Auto Recovery Takes Tool Steel Along for the Ride
By Dan Markham, Senior Editor
The North American tool steel market has enjoyed double-digit growth in 2010, the result of increased auto production and retooling for new models.
The surprising resurgence of the North American automotive market in 2010 was welcome news for the domestic tool steel industry. Tool steel demand rebounded significantly in 2010, a combination of inventory restocking and increased vehicle production.
Members of the supply chain for this specialty material are enjoying the more favorable conditions. “We saw tool steel make a comeback in June 2009, and it has continually grown since then,” says Jim Walsh, tool steel manager for Pennsylvania Steel Co., Bensalem, Pa. “Some months saw quite a large growth rate, but for the last seven or eight months it’s just been steady.”
That sentiment is echoed by Dave Murray, distribution manager and vice president at Latrobe Specialty Steel, Latrobe, Pa. “We’ve seen a nice steady improvement. We’re still not yet back to the 2008 levels, but we’re getting there slowly. I’m anticipating we’ll see continued slow improvement.”
U.S. auto production, the end market for 50 to 60 percent of all domestic tool steel, was the key driver in tool steel’s rebound in 2010. Through the first nine months of 2010, car and truck manufacturers produced 5.8 million units, 49 percent greater than the production through the first three quarters of 2009, according to Ward’s North American Vehicle Production Summary.
The comeback was a pleasant surprise to tool steel suppliers. “The automotive industry has done surprisingly well,” says Jackson Milhollan, president of Precision Marshall Steel Co., Washington, Pa. “The resurgence of General Motors has stimulated demand more than we would have thought if we were making predictions a year ago.”
The auto industry took a big hit during the recession, however, sharply reducing the number of Tier 1 and Tier 2 suppliers. The tool steel market is still feeling the effects of this shakeout. “We’ve all seen a kick up in automotive, but there aren’t as many companies out there as there were 16 to 18 months ago,” says Gary Heien Jr., president of Ford Tool Steels in St. Louis. The diminished number of potential customers has squeezed margins for most service centers. “We’re all doing more for less,” he adds.
Analyst Markus Moll, managing director for Austria-based Steel & Metals Market Research, says several factors contributed to the automotive recovery in 2010 and its corresponding effect on the tool steel market. The overall increase in the volume of vehicles produced was complemented by the number of model changes undertaken by various automakers.
“We came back in 2010 not only because people bought new cars, but also because they got new models into the showrooms. These models needed new tooling, and that’s why we had a relatively strong recovery in the tool steel market,” Moll says. While that effect will taper off in 2011 with fewer model changes, rebuilding of auto inventories will buoy the industry. “Restocking is slowing a little, but it will still go on throughout the supply chain next year,” he says.
Like in other metals segments, users are keeping a tight rein on their tool steel stocks. “Customers are just buying what they need,” says Murray. “People are just taking what they can use and not putting the extra in inventories.”
Even mills and service centers are keeping stocks lean in the face of uncertain prices. While nowhere near 2008 levels, tool steel pricing has rebounded this year. Latrobe, among others, announced a base price increase effective Oct. 1.
Walsh at Pennsylvania Steel remains skeptical about such increases. “We’ll have to see if they stick. Right now, we’re not seeing the market ready for that. It’s still a fight for every piece of business you can get.”
Moll feels the fundamentals are in place for successful price increases, a byproduct in some cases of reduced capacities. Some tool steel manufacturers have cut their shifts. “They are now running into capacity problems even though they are above the previous peak levels of output, simply because they have fewer teams available to operate the steel plants. Based on this, I see a realistic chance for some base price increases in 2011,” Moll says.
Despite the healthy rebound thus far in 2010, most in the supply chain are operating with trepidation. “I think there’s a lot of caution out there,” says Milhollan. “Tooling, along with the rest of the industrial economy, has slowed a bit.”
Heien says the uncertainty is reflected in the mixed results he’s seeing from customers. “We’re spread out in 22 states, so we hear it from all over,” he says. “If you take Houston, there are a handful of people going gangbusters and others who are still only working three or four days a week. It’s the same way in our backyard in St. Louis.
“I feel bad for 40- or 50-year-old companies that have been strong for so long, and now they don’t know what tomorrow will bring,” he adds.
Moll, for one, is a bit more optimistic about tomorrow’s prospects. While auto won’t be as big a driver as it was this year, he thinks cold-rolled tool steels, used in such products as appliances and building materials, may assume that position.
“I hope they will take over as a source for growth,” Moll says of the cold-worked material. “With a little luck, we could see another double-digit growth year in 2011 for North American tool steel.”