Nov 2016

Tool Steel: Duty Bound?

Tool steel has gotten swept up in the trade case on cut-to-length plate, making suppliers wonder where the material will come from in 2017 and how much will it cost.

By Dan Markham, Senior Editor

Ordinarily, tool steel suppliers keep their attention focused on the automotive and industrial markets, the two main consumers of tool steel. This year, instead, all eyes are focused on Washington, where a trade case is playing out—one that has caught the industry off guard and left it little perplexed.

“Right now, we’re following it closely. We’re in a waiting period on a ruling to come out of Washington in November, ironically the day after the election. I don’t know if they have a perverse sense of humor,” says Jackson Milhollan, president and CEO of Precision Marshall, a producer of tool steel, alloy plates, ground flat stock and drill rod based in Washington, Pa. Such products are used to make tooling and dies for metalworking applications.

In April, domestic steelmakers ArcelorMittal, Nucor and SSAB filed antidumping claims against cut-to-length plate products from 12 countries: Austria, Belgium, Brazil, China, France, Germany, Italy, Japan, Korea, South Africa, Taiwan and Turkey. Additional countervailing duty petitions were filed against China, Korea and Brazil. The products covered include not just carbon steel, but alloy steel products, as well.

For many, the inclusion of tool steel was mystifying. Neither Nucor nor SSAB make tool steel, and ArcelorMittal has limited ability to produce the material. Some tool steel products must be sourced overseas because they are not available domestically, sources say.

Tool steel suppliers tried to fight back. Japan’s Daido Steel Co., ThyssenKrupp Steel Europe AG, Tellin-UPC and JFE Shoji Trade America petitioned the Commerce Department to exclude certain carbon and alloy steel CTL plate products from the scope of the investigation. In a letter to Commerce, these companies claimed that “the domestic industry either does not produce or is not capable of producing in sufficient quantities the products for which scope exclusions are requested.”

The petitioners responded, claiming there is no legal requirement that the domestic industry makes every product included in the scope of an investigation. The industry is “developing new capabilities,” they said, and those efforts are inhibited by the dumping. The Commerce Department sided with the domestic mills.

“I’ve been doing this for over 30 years and it’s the first time they’ve come up with one of these cases on tool steel. My question is, what’s changed?” asks Jeff Bartusek, president of Drill Rod & Tool Steels, Franklin Park, Ill.

The only significant change in the supply base is the emergence of China. But that part of the question was already answered. In September, the Commerce Department levied a preliminary duty of 210.5 percent against all Chinese producers, effectively removing their products from the U.S. market. Producers from the other named countries await the findings of the antidumping investigations. Among them are long-time suppliers to the American market, delivering product the domestic industry is either unwilling or unable to make.

Industry observers are skeptical that another ruling against the foreign mills will have any effect on the tool steel offerings coming from U.S. mills, either from the petitioners or other steelmakers such as Universal Stainless and Carpenter Technologies. Most producers seem comfortable making a handful of high-value niche products, while letting the overseas mills handle the commodity grades, they say.

If significant duties are levied against the named countries, it will seriously disrupt the U.S. supply chain, say some tool steel distributors. “Supply is going to become an issue,” says J.R. Crouse, president of American Specialty Metals, Willoughby, Ohio.

Depending on the final rulings, distributors may be forced to scramble to find material from countries not named in the suit or those that escape significant levies. Given the logistical challenges in sourcing overseas, the potential for disruption is considerable. “My lead times on raw materials are typically 4-6 months,” says Bartusek, whose company specializes in supplying precision ground flat stock to U.S. distributors. “I can’t afford to wait to see how this gets hashed out. I have to have constant material flow coming in.”

Along with the supply concerns, tool steel executives say punitive duties on imports could have a significant effect on the price of most flat products, which sank to low levels in 2015 along with other metal products. “The end-users are going to see some heavy increases, if what I’m hearing is true,” says Ray Gamache, operations manager at Ford Tool Steels in St. Louis. “These guys are going to
be in for a shock.”

“We can’t absorb that,” Bartusek agrees. “If we get socked with an additional tariff on this raw material, we’re going to have to raise our prices. It’s a trickle-down effect. We’ll raise our prices, and you’ll pay more for an automobile, for a washer-dryer, for anything that uses tool steel.”

Obviously, the hope with any levies against foreign mills guilty of unfair trade is to reclaim the market for domestic producers. The fear, in the case of tool steel, is that there aren’t enough of them with the necessary capacity to meet the market’s needs.

“I believe [the petitioners] will probably participate to some extent. They should, since they helped bring these cases forward,” says Crouse. “But there aren’t a lot of them. And whether they can, or want to, is another story.”

The trade case is unfolding before a tool steel market backdrop that can best be described as spotty. Some distributors report decent sales through most of 2016, with a few sluggish periods, while others have seen steady conditions at low levels of activity.

The auto industry, the primary consumer of tool steel products, has been setting production records for the past six years. Service centers connected to Tier 1 and Tier 2 parts suppliers have enjoyed healthy demand. Vehicle output may slow a bit in 2017, experts say, but it should remain at robust levels.

There was hope the ongoing auto body material war would be a huge win for the tool steel market, if parts suppliers were forced to continually upgrade their tooling to handle the higher-strength steels and aluminum increasingly preferred by automakers. But that has not panned out so far, observers say. “There could be something subtle going on out there, but we don’t see it,” says Milhollan.

Strength in the automotive and medical markets has not been enough to offset the weakness in energy, defense and other sectors, says Thomas Susini, president of Susini Specialty Steels, Natrona Heights, Pa. “The work climate just slowed down. People aren’t putting anything in on a long-term basis. What that does is bring volumes down and create the feeding frenzy on price.”

Gamache says rough conditions in a few industrial markets and geographies have pushed some competitors out of the market, though he’s amazed how often new companies step in to take their place. Bartusek hasn’t seen any evidence of such a shakeout yet, but can’t rule it out. “I haven’t gotten hung out to dry on any receivables. Usually these downturns will weed out some guys.”

In general, producers and distributor of tool steel expect some improvement in business conditions in 2017. “We’re optimistic things will turn.

Realistically, it will probably be the second quarter,” says Crouse. “I think we will have opportunities to serve some markets we haven’t in the past.”

At last month’s CRU North American Steel conference in Chicago, analysts were particularly positive about the outlook for the U.S. industrial sector in 2017, saying it has the greatest growth potential for the U.S. economy. That would be a welcome development for the tool steel industry.

“My customers are optimistic, but guarded. The activity is starting to pick up for them now,” says Susini.|

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