As with many segments of the metals market, tool steel’s luster has been dulled a bit in 2007, notably by the slowdown in automotive production. Executives from North American tool steel companies say demand remains fairly solid, though not on par with the outstanding three-year run tool steel enjoyed leading up to this year.

“Our industry reached long-awaited highs in volume and value in 2004 and 2005 and has flattened since then,” says Thomas Bell, vice-president of business development for Bohler-Uddeholm, Rolling Meadows, Ill. “Actual consumption of tool steel is difficult to determine, but we believe 2007 will be less than 2006.”

Other tool steel executives agreed that demand has eased in 2007, which did not come as a surprise. “We’ve had lower expectations, but we’ve met our quotas,” says Brian Cincinnati, vice president of operations for Cincinnati Tool Steel Co., Rockford, Ill. “We’re down 5 percent from last year, but 2005 and 2006 were probably the two best years in the history of the company, so a 5 percent slip is OK.”

“Like a lot of segments of the steel industry, 2001-2003 was tough, but 2004 brought a measure of prosperity we hadn’t seen for a while. That initial burst has stabilized, but we still have a healthy industry,” says Jack Milhollan, president of Precision-Marshall Steel Co., Washington, Pa.

The current decline in tool steel consumption can be traced primarily to the limp North American automotive market. The automotive industry accounts for almost half of all tool steel sales. Morgan & Co. forecasts U.S. automotive production of 15.2 million vehicles in 2007, a similar number to 2006 but well below 2004-05 levels. A modest improvement is projected for 2008.

“The slowdown in automotive has hurt, but there’s enough diversity there,” says Milhollan, noting that aerospace and electrical customers have picked up some of the slack.

Carmakers’ attempts to stimulate demand with new model designs has slowed tool steel’s erosion. “Although vehicle unit output is actually down, the number of model changes is slightly up, which will have a positive effect on tooling demand,” Bell notes.

As manufacturers develop new models, they require new tooling to produce new parts. “They’ve also made some significant changes in terms of the steel they use,” Milhollan says. “The high-strength steels require more sophisticated tools and dies. This is going to be a change, and those who bring the most effective tools to the market will win out. It’s an evolutionary thing.”

Salespeople at Cincinnati Tool Steel, which provides tooling and blades to Tier 1 and Tier 2 suppliers of Chrysler and GM, are witnessing signs of life in the industry. “We’re starting to see more quoting,” Cincinnati says.

Tool steel suppliers are striving to make inroads with the New Domestic automakers, such as Toyota, Honda and Nissan, which gain a greater share of North American vehicle production each year. The foreign-owned companies historically have opted to purchase tooling from Asia. North American tool steel suppliers hope to forge more profitable relationships with these carmakers going forward.

“This is one of the most exciting developments in the industry,” Bell says. “If you notice the investments and supply-base expansion the New Domestics have made here in the U.S., we are very optimistic that this will eventually increase tools, molds and dies needed for those plants.”

Another factor behind the dip in tool steel demand this year has been the decline in homebuilding. Though tooling doesn’t play a direct role in home construction, the housing slowdown translates into lower demand for appliances and other household products.

In contrast, tool steel executives say, the aerospace, agriculture and consumer packaging markets are all enjoying solid years.

One market, however, has disappeared, Bell says. The electronics industry—and with it the market for related tools and dies—has departed the United States for Asia, potentially for good.

Overseas activity is causing one of the major concerns expressed by tool steel distributors—the tight availability of product. Most tool steel is sourced from foreign mills, where lead times have stretched out to over a year in some cases.

The comparatively strong economies outside North America are contributing to the longer delivery times. With demand strong in Europe and Asia, and particularly in China, foreign mills have less incentive to export product to the United States, executives note.

“It’s such a small market, we don’t have the supply base we once had,” says David Murray, distribution vice president and general manager at Latrobe Specialty Steel. “On top of that, Europe and Asia are busier. The tool steel mills can charge more money in certain parts of the world. We’re seeing lead times go out.”

Bohler-Uddeholm is one of the world’s leading producers of tool steel, with production mills in Austria, Sweden, Germany and Brazil. Bell, who works in the company’s U.S. headquarters, says the tight supply is due not only to strong demand in the European Union and Asia, but also to expansion of aircraft production worldwide. “Since the aerospace market has occupied a larger percentage of our remelt and forging capacity, we are affected with longer lead times for tool steel,” he says.

The tight availability has resulted in lean inventories throughout the system, with mills, distributors and end users all running in short supply, Bell says.

To Cincinnati, the lead-time issue seems to be most noticeable on large-diameter products, citing 10-month lead times on some items. He hopes for improvement on that front in 2008. “Ultimately, it comes back to capacity. Some of the mills are making moves [to expand],” he adds.

Like other sectors in metals, the tool steel supply chain is no stranger to industry consolidation. In 2006, The Timken Company divested Latrobe Specialty Steel to a group of investors. Earlier this year, German company Schmolz+Bichenbach AG grabbed a foothold in the North American market with the purchase of A. Finkl & Sons Group of Chicago.

Precision-Marshall’s Milhollan describes the global consolidation of steel, and the activity at the tool steel level, as a “good thing,” but one that has changed the way his company does business.

Executives report that tool steel’s base price has remained fairly stable, though surcharges have hit record highs in recent years.

Though not directly affected by nickel, which has seen historic run-ups, the high price of nickel may have contributed to higher prices for molybdenum, a key component in tool steels. Moly prices, once in the $4 per pound range, remain at more than $30 per pound.

“Pricing has been interesting, between raw material surcharges and energy surcharges,” says Cincinnati. “The base prices have been fine, the fluctuation is with the surcharges.”

Bell doesn’t expect any significant decline in the near term. “The steel industry worldwide is operating at a very high level. Raw material availability will remain a concern, and it is unlikely prices will drop in the foreseeable future.”

While the outlook for tool steel sales remains sunny heading into 2008, warns Jeff Bartusek, president of Drill Rod & Tool Steel, Franklin Park, Ill., the market is inherently cyclical and could cloud up in a hurry.