11-2009 Tool Steel Outlook
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Tool Steel Outlook: Signs of a Slow Recovery?
 
Is the recent uptick in tool steel sales a precursor of better times for manufacturing?

By Dan Markham, Senior Editor

Tool steel has long been considered a leading indicator for manufacturing. Sales of tool steels—used by many manufacturers in the creation of dies, cutting tools and other industrial products—tend to signal what’s ahead for the entire metals industry. If that holds true despite today’s uncertain economy, then the market may be trending upward.

“We’re sort of like the canary in the mine,” says Dave Murray, distribution manager and vice president at Latrobe Specialty Steel, Latrobe, Pa. “When the gas hits, we’re the first ones to notice.”

“Tool steel has always been a good indicator,” adds Jim Walsh, tool steel manager for Pennsylvania Steel Co., Bensalem, Pa. “We started to see a decline in tool steels in April of 2008 [prior to the market collapse in October]. We see it decline first, then we’re the first to recover.”

Murray, Walsh and others in the tool steel sector report modest improvement in demand that began late in the second quarter. Which begs the question: Is this a precursor of better times to come?

“We’ve seen a little month-upon-month increase for the past four months now,” says Murray. “Obviously tool steel is tied heavily into automotive, so we’ve seen some of that. And there’s been a little more activity in appliance.”

“The stamping industry was the last to start picking up,” says Walsh. “Initially it was roll forming, but now it seems like the improvement is across the board.”

“We’re starting to see a slight uptick on a month-to-month basis,” adds Don Lee, president of Precision Kidd Steel Co., Aliquippa, Pa., “It’s nothing overly significant, but it’s been on a progression mode. It’s still quite depressed from what we’d consider normality.”

Ed Blot, an analyst with Blot & Associates, Brunswick, Maine, says there are three primary destinations for tool steel: automotive parts manufacturers and aluminum extruders, where it goes into dies, and general manufacturers that use the material in cutting tools.

A boost in tool steel demand from a major market such as automotive may just signal a tooling changeover for new models. It does not necessarily mean those new models will catch the eye of consumers, Blot says, suggesting caution about projecting tool steel trends on the whole market. “Ultimately, it can be a combination. You can have one market up, one down and one sideways,” he says.

No one needed a special indicator in late 2008 and early 2009 to see which way the market was headed. Tool steels, like all other metals in the recessionary economy, were being dragged down by disappearing demand, excess inventories and falling prices. Among those problems, the inventory glut remains the most persistent.

“The inventory overhang has definitely caused some pain,” says Jack Milhollan, president of Precision Marshall Steel Co., Washington, Pa. “We’re working through that, but it’s not over entirely.”

The fact that so much tool steel is sourced from foreign suppliers contributed to the inventory surplus, says Lee at Precision Kidd Steel, which specializes in drill rod. When the market tanked in late 2008, substantial orders were already en route from overseas. “We’re still working on that inventory. We haven’t ordered any raw material tool steel because we had so much from last year.”

Base prices for most tool steels tumbled by 20 to 50 percent on the domestic market in the first quarter and remain at depressed levels, according to various sources.

The highly publicized struggles of the auto industry—one of the largest consumers of tool steel—has put added pressure on many producers and distributors of the material. With concerns about the solvency of Ford, Chrysler and General Motors, in particular, “a lot of people were afraid they weren’t going to get paid,” says Murray. “They didn’t put product on the floor for the tooling packages to support the automotive people. That sort of killed demand right away.”

Once GM and Chrysler filed for Chapter 11 protection, Murray adds, the market began to open back up. “We knew it was going to take awhile for the automotive companies to get cranked up again, but we’re starting to see it now.”

Alro Steel, Jackson, Mich., reports a similar increase in tool steel activity, though Chairman and CEO Al Glick is not sure if it signals a true change in demand or if it’s fallout from the recent bankruptcy filing by Crucible Materials Corp.

In May, the Syracuse, N.Y.-based producer and distributor of specialty metals and powders filed for Chapter 11 protection, citing the economic crisis and prolonged downturn. At the time, Chairman and CEO David Robbins claimed the filing “would be the best option in order to achieve a sustainable long-term financial structure, and to save jobs.”

Milhollan says whatever kind of company emerges from bankruptcy, the effect of Crucible’s restructuring will be felt throughout the supply chain. Crucible has already liquidated its powder metal divisions through a $40 million sale to Allegheny Technologies. “It’s going to change the texture of the game. There is significant distribution capacity and mill production capacity to replace Crucible. That business will be dispersed around to those that can earn it,” Milhollan adds.

Blot says Crucible’s structure was unusual in that the mill didn’t make a lot of the products its service centers sold. Most were purchased from other producers around the world. Now other distributors are picking up that business. “If you’re an end-user, you don’t like the fact Crucible’s out, but it’s not like you can’t get the product. The fewer people in the business, the better the price stability.”

Milhollan is surprised the poor economy has not produced more casualties. “Other than Crucible, it has not been as catastrophic as it might have been. With two of the three [Detroit] automotive companies struggling, and how much downstream damage has been done, I don’t think the fallout was as great as what might have been anticipated.”

While the recent uptick in tool steel activity awoke some dormant feelings of optimism, members of the supply chain are aware that the climb back up is a long and daunting one.

“I’m cautiously optimistic that we’re going to see, as we have historically, a steady though slow improvement over the next couple of years,” says Latrobe’s Murray.

“I don’t think there’s going to be a great increase in the tool steel market next year over this year,” Blot says, noting that neither the extrusion nor general manufacturing sectors seemed poised for substantial growth. “We’ve had such a bad first half that anything is going to be an improvement. But we’re certainly not going to get back to 2007 levels for the next few years.”

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