Stainless Pauses as Nickel Plunges
By Dan Markham, Senior Editor
Demand for specialty metals remains healthy in most end markets, but the falling price of a key raw material is making buyers cautious.
Midway through 2011, it appeared the specialty metals supply chain had navigated its way through the difficulties brought on by the recession. Consumption of stainless steel and other specialty alloys was up 38.4 percent through the first three months, with sheet, plate, bar and rod products all demonstrating double-digit gains from 2010, according to the Washington, D.C.-based Specialty Steel Industry of North America. Global stainless steel production was up 8.6 percent, reaching a record 8.4 million metric tons in the first quarter, reported the Brussels-based International Stainless Steel Forum. The forecasts all appeared positive.
As is often the case with stainless steel, however, forecasts aren’t worth a nickel—when the nickel price proves fickle. After peaking at $29,000 per metric ton on the LME midway through the first quarter, nickel suffered a tumble. According to the latest data from CRU, the nickel price was near $24,000 in May, with further deterioration possible. The dramatic fall in the value of the volatile material has thrown a monkey wrench into the stainless steel market. Suddenly, buyers up and down the chain have become reluctant to make any purchases, anticipating that a lower price will be available next month.
To distributors, it’s a familiar, if unwelcome, story. “Nickel is up and down and the unpredictability is hard on everyone in the supply chain, from mills to service centers to end users,” says Nick Briscoe, vice president at Valley Iron, Fresno, Calif. “If it could just find some stability, that would be a win-win for everybody. Service centers would be more comfortable with stocking more and end users would be comfortable with using more.”
“We’re starting to see a softening, basically because of surcharges,” says Tony Amabile, director of marketing for TW Metals, Exton, Pa. “Folks have been just sitting on their hands for the last few weeks. Prior to that, we were doing very well.”
One company that has not been victimized by the nickel surcharge issue is Main Steel Polishing. Formerly a dedicated toll processor, the company has begun transitioning to full-line service center following its acquisition by Shale-Inland earlier this year. (See sidebar on page 21). “Some people have a bigger inventory position and it wreaks havoc on their financials because the price has fallen so much in the last couple of months,” says Keith Medick, who was named CEO of the Tinton Falls, N.J.-based company. “We’re a little insulated from that because we’re just starting to buy our large inventories. From that perspective, our timing is good.”
Most others do not feel so fortunate. While most service centers have been cautious in their buying since the recession, many had done considerable restocking leading up to the unexpected falloff in pricing. Now, the destocking will begin anew, say the experts.
Markus Moll, managing director of Austrian research company SMR and a leading stainless steel analyst, is pessimistic about the global market at the moment. “The situation is widely depressed in the distribution business,” he says. “With falling nickel prices it’s always the same, with distributors and other buyers trying to get rid of stocks.”
Moreover, Moll sees the current decline lasting into the fourth quarter, when the price will bounce back temporarily. Still, he believes nickel will be in an oversupply position for a while, in part because of what’s happening in the Far East.
In China and a few other places in Asia, nickel pig iron has become a legitimate substitute to the expensive commodity. While an inferior grade to standard nickel, the low-sulfur material can offer a cost savings of up to $300 per ton. “It’s a real, usable nickel source for the stainless industry,” Moll concedes, noting that its increasing acceptance will work to keep down the price of nickel.
Use of the substitute erodes some of the advantage enjoyed by U.S. mills, which have easier access to scrap material than their Asian counterparts. Today, the stainless scrap market is at a standstill, Moll says, as the declining prices have kept members of the scrap supply chain waiting for more favorable conditions.
Altogether, he says, the unpredictable ups and downs of the nickel price weaken the industry as a whole. “This kind of volatility makes the industry unattractive to customers and the financial community. Stainless assets are rather a liability to companies. We’ve seen it with offloads and spinoffs in Europe,” Moll says.
On the other hand, he notes, American stainless producers have been far more adaptable than their European counterparts. Most European mills are either limited to production of more commodity-grade stainless or have had difficulty getting a premium on their higher value products. In contrast, domestic companies such as Allegheny Technologies have found greater success through their focus on more specialty stainless products.
More than 70 percent of Allegheny Ludlum’s production is in higher-value products, such as nickel-based alloys, titanium and titanium alloys, Vice President of Investor Relations Dan Greenfield said at a recent presentation with investors. Moreover, these premium grade products are the areas where ATI expects the best growth.
Two major developments in June were driven by a similar desire to expand into more high-value specialty metals—Carpenter Technology’s acquisition of Latrobe Specialty Steel Inc. and Universal Stainless’s purchase of the assets of Patriot Special Metals (see sidebar).
Service centers also have found that a greater focus on these high-end products is the best buffer against volatile prices. “We sell into more niche-oriented areas. We sell specialty strip for special applications. That seems to help in some of these nickel downturns,” says Frank Best, group president of the distribution division for Ulbrich Stainless Steels and Specialty Metals, North Haven, Conn.
The same is true at TW Metals, which primarily sells into aerospace, oil and gas, and food processing markets. “Stainless aerospace grades of bar and sheet have been very strong for us. The surcharges have less of an impact there than on commodity items,” Amabile says.
Though the nickel price has slowed activity throughout the chain, most observers believe the underlying demand remains solid. The most promising, they say, is clearly aerospace. Many members of the specialty metals industry spent a week in June at the Paris Air Show, where the outlook was as attractive as the surroundings. “Demand is driven by Boeing and Airbus and they’re pretty public about increasing their build rates,” says Denny Oates, chairman, president and chief executive officer of Universal Stainless, Bridgeville, Pa. “They’ve been announcing them quarter to quarter, continuing to expect increased build rates over the next couple of years.”
TW Metals’ Amabile echoed the sentiment. “The build rates over the next three to four years look fantastic for both commercial and military aircraft. It’s definitely trending in the right direction.”
He also sees solid activity in the oil and gas business, as the continued high price of petroleum keeps companies drilling. That view was shared by ATI.
In his presentation to investors, Greenfield said the specialty metals industry is primed to benefit from a long stretch of strength in the oil and gas industry. “As the world moves into middle class, as other countries around the world drive more cars, we’re going to need more energy, oil and gas, as well as chemical processing. We benefit from deep-water exploration. We benefit from horizontal directional drilling. We now also benefit from solid gas beds in natural gas and oil.”
Food processing remains promising, says Briscoe, whose California-based business is heavily involved in that market. “It seems like there is better demand than we had last year or the year before. Overall, our stainless tons shipped are up this year, and it has continued to rise since bottoming out at the end of 2008.”
Medick cites the entire transportation market, including automotive and larger commercial vehicles, as Main Steel’s most active market. “The transportation industry is very hot. All types of truck/trailers, tanker trailers, are really strong.” In contrast, he says, the appliance market is fairly flat, with industry numbers indicating a slight decline.
Best says most of his company’s primary end markets have been relatively strong this year, though he has concerns over the confidence levels in general. “We’re in a period right now where the confidence is a little bit weaker than it was six to eight months ago. And confidence is what drives a lot of business. I think it will come back, but right now it’s a little on the soft side.”
Acquisitions Mean Change at Universal, Carpenter, Main
Two Pennsylvania specialty metals companies took major steps toward significant product offering expansions with a pair of major announcements in June. In separate deals only days apart, Bridgeville, Pa.-based Universal Stainless acquired the assets of fledgling company Patriot Special Metals, while Carpenter Technology responded with the acquisition of Latrobe Specialty Steel in a $558 million package. The reasons for each deal were similar. Chief executives from both acquiring companies cited the growth of product lines, particularly into more high-value specialty metals.
The Universal Stainless deal with Patriot Special Metals will add several assets in various stages of development. The equipment includes a new radial forge and 18-ton vacuum induction furnace, two vacuum arc remelting furnaces, plus equipment for heat treating and finishing long products, all at Patriot’s greenfield facility in North Jackson, Ohio. Additionally, the company has committed $6 million for the installation of an electroslag remelting furnace on site.
Universal’s President, Chairman and CEO Denny Oates says the acquisitions were done to expand their product portfolio in response to customer demand. “For the past several years, we’ve had customers ask us if we could also supply X, Y and Z. In some cases we could, but in many cases we simply didn’t have the facilities and equipment to do that.”
He says the benefit of acquiring Patriot is that the equipment is either already in place or is well on the way. “If we were doing it ourselves, it would take us two to three years to buy, have built and installed. Now we’re doing it in one fell swoop.”
The addition of the hydraulic radial forge will allow Universal to produce larger and long-forged squares, rounds, bars and custom shapes. In the past, the company worked with third parties to handle any hot-forging requirements, which “can work, but it extends your cycle times and in some cases makes you uncompetitive from a cost standpoint,” Oates says.
Adding VIM and VAR capability will enable the company to enter some high nickel alloy and super alloy markets. These will primarily be targeted at the company’s existing aerospace, oil and gas, and power generation businesses.
The deal is expected to close this month, at which point the forge will be operational. The VAR furnace will be delivered in September with melting starting in the fourth quarter. The VIR is on site and largely complete, with remelting there expected in early 2012. Finally, the electroslag furnace is expected to be delivered and installed next year, with testing beginning in the second quarter of 2012.
The early response to Universal’s plans was positive, Oates says. “I spent the last three days with large aerospace customers,” noting his visit to the Paris Air show. “It’s been beyond my expectations in terms of favorable response.”
Carpenter Technology made an even bigger acquisition in June with Latrobe Specialty Metals. Latrobe offers specialty metal production in Pennsylvania, Ohio, Texas and the United Kingdom, plus processing and distribution at a number of facilities throughout the United States.
“We consider Latrobe an important extension of Carpenter’s capabilities and are very proud of our new partnership. By combining the two companies, we will improve product mix, lower cost and reduce required capital investments for future growth,” says William A. Wulfsohn, president and CEO of Carpenter. “The Latrobe acquisition will provide needed capacity to meet strong demand for our premium products, improves our position in attractive segments like aerospace and energy, and provides capabilities that will help us commercialize important new product offerings.”
The deal includes the issuance of 8.1 million shares of Carpenter stock, representing $388 million, to current owners of Latrobe, including Hicks Equity Partners and The Watermill Group. Those owners had recently filed to take Latrobe public, though the deal with the existing public company was deemed a better fit.
“We quickly came to see that the opportunity to join together with Carpenter provides benefits for all of our stakeholders,” says Thomas O. Hicks, chairman and CEO of Hicks Equity Partners. “Our companies are an excellent fit. The combined company will reach new markets and will be well positioned to provide more offerings to customers and business partners throughout the world.”
Like the Universal deal, the companies believe the combination will help the companies serve the high-alloy markets more effectively. “The market is demanding it,” says The Watermill Group Managing Partner Steve Karol, who will join Carpenter’s board of directors. “The steel world is heading in a different direction, and the high-alloy market is robust. There’s a lot of need for these alloys.”
The transaction is expected to close sometime during Carpenter’s fiscal first quarter, which ends Sept. 30.
While those transactions are in the early stages, the most recent major shift to the specialty metals landscape in North America continues to ramp up to full production. ThyssenKrupp’s stainless facility in Calvert, Ala., opened in the fall of 2010, delivering its first cold-rolled coils while moving toward its eventual 1-million-ton capacity.
The new capacity will test North American supply-
demand, particularly initially, though analyst Markus Moll of Austria’s SMR, says the U.S. market should be able to handle the added production. “There will be some pressure on pricing once they come up, but by 2015 pricing should be at reasonable levels again.” Moll expects the new capacity to replace a lot of the imported material, as much as 400,000 tons worth, that enters the United States each year.
Finally, on the distribution side of the business, the major development this year has been the purchase of Main Steel Polishing by Shale-Inland, the new group formed by former Esmark executive Craig Bouchard. The Tinton Falls, N.J.-based company has been one of the largest toll processors of nonferrous material in the country, though that is only part of the story going forward.
Under the new ownership, Main Steel will add metal sales to its toll processing services, according to new CEO Keith Medick. “Main Steel was truly the only national nonferrous toll processor, so this is a pretty big change from that perspective. But it’s not that unusual. On the ferrous side of the business, most toll processors are also service centers.”
Main Steel will continue to serve its existing customers, including service centers, with a range of toll processing services, including slitting, cut-to-length and blanking, plus its buffing and polishing.