Specialty Steel Outlook
Healthier, But Not Robust
Finally off life support, the stainless steel market faces a lengthy rehab.
By Myra Pinkham, Contributing Editor
While still not where suppliers would like it to be, the market for stainless steel and other specialty metals is in a better place than it was about a year ago.
“2008-09 was very difficult for our industry and most industries across the world. Now, at least the patient is off of life support,” says Michael Stateczny, chairman of the Specialty Steel Industry of North America’s market development committee and vice president and general manager at Outokumpu Stainless, Schaumburg, Ill.
“Coming out of the worst recession in 70 years, we are now seeing steady, gradual recovery in most of our end-markets,” says Terry Hartford, senior vice president of Pittsburgh-based ATI Allegheny Ludlum.
But while the industry is climbing out of the recession, the ascent won’t be quick or easy, says Stephan Lacor, vice president of sales and marketing for ThyssenKrupp Stainless North America. “Even though things are getting a little better, we aren’t out of the woods yet.”
One indicator, the Institute for Supply Management’s Purchasing Managers Index, hit 59.7 percent in May, the 10th consecutive month that the index topped 50 percent indicating that the manufacturing economy expanded. But the rate of expansion was down from April when the well-watched index registered 60.4 percent.
Markus Moll, managing director and senior market analyst for Austria’s SMR Steel & Metals Market Research GmbH, cautions that just because the specialty market saw a bump in orders in the first quarter, “I wouldn’t misread it and assume that kind of momentum would take you through the whole year.”
In fact, about two months ago the market seemed to stall, observes Dennis Oates, chairman, president and chief executive officer of Universal Stainless & Alloy Products Inc., Bridgeville, Pa. This was the result of raw material prices drifting lower, apparently in connection with the European sovereign debt crisis, which had the effect of weakening the euro and strengthening the U.S. dollar. Consequently, not only did mills significantly lower their raw material surcharges, but some of their announced price increases, especially for flat-roll, failed to stick.
The recent volatility of raw material prices—and therefore stainless transaction prices—has begun to affect buyer behavior, says Rick Lazzari, director of strategic sourcing for Castle Metals, Franklin Park, Ill. “Our customers are holding off purchases in case prices go down further.”
Following a long period of destocking, there was “a bit of an inventory restocking pop,” says analyst John Mothersole, a principal at IHS Global Insight. Now, with prices questionable and confidence waning, buyers are trying to live off their stainless inventories, or at least being very cautious about their purchases. “They are only buying when they absolutely need to and in smaller quantities, and also doing more shopping around,” says Bill Sales, senior vice president of nonferrous operations for Reliance Steel and Aluminum Co., Los Angeles.
Yet service center specialty metal inventories have actually increased. According to London-based Metal Bulletin Research, service center stainless steel shipments declined 8.4 percent in May from the previous month (though they were still up 10.1 percent from a year earlier). With shipments down, distributor inventories were up to 343,500 tons, 6.3 percent more than April and nearly 21 percent more than a year earlier. Service center specialty metal inventories are the highest they have been since February 2009, reports MBR.
Not all service centers are seeing their inventories bloat, however. “We always keep our stainless inventories close to the vest, even in boom times, because we know that anything affected by commodities that trade on the London Metal Exchange is unpredictable and doesn’t necessarily follow true life. You never know what speculators are thinking,” says Lourenço Gonçalves, president and chief executive of Metals USA Inc., Fort Lauderdale, Fla.
Sales says Reliance has also been managing its stainless inventory turns very closely, given all the price volatility. But not all service centers have done an equally good job, and many are scrambling to reduce their stocks, which could put downward pressure on margins, he adds.
John Zemon, vice president of stainless marketing for Atlas Steel Products Co., Twinsburg, Ohio, also highlighted the importance of inventory management in this time of volatile commodity prices, although he admits it’s not always easy. “Even in this information age, it is a challenge for our customers to give us an accurate forecast,” he says.
Having an accurate forecast is vital, adds Bob Mraz, vice president of sales and marketing for TW Metals Inc., Exton, Pa. “We would like the visibility so that we could place orders and theoretically run out of stock on the same day shipments come in.”
Much of the current weakness can be attributed to nickel and stainless steel scrap, and to a lesser extent ferrochrome, price movements, says Mothersole. “We forecast some correction, as their prices had been out of line with market fundamentals, but the fall was more than we expected, partly due to the euro zone debt crisis.”
Rising imports of lower-cost specialty steel products are also a concern. After dropping sharply in 2008-09, imports have inched upward over the last few quarters and, with the strengthening dollar, are expected to continue growing, says David Hartquist, a trade attorney for the SSINA and senior partner of Kelley Drye & Warren LLP, Washington, D.C. Corroborating that trend, Sales says Reliance has seen an increase in import offers recently, some with more aggressive price tags, which could add pressure to domestic specialty price levels.
But over the long haul, if developing countries such as China and India continue to consume more raw materials, their demand will cause nickel and chrome prices to rise, says Dan Hennessy, vice president of manufacturing for Latrobe Specialty Steel Co., Latrobe, Pa. Concern over power shortages that could affect South African mines also may boost ferrochrome prices, adds John Anton, director of the steel service at IHS Global Insight.
Underlying stainless demand is increasing almost across the board, says Moll at SMR, who predicts a 15 percent rise in U.S. apparent consumption this year. In North America, the only product that Moll expects to decline is “semis” or slabs used mainly as forging stock for the power generation industry—a market that hasn’t opened up yet. Meanwhile, he forecasts use of bars to increase about 10 percent, wire and wire rod to increase 23 percent, pipe and tube to increase 18 percent, plate-mill plate to increase 10 percent, hot-rolled coil and coil-mill plate to increase 27 percent, and cold-rolled coil to increase 18 percent.
This strength comes from a variety of end-use markets. Getting an initial push from Cash for Clunkers, the automotive market has been on a steady upswing, helped by improved availability of financing and stabilization of gasoline prices, says Michael Hajost, a spokesman for Carpenter Technology Corp., Wyomissing, Pa.
North American auto production should reach 11.5 million light vehicles this year, which is a big improvement from 8.5 million last year but a far cry from the 16 million of a few years ago, says Anton.
Despite continued weakness in housing starts, appliance demand has increased by 25 to 35 percent vs. a year ago, which is particularly notable for the high-end appliances that use more stainless steel.
Gonçalves at Metals USA attributes the improved appliance sales more to a modest rise in consumer confidence than to government incentive programs, such as the so-called Cash for Crispers program. “Consumers, while still skeptical about the future, are no longer afraid to make purchases,” he says.
Demand for aerospace alloys also remains strong. Commercial aerospace build rates should increase for at least the next three to four years, says Latrobe’s Hennessy, who notes that both Boeing and Airbus have announced increases to their production estimates.
Prospects for the oil and gas market are a bit cloudy following the BP Deepwater Horizon drill rig accident in the Gulf of Mexico. On the plus side, sentiment may favor more directional drilling in natural gas shale plays, which calls for stronger, more corrosion-resistant specialty metals, Hajost says. The accident itself could beg the question of whether specialty metals should have been used for the blowout preventer and other deepwater drilling components, Moll adds. On the other hand, the environmental impacts of both offshore and onshore drilling are under scrutiny, notes Mothersole, which could dampen future demand.
Several emerging applications for specialty metals, including nuclear power and reinforcing bar, do hold promise for the future, say the experts (see sidebar below).
Even with these increases, underlying steel and specialty metals demand is still relatively weak, historically speaking. Yet production is already returning to near May 2008 peak levels, notes Anton, while additional capacity is expected to come online soon, especially for flat-roll.
Carpenter, Universal and other long-product mills have added some premium melting capacity recently, but their initiatives are dwarfed by capacity additions planned on the flat-roll side by ThyssenKrupp and ATI Allegheny Ludlum.
ThyssenKrupp Stainless USA’s new greenfield mill in Calvert, Ala., which will share some facilities with the ThyssenKrupp Steel USA carbon sheet mill, will add one million tons of new capacity to the stainless market. The new mill has been called “a game changer” for ThyssenKrupp, which for the past 20 years has been a niche player in the U.S. market, but will now be propelled into the mainstream as a provider of commodity stainless flat-roll.
Lacor says the facility’s 72-inch cold-rolling mill—the first stainless rolling mill of that width in the United States—is on track to start up in October, at first using stainless coils provided by other ThyssenKrupp divisions. It received its first coils from Germany in late June. To follow will be the launch of its hot pickle line in 2011 and the opening of its melt shop as early as in 2012 (a full two years earlier than originally anticipated).
ATI Allegheny Ludlum inked a contract in June with Siemens VAI Metals Technologies to design, engineer and supply the hot-roll mill—reportedly the largest hot mill of its kind in the United States—for its new specialty metals hot-rolling and processing facility in Brackenridge, Pa. The Brackenridge mill, slated to come on stream in about four years, will handle stainless steel, electrical steel, titanium and nickel-based alloys, allowing Allegheny to produce hot-bands more than two meters wide and at thinner gauges.
“When the ThyssenKrupp mill comes on line, it will put a lot of pressure on the market. But I think they understand that and will do what they can to bring their capacity on responsibly,” says Reliance’s Sales.
Lacor maintains that the market impact will actually be less than it seems because the mill will, to some degree, lessen the flow of stainless coming into the United States from its Mexinox sister mill in Mexico. Mexinox’s capacity is being absorbed more and more by the growth of the Mexican market, he says. The company also plans to increase its exports to Mexico, Latin America and Canada. “In three to four years, we should be able to be in the market broadly enough that it doesn’t have any disruptive impact,” he adds.
Most producers and distributors of stainless and other specialty metals look for gradual gains in the second half and even more improvement in 2011. “I think it will take awhile, but things will get better,” says Sales. “Price volatility will continue, however.”
Stainless Apps Go Nuclear
Looking down the road, specialty metals suppliers see potential new demand for stainless or stainless-clad reinforcing bar and other stainless products in various types of alternative energy and construction projects.
“We are seeing meaningful momentum in the use of specialty metals for alternative energy, including nuclear,” said Terry Hartford, senior vice president of ATI Allegheny Ludlum during American Metal Market’s recent Stainless & Specialty Metals conference. “Will companies build 20 new nuclear plants this year? No, but over time there will be more nuclear plants built.”
Several stainless suppliers have voiced their intentions to go nuclear. Allegheny, for example, formed a marketing organization focused on the nuclear industry. Likewise, TW Metals, Exton, Pa., upgraded its ASME accreditation so it is qualified to supply the specialized products required by nuclear power plants.
Growing support of nuclear as an alternative energy source is good news to suppliers of such specialty metals as stainless steels, titanium, grain-oriented electrical steel, zirconium and nickel- and cobalt-based alloys, as well as carbon steels. According to Jack Lanzoni, vice president of the nuclear plant supply chain for Pittsburgh-based Westinghouse Electric Co., each of its 1,000 megawatt AP 1000 nuclear reactors takes about 35,000 tons of metal to construct. Much of that is structural steel, rebar, other bar, plate, forgings, cladding and filler metal, but about 7,500 tons is made up of various forms of stainless steels and specialty alloys.
“Four years ago it was difficult to get a supplier in to talk to us, but since then a lot of companies have realized that the nuclear renaissance is real. Now there are more suppliers to the nuclear business than ever before,” Lanzoni says. Currently, he adds, about 50 new nuclear plants are being built worldwide (many in China) and up to 1,200 could be under construction by 2030. Twenty-two new nuclear plants have been announced in the United States, six of which are under contract.
Westinghouse redesigned its AP 1000 container vessels to allow the use of narrower plate in an effort to increase its supply base and enable more localization of raw materials, which will shorten lead times and save freight cost. However, much of the metal for their Chinese power plants can’t be sourced locally and will be imported from Europe and the United States, at least for the time being, Lanzoni says.
Michael Stateczny, Outokumpu vice president and general manager and chairman of the Specialty Steel Industry of North America’s market development committee, sees great potential for stainless and stainless clad rebar, especially in climates where a lot of salt is used for de-icing. Corrosion of conventional carbon steel rebar is believed to be a major cause of premature failure in structural applications.
Although this market has been around for a while, volumes remain quite small at only 5,000 to 10,000 tons a year, estimates Seth Fischer, executive vice president of sales and marketing, North America, for NX Infrastructure, a Jacksonville, Fla.-based maker of stainless-clad rebar. However, it has a lot of upside potential, especially for bridges, he notes, pointing to the 720,000 tons of corrosion-resistant rebar sold each year.
“Some ideas take an awful long time. The first stainless steel sink was built 50 years after stainless was invented,” says Markus Moll, managing director and senior market analyst for Austria’s SMR Steel & Metals Market Research, who also predicts slow growth in the use of stainless rebar.
Others are not as bullish, pointing to the large cost differential between stainless and black epoxy coated or galvanized rebar. “It is something everyone has been wishing for, but we haven’t seen any pickup yet,” says Dennis Oates, chairman, president and chief executive officer of Universal Stainless & Alloy Products Inc., Bridgeville, Pa.
“We are seeing a lot of people discussing it, but not a lot of people using it yet,” says John Anton, director of the steel service at IHS Global Insight. “It makes sense long term, but the question is if people are willing to pay four to six times more for stainless rebar, especially in tough economic times.”
Fischer has seen a shifting of mindset among some engineers and contractors, who have begun to consider the lifecycle cost advantage of stainless vs. the upfront cost advantage of conventional rebar.
By some estimates, stainless and stainless-clad rebar will last 150 years or more, while other rebar has a service life of only about 25 years. In addition, stainless reinforcements allow bridges and other structures to be built with less concrete, which recoups some of the cost.
Using stainless-clad rebar, which is produced by metallurgically bonding a stainless tube packed with carbon steel scrap, further brings down the lifecycle cost, he says. Stainless-clad rebar sells at about a 25 percent discount to solid stainless rebar.
Some states have banned or are considering bans on epoxy-coated rebar for bridges costing over $25 million, which could provide an opening for suppliers of stainless products, he adds.
“What our industry needs to do is get the word out on the properties of stainless. We need to get people over the sticker shock and to think of the lifecycle cost and the danger of corrosion,” says Stateczny. “Hopefully, we will reach decision makers and help them think more about lifecycle cost when specifying materials and prove to them that stainless offers a better long-term value.”