser grades at the request of customers.

“Once you have a product that’s made for specific applications, people have a hard time trying to replace it. There have been some companies that have gone to a lesser grade, but in the whole scheme of things, it’s very small.”

Executives say most of the major markets for stainless steel remain fairly strong, including appliance and manufacturing. Aerospace has been in a growth mode for several years, and should remain so for the immediate future. Energy-related projects for production of ethanol and other biofuels are booming.

“Construction in the ethanol market should remain strong for the next 12 months,” Elrod says.

The one market that remains a non-starter for stainless distributors is automotive, which is expected to remain flat for the third consecutive year, Plummer says. Yet not all news out of the automotive industry is bad, as light trucks are showing a rebound in consumer preference.

Overall, Elrod expects stainless demand to grow 1 to 2 percent in the next six months over the market in 2006.

“Business is still pretty good. We’ve seen markets stronger than this, but we’ve seen them a heck of a lot weaker,” Mollins says.  “We’re not complaining.”

That seems to be an industry-wide feeling.  Neither concern over the inventory exposure or potential substitution is causing service centers to shy away from stainless. In fact, the bigger companies are making it a larger part of their business.

In late 2004, Chicago-based Ryerson Inc. acquired Minnesota’s Integris, significantly expanding its presence in the specialty metals business. Reliance has added stainless sales to some of its existing facilities, including one in the Pacific Northwest. A.M. Castle and Co., Franklin Park, Ill., made a major step toward the company’s goal to become a leader in specialty materials with the 2006 acquisition of Torrance, Calif.-based Transtar Metals, supplier of specialty metals to the aerospace and defense industries.

“I think the value of stainless steel and the relative margins allow for more profits on smaller orders,” says Elrod, whose company was acquired by O’Neal Steel, Birmingham, Ala., in 2005. “You don’t need to ship a truckload to make money, therefore, the relative expense to handle the product is less.”

Mollins agrees that the higher margins are magnets for larger service center companies.

“Instead of selling [carbon] steel at 50 cents a pound, you can sell stainless at $3 a pound,” he says. “That’s why so many people make runs at stainless.”