Stainless Market Uninspiring
Demand for stainless steel is healthier in North America than elsewhere around the world, but sharp declines in the nickel price have compressed supplier margins.
By Dan Markham, Senior Editor
From the perspective of most North American stainless steel producers and distributors, the specialty metals market slogged through an uninspiring first half. From the vantage point of the rest of the world, however, the United States is the place to be.
Despite lingering economic challenges, demand for stainless steel products remains the most robust in the U.S., Canada and Mexico. But paltry nickel prices, political uncertainty and some contraction in the manufacturing sector only make the U.S. the healthiest among the infirmed.
“There is a little more optimism in the United States than there is in Europe when they look through their order books and at their profitability,” says Markus Moll, a specialty metals analyst with Austria’s Steel and Metals Market Research.
A few key markets are propelling demand domestically. Housing starts are rebounding from their depths, with forecasts of up to 1 million units in 2013. This is driving the markets for appliances and architectural products, where stainless plays heavily.
Additionally, auto production remains on an upward trend, forecast at more than 15 million vehicles this year. West Chester, Ohio, steelmaker AK Steel reported its highest level of stainless shipments to the auto market since the first quarter of 2008.
“Aerospace, automotive and energy markets continue to be the winners for stainless steel bars,” says Bill Gall, who manages stainless steel long products for master distributor Ta Chen, Long Beach, Calif. “I expect the second half of 2013 will outperform the second half of 2012, and the net result will be growth.”
In contrast, stainless producers report less activity from their service center customers and other OEMs. “Distributors and general manufacturing, where a lot of stainless goes into small parts, have been sluggish,” says Mick Wallis, CEO of Outokumpu Stainless USA, Calvert, Ala. “We’re a little concerned about the overall state of the economy. There isn’t any point in hiding that.”
Such concerns were validated in June by the Institute for Supply Management’s monthly report on manufacturing. After showing modest growth through the first four months, the manufacturing sector contracted in May to its lowest point since 2009.
Another soft spot is in construction. Moll’s firm tracks more than 1,000 of these large project builds across the globe, and he is surprised at the number put on hold in the first six months of this year, especially considering the inexpensive financing available. He expects a greater percentage to get the go-ahead in the second half.
The sum of all these factors has been a fairly flat market for stainless steel products so far in 2013. SMMR projected 4 percent global growth for the material this year, a number that looks a little optimistic to Moll at the moment.
“We hear such a mix from our customers. Some are just barely hanging on and others say they have an OK backlog,” says Jason Martineau, national sales manager for Penn Stainless Products, Quakertown, Pa.
TW Metals, Exton, Pa., has two main business units for its stainless products: aerospace and commercial. Bob Mraz, vice president of sales and marketing, says the company’s aerospace segment has enjoyed steady quarter-over-quarter increases in demand, driven by the engine and airframe markets. The commercial side, primarily material going into food processing, chemical and petrochemical markets, has been softer than anticipated. “We thought this year would be up 8-10 percent, but it’s pretty much right on pace with last year,” he says.
AK Steel’s forecasts for both its stainless and grain-oriented electrical steel segments demonstrate the dynamics of the current environment. The mill sees continued sluggishness ahead for its commodity stainless, while the outlook for its specialty grade products is much better. “For example, thus far in 2013 our Coshocton Works products and automotive exhaust grades have exhibited stronger demand, and that trend is expected to continue for the foreseeable future,” says Chairman, President and CEO James L. Wainscott.
Additionally, on the electrical steel side, the company anticipates increased shipments domestically as a result of a strengthening housing market. Conditions remain far less favorable for its overseas sales to both European and Asian markets, however.
The more vigorous U.S. market is reflected in Outokumpu’s operations on both continents. In Europe, the Finnish stainless steelmaking giant is trying to divest its Italian plant, Acciai Specaiali Terni, a condition of its merger with ThyssenKrupp’s stainless business, Inoxum. Outokumpu has received five bids for the facility, one of the most modern in Europe, but none has been deemed satisfactory. Elsewhere in Europe, a temporary rationalization of capacity is ongoing.
The story is much different in the U.S. Outokumpu continues to move up production at its Calvert, Ala., facility, which it acquired in its deal with ThyssenKrupp. That process is moving along nicely, Moll says. “The ramp-up is going well. All the equipment works and the quality is good.”
That’s certainly the perspective of Outokumpu USA’s Wallis. The Calvert facility, which opened its melt shop in November 2012, enjoyed its best month in May. “It has gone very well in terms of operating rates,” says Wallis. When fully operational, the facility will have a capacity of 350,000 tons of cold-rolled product and 900,000 tons of slabs. That supply won’t be limited to the United States. “The clear message from the merger with Inoxum is that the U.S. is seen as a great growth opportunity for Outokumpu,” he adds. “Not only in the NAFTA region, where Mexico has been growing at 12 percent a year for the last 10 years, but also in South America.”
In a perfect world, Calvert’s capacity will replace imported material, rather than simply fighting with other North American suppliers for the existing share of the domestic business. In the current market, where Europe is struggling on the demand side and much of Asia is seriously overstocked, keeping imports out isn’t easy, say the experts.
“Even though it’s a bit soft, the long products market here in the U.S. is stronger than that in Europe and Asia, making the U.S. an attractive place for importers to try to do business,” says Gall at Ta Chen.
The U.S. is an enticing market for Chinese and Taiwanese stainless, Moll confirms. To keep imports in their home countries, the U.S. price will have to be globally competitive. The pricing dynamic in the domestic market will depend on what Moll expects to be fierce competition between Outokumpu, North American Stainless, Allegheny Technologies and AK Steel. “The question is how much AK will fight in the commodity austenitics. They will fight on the ferritics, but with the austenitics it’s a question of how much market share they want to keep,” he says.
Ultimately, Moll expects the stainless price in the U.S. will come down in the second half. That’s in contrast to Europe, where some strengthening is forecast. But he doesn’t expect major movement anywhere.
Among concerns for the supply chain is the frightfully low price of nickel, a major component of stainless steel, which has lost 20 percent of its value since early February, falling below $7 per pound. “The bottom line is volumes are OK, but margins are a disaster. The industry can live with the volumes it has, but the margins on every ton sold are at record-low levels,” Moll says. Any rebound in nickel prices is unlikely, he adds, at least in the short term. “The recent weeks show us the fundamentals are weak and the prices are headed further south.”
That trend line for nickel has left stainless buyers ultra-conservative. “When prices are coming down, it leaves a reason for people to sit on the sidelines,” says Martineau.
Mraz also sees cautious buying behavior, made possible by quick lead times from the mills. “Our orders are about on par with last year, but the value of the order is off about 15 percent. That means people are really buying short.”
Ta-Chen’s service center customers are holding the line on stocks in all product segments. “We are seeing very timid inventory replenishment from our customers, which will help to bring down inventory levels in the second half of 2013,” says Danny Tu, who manages pipe, valves and fittings for TCI.
Though the short-term outlook for specialty metals is uncertain, stainless executives believe most factors point to a healthy future for the material. The global megatrends of population growth and urbanization, plus the expected energy revolution in the U.S., are strong positives for future demand. Urbanization will deliver stronger results in the food processing and white goods markets, officials say, as more of the world’s population has access to the same standard of living available in the western world.
The anticipated energy boom in the United States will also benefit stainless in a variety of ways, from petrochemical processing to infrastructure and more. On the other hand, the growth in oil and gas exploration in the U.S., coupled with some cost overruns on the Vogtle project in Georgia, may put the brakes on the fledging restart of the nuclear industry, Martineau says.
Major nuclear builds tend to buy more mill-direct, Mraz notes. More importantly for service centers, maintenance and repair work for the nuclear industry will continue to be healthy as many facilities are being kept operational longer than originally planned.
The industry also continually looks for new alloys to better serve current and potential markets. In May, Outokumpu unveiled two new duplex grades that are less brittle than previous offerings. “The duplex grades have always been about strength but lacking in formability,” Wallis says. “These new grades don’t have that compromise.”
Introductions such as this may help stem encroachment on stainless from other products, such as clad materials where stainless content is minimized. “The industry is still innovative and developing new solutions,” Moll says.