Optimism Cautiously Returns to Stainless

Stability in raw material prices and depleted inventories give stainless producers and distributors hope that the worst of the specialty market’s doldrums are in the past.

By Dan Markham, Senior Editor

Over the past eight months, optimism has been as difficult to find in the stainless steel supply chain as material. But as 2009 rolls into the third quarter, specialty metal manufacturers and distributors are starting to see a few signs that the worst is behind them.

A slight uptick in commodity prices, the possible end to the industry-wide destocking cycle and a more healthy order book in some places have left executives a little more confident that prospects are not hopeless for stainless.

“We’re seeing some optimistic signs,” says Bob Mraz, vice president of sales and marketing for TW Metals, Exton, Pa. “Our inventories have been rebalanced. We let them run down when nickel was $12 per pound, and replenished at $5 to $6 per pound. We’ve seen a couple of price increases on key commodities. We’re looking forward to a nice, stable second half growing into next year.”

“It’s been a tough year, but there are some positive signs,” says Bill Sales, senior vice president of nonferrous for Reliance Steel and Aluminum, Los Angeles. “We’ve had people on the sidelines who are beginning to come back. We’re definitely seeing more quoting activity that will generate better business.”

Any turnaround can’t come quickly enough for the industry. Demand for stainless, as it did for carbon steel, nosedived in the fourth quarter of 2008. The price of nickel plummeted and, combined with the worldwide financial crisis, sunk the market for specialty metals.

Since then, the stainless supply chain has been working off inventories of its material through the sluggish market while waiting hopefully for a rise in commodities such as nickel, chromium, iron and molybdenum.

Finally, toward the end of the second quarter, there seemed to be a little life in the commodity prices, which inched up in May and June. Further strengthening is anticipated among some commodities. “A lot of houses feel that $4 to $5 was the bottom point,” says Chris Zimmer, vice president of sales and marketing, Universal Stainless and Alloy Products, Bridgeville, Pa.

The price increase is one of the key reasons stainless steel producers and distributors are sounding a slightly more optimistic note, though specialty metals analyst Markus Moll cautions against reading too much into the price hikes.

“The nickel rally has nothing to do with fundamentals,” warns Moll, who analyzes the worldwide stainless market for Steel & Metal Market Research in Reutte, Austria. Moll notes that demand for the material has only spiked in one part of the world, China, which has ramped up stainless production in recent months. In fact, in Moll’s opinion, the Chinese mills are guilty of overproduction.

Thus, the rising nickel price is a product of this increased but unsustainable demand from China and LME speculators guessing the price of the commodity had gotten too low.

“The capacity utilization of nickel is low,” Moll explains. “The nickel price has reached a relatively high level already, and some of the speculators will get cold feet soon and sell again. That could bring a correction.”

For some in the stainless industry, as long as nickel and other raw materials find a general price range and remain there, it will be a boon for the market.

“I would just like to see it stabilize between $6.50 and $7,” says Nicholas Briscoe of Valley Iron Inc., Fresno, Calif. “For a while the price was pretty stable and it was easy to plan. I definitely like it better than the ups and downs.”

On the demand side, the story has been all downs since the market turned in October 2008. The demand decline, coupled with the drop in commodity prices, put buyers in lockdown mode.

Compared to carbon steel, Briscoe says, stainless “suffered a much bigger drop. We had a freefall, but by March we had bottomed out. Then we were flat for a couple of months.”

The mills responded quickly. According to the Brussels-based International Stainless Steel Forum, production of stainless dropped precipitously in the fourth quarter of 2008, then remained low through the first quarter. In fact, the 4.8 million tons produced worldwide during the first quarter of 2009 represented the lowest total since 2000.

Moll says that worldwide production in 2009 will be down 20 percent to about 21 million tons. But much of that loss was already suffered in the first half, when stainless production was off 40 percent around the globe.

“Volumes won’t significantly grow because real consumption will be down by at least 20 percent,” Moll says. “But production at the moment is down by 40 percent, with North America down about 40 percent and Europe down 50 percent. In the fourth quarter, you will see a ramp-up of production.”

That ramp-up will be necessary to complete the restocking of inventories throughout the supply chain. Most observers feel that, if not altogether complete, the majority of the destocking has run its course.

“We have worked hard and have our inventories in good shape,” says Sales. “The industry is getting there.”

Briscoe says his company has started to replenish its inventory after “running it down to pretty much nothing.” Valley Iron plans to add a bit more inventory to cover its needs into September, then see where nickel has gone before making further decisions.

From Moll’s analysis, the destocking of flat products has been completed, while some long product stocks remain on the high side. But he also believes that the restocking will be somewhat muted as “volume expectations are rather sluggish and stockists are rather risk-averse at the moment, even as prices offer more upside than downside potential.”

As service centers and end-users allowed their inventories to dwindle, the mills have taken steps to control theirs as well. Stainless producers have put a premium on material bought from depot stocks, a smart decision, according to Reliance’s Sales. Service centers that are committed to giving the mills lead times with production orders, rather than buying from the depot, should be rewarded with a more favorable price, he says.

Though the domestic mills have slashed production levels, they remain largely insulated against import threats. Petaluma, Calif.-based Comprinox distributes imported material, and its market is off by an estimated 70 percent.

“Offshore producers are busier and not as hungry as the U.S. mills are for that business. And they have long lead times, while the U.S. mills can get stuff out the door within three to four weeks, depending on the product. You combine price and delivery both being out of the ballpark, and it’s tough [for imports],” says Comprinox President Chad Hawley.

For the import market to improve, he says, change will have to come for the North American producers. “It won’t get any better until it gets better for domestic mills, or the domestic mills go under,” he says.

There has been some weakness on the domestic front. Crucible Materials Corp., Syracuse, N.Y., a manufacturer and distributor of specialty metals, filed for Chapter 11 bankruptcy protection in May. Crucible cited the economic downturn and automotive slump as reasons for the bankruptcy filing. According to published reports, several companies have shown interest in purchasing the specialty metals manufacturer.

Additionally, ThyssenKrupp Materials NA has slowed production of its new stainless facility in Alabama. The facility had planned to start production in early 2010.

In contrast, Universal Stainless has utilized the downturn to move forward with a $13 million capital investment in its melt shop. “In an environment where companies are hoarding cash, we are investing in our business. We do believe the market will come back, and when it does we will be that much stronger,” Zimmer says.

Some of that strength is beginning to manifest. While automotive remains dismal and anything connected to the housing industry, including appliances, is also suffering, other stainless markets are doing fairly well.

“One of the noteworthy industries we’re beginning to see is fabricators. They have jobs in house and jobs that are being released again,” Mraz says. “What we have seen is decline, stability and gradual recovery. We’re on the cusp of that [recovery].”

Mraz is also quite high on the company’s energy business, particularly nuclear. “Our nuclear business is off the chart. They’re going to be building new plants, but they’ve also got to juice an additional 25 percent out of existing plants. That means bigger pipes, bigger valves, bigger tubes, more heat exchangers and more storage containers. And that’s stainless and nickel.”

Another market that has remained relatively healthy throughout the downturn is food production, which represents a large part of Valley Iron’s business in the Central Valley of California. “One food company we serve is having a great year. They’re doing some big projects because their revenue is up,” says Briscoe.

Moll believes stainless will continue to win over markets from other metals in the coming years, especially in food processing. He also envisions market share gains in building and construction and other types of process industries, while automotive is the only market that will remain stagnant.

Ultimately, while some stainless executives believe the turnaround has begun, others are taking a more measured approach. “The first half of this month has been better than the last eight. Is it starting to turn? I hope so,” says Hawley. “But we have to see three months of back-to-back improvements before I would say we’ve turned the corner.”

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