Stainless steel specialist Markus Moll turned meteorologist at the Metals Service Center Institute’s Specialty Metals Conference in March.

“What I’m seeing for your market is some rain, but no real thunderstorms,” said Moll, the managing director and senior market analyst for Steel & Metals Market Research, a specialty metals research organization based in Austria.

Moll broke down the world stainless market on a variety of fronts for the MSCI attendees, offering his take on the year past, global production going forward, imports and exports, raw materials and the state of substitution.

The stainless industry experienced one of the “biggest meltdowns” it has ever seen in 2007, Moll said, though one that produced few casualties.

Global production of stainless products dropped in 2007 by 2.0 percent, nearly evenly split between flat products and long products. Some of that production decline could be attributed to worldwide destocking at unprecedented levels.

Though distributors continued to build inventories through the first quarter, the subsequent three quarters saw inventories slashed across the board. In the third quarter alone, there was a 1.3-million-ton drawdown of stainless materials. Much of the destocking occurred in Europe, where “supply chain management is not as efficient as it is in the U.S.,” Moll said.

The destocking bloodbath should be over by now, he added, though it’s unlikely inventories will rebound to 2006 levels. Global production, however, is expected to grow by about 5 percent. How much the actual market for stainless grows is largely dependent on the uncertain U.S. economy.

If the U.S. dips into a full-fledged recession, global demand will only hit 3.8 percent, with the NAFTA countries projected to cut back production by 6.0 percent. But if the U.S. is able to avoid recession and simply slow down in 2008, the worldwide impact will be significant. The NAFTA countries are still projected to show declines in the market for stainless, but by only 1.9 percent. And the world’s demand is forecast to improve by 6.4 percent if the U.S. stays out of a recession, with each of the major stainless producing regions enjoying greater growth.

China is already the largest producer of stainless steel at more than 10 million tons annually, followed by the EU, Japan and the United States. Looking out five years, India will become the third-largest producer, though the U.S. will surpass Japan. India, however, will not become “another China,” Moll said, because most of India’s production is designed for local demand, not to trade on the world market.

The U.S. is expected to increase production from its current 2 million annual tons to almost 3 million by 2012, according to SMR’s projections.

“More and more, the U.S. is becoming self-sufficient, and will become a net exporter at times,” Moll said.

That trend started in 2007. The U.S. imported 610,000 tons from Europe in 2007, a 1 percent decline, and 390,000 tons from Asia, a 17 percent dip. Conversely, U.S. exports to Europe increased 78 percent to 130,000 tons and exports to China jumped 52 percent to 80,000 tons.

Still, Moll said, while the U.S. may enjoy a greater role in exporting than in the past, the actual trend in specialty metals is away from global trade. The intercontinental trading figure—the percentage of material that is traded between the continents—is only at 15 percent.

“Globalization is not increasing in this business,” Moll said. “On the contrary, it’s going down. It’s more of a regional business, where the majority of the material is being used where it’s produced.”

Though stainless steel produced in Asia remains the lowest priced, the difference is not substantial. There is now less than a $500 per ton difference between the lowest priced 304 cold-rolled sheet produced in Asia and the same alloy produced in the United States. Moreover, that cost edge doesn’t travel well. “Are Chinese mills really cost leaders?” Moll asked. “Yes, but only in China.”

The cost of stainless steel produced in China is actually higher than the cost leader in Europe, when transportation, agent commission and risk factors are taken into account. Such costs contribute to the regionalization of the stainless business.

“The price is lower, but the gap is relatively small,” Moll said. “With that gap, it makes less and less sense for Asian producers to supply Europe and North America.”

With the cost of nickel moderating by 20 percent, the U.S. price of 304 stainless has declined from over $6,300 per metric ton to less than $5,000 per ton since mid-2007, substantially reducing the threat of substitution by users to 200-series stainless alloys or other non-stainless materials. More than 190,000 tons of new nickel mining capacity is in the works for 2008, Moll added.

Moreover, he said, manufacturers must be able to answer five questions positively before substitution is worthwhile:

• Is the price of stainless steel important in production?
• Would a new material provide a competitive advantage?
• Are there easily available substitution alternatives?
• Does the substitution material meet the standards?
• And does the price difference outweigh the costs of change?

For most companies, the answer to at least one or two of those questions would be no. The waning substitution threat, coupled with the shrinking price gap, is leading to what Moll called, “the renaissance of 304.”

Stainless steel companies seem equally bullish on the industry’s future, Moll concluded. Specialty metals producers are enjoying healthy profits and pouring that money back into the businesses. “The mills are using it for equipment. They’re investing in facilities. This industry believes in its future, and there’s no better way to show it than by investing in it.”