July 2016
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Supply Side Steers Stainless
 
While demand for specialty metals remains relatively flat, trade cases and an end to destocking hold promise for more orders and better prices for domestic producers.

By Dan Markham, Senior Editor

Sales of stainless steel are forecast to increase in 2016 in North America and around the world, but that’s no cause for exuberance, say the experts. The gains are the result of changing supply conditions, not necessarily healthy demand.

Last year, the specialty metals industry was the victim of a major destocking trend in most major end markets. Distributors and end users spent the final six months of the year trying to empty their shelves of material in a market where the price was declining.

“As far as 2015 went in the specialty metals market, there were some areas of strength and some new market development, but overall it was pretty much flat,” says Scott Fasse, vice president of strategy and marketing at United Performance Metals, Hamilton, Ohio.

The inventory drawdown seems to have run its course around the globe, says Markus Moll, a stainless steel analyst for Steel and Metals Market Research in Austria. “The destocking has stopped, but the restocking hasn’t started yet.” Nevertheless, he predicts apparent consumption (production plus
imports minus exports) will be higher this year than real consumption (actual use of stainless steel). In 2015, it was the other way around.

According to the International Stainless Steel Forum in Brussels, global stainless production declined 0.3 percent in 2015 to 41.5 million metric tons. North American production dipped by 2.3 percent to 2.7 million tons last year. Only the Asian region, excluding China, showed growth in 2015.
 
“Overall, we believe global consumption of stainless will grow at about 3 percent this year, which makes us the optimists,” Moll says. His company’s forecast is more bullish than other industry watchers because he continues to see growth in China, defying the prevailing pessimism about conditions there. SMR believes the positive signs for building and construction, white goods and automotive in China will offset the negative economic factors. “Your global forecast depends on how good you are in China. There are articles from intelligent people predicting a metal meltdown there. If that happens, we’re totally wrong.”

Executives at Universal Stainless and Alloy Products, Bridgeville, Pa., are not forecasting any major growth this year. “As expected, 2016 is evolving as a transition year with moderate improvement in market demand and stabilizing commodity prices. That said, demand is currently tempered
by lingering economic and market uncertainty, sharp competition and very short industry lead-times. Longer-term, customers continue to say they expect the second half of 2016 to be the stronger half this year,” said Dennis Oates, chairman, president and CEO, during the company’s most recent conference call.

While lead times have shortened for aerospace alloys, they have stretched out for some of the commodity grades as Chinese imports have dried up and no other foreign supplier has stepped in to fill the gap. “We’re seeing material becoming a little harder to get in some cases, which is not such a terrible thing,” says Bill Gouveia, vice president of Atlantic Stainless, North Attleboro, Mass., alluding to the upward pressure on prices as supplies tighten.

In North America, the supply-based market changes also are influenced by trade actions. In February, the four largest domestic producers—AK Steel, ATI Flat Rolled Products, North American Stainless and Outokumpu Stainless USA— filed antidumping and countervailing duty petitions against stainless sheet and strip imports from China, seeking antidumping margins ranging from 53.39 to 83.24 percent. Stainless steel imports from China have increased 133 percent since 2013. Chinese products have accounted for 81.2 percent of the total increase in U.S. stainless steel sheet and strip imports in the past three years.

The service center sector is already feeling the effects of the trade case filings. Offers of cheap Chinese material are drying up. “It’s a unique period right now, with the Chinese trade cases and ATI’s lockout,” says Rolled Metals President Steve Pearce, referring to the ATI labor dispute that was settled in March. “It feels like there’s some supply-side constraint. I wouldn’t say demand is tremendously strong.”

Some worry stainless supplies could become too constrained. “The biggest fear we have is possible material shortages,” says Gouveia. Chad Hawley of Petaluma, Calif.-based Comprinox, is even more pointed. “If the domestic mills get all they wish for, the USA manufacturing sector will be faced with some serious supply shortfalls in the short and medium term, and some significant price increases.”

In fact, stainless prices edged up in the second quarter. “We’ve seen a little pickup in pricing on the flat-rolled side, though that’s due to the issues on the domestic supply side more so than demand at this point,” says Fasse. Adds Hawley, “The only thing propping up prices in the USA is antidumping. Without the curtailment of supply, the weak demand situation is not going to drive pricing.”

Whether the price hikes for stainless will have staying power is very much an open question. Moll believes that if any region can support the increases, it’s the North American market. “I think at the moment these prices will hold, which would be good news for all U.S. producers. All of them had disappointing results last year. Even North American Stainless didn’t make money in the first quarter.” If the prices stick, profitability will be better for both mills and service centers, he adds.

Gouveia would settle for simply a consistent pricing environment. “This market could use some stability. If you know your prices will be stable, it enables producers and distributors to act accordingly.”

Moll believes there’s some growth potential for nickel, a key component of stainless, which remains at a low level of around $4 per pound. The LME prices don’t accurately reflect some growing tightness in the global supply of nickel, he says. On the other hand, inexpensive nickel is a positive for traditional 300 series stainless. “Since nickel is so cheap, the substitution of austenitic by 200 series or 400 series ferritic and martensitic has slowed down. There’s no further substitution, and probably in some cases resubstitution.”

As was the case in 2015, demand for stainless in the major end markets remains muted. Service centers report some strength in food processing equipment. Medical and construction markets are performing adequately, while automotive seems to have plateaued, although at high levels. But most of the gains are being offset by losses in the energy market.

“About all you can say positive on energy is that the speed of the decline has slowed,” Moll says. Oil and gas producers are still forecasting declines in capital expenditures. “Even an oil price back up to $50 per barrel is not changing anyone’s investment decisions yet.”

The market for aerospace alloys, which dipped in 2015 due to some supply chain issues, is poised to rebound in the second half, says Jeff Adams, business development and marketing manager for Aerodyne Alloys, South Windsor, Conn. “New programs are starting to ramp up. We’re already seeing it on the Pratt and Whitney side,” he says of the aerospace engine builder.

Domestic suppliers have overcome some challenges in the past 12 months. Late last summer, Allegheny Technologies locked out employees at its flat-rolled facilities, a process that stretched on for more than 200 days. The Pittsburgh-based company continued to produce while negotiating a new union contract, but the labor issues were clearly felt throughout the specialty metals world. “There have been some issues with product availability, with ATI being the big one, but we’re starting to see the effects of that wane a little bit,” says Adams.

Since resolving its labor dispute with hourly employees, ATI announced plans to restructure its Flat Rolled Products business and reduce its salaried headcount. The company is eliminating one-third of its salaried workforce, a response to unfavorable business conditions in its commodity flat-rolled division. “It is difficult for a U.S.-based company to compete in the global commodity markets, particularly when significant global overcapacity exists for products such as commodity stainless steel sheet and grain-oriented electrical steel,” said Rich Harshman, chairman, president and CEO of ATI. “The restructuring and right-sizing actions we are taking, while painful for our employees and our company, are necessary to help secure the future of ATI Flat Rolled Products.”

The latest announcement continues the trend of domestic specialty metals producers moving away from offering commodity grades in favor of higher-value niche products. Such a move can cause longer lead times for service centers looking to source certain products.

Supply chain changes haven’t been restricted to producers. Two recent deals merged longstanding specialty metals distributors. In April, TCT Stainless Steel of Nashville, Tenn., became a division of Rolled Metal Products, Alsip, Ill. “It has broadened our capabilities and broadened our geographic reach,” Pearce says of the acquisition. “The integration continues as we go forward, but it’s off to a really good start.”

Later that month, Atlantic Stainless bought some of the assets, the business name and customer base of the former Skorr Steel, a New York distributor of stainless products. “We were very happy to get the opportunity to bring them into our family,” says Gouveia. “This is the first time we’ve taken a company along with the people. It’s a nice way to do it.” Acquisitions of smaller, older companies by competitors and larger national distributors are not uncommon, particularly in the Northeast where Atlantic operates. “The number of independent, mid-sized distributors is a lot smaller than it used to be, though the ones who remain typically come out stronger and better,” he adds.

Further consolidation of the stainless supply chain is likely. “Some companies are struggling to keep up with the market changes. They could be acquisition targets,” says UPM’s Fasse, whose company is part of consolidator O’Neal Industries, which also owns Aerodyne Alloys, Plus Ten Stainless and Vulcanium.

Despite the uneven conditions in the stainless market, some executives are optimistic. “As a company, we’re doing fairly well considering the revenue is nowhere near what it was two years ago. But we’re seeing customers come out that we haven’t seen in a while,” says Brent Wilson, sales manager at Crompion International, Baton Rouge, La.

“All the economic indicators and price indicators are moving in the right direction,” adds Gouveia. “While the economy is not booming, it’s definitely doing better than it was.”

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