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July 2012
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Stainless Market’s ‘OK’…But for How Long?

Demand for specialty steel improved in the first half, but most factors point to a slowing business climate in the coming months.

By Myra Pinkham, Contributing Editor

Through the first five months of the year, the United States was the strongest market for stainless steel. Such a distinction is as much an indictment of the rest of the world, however, as it is a point of favor for the U.S.

A slowing economy, uncertainty about global markets and falling raw material prices threaten the near-term prospects for specialty metals suppliers. The result is a tepid market one service center executive described as “OK, but only OK.”

The momentum the U.S. stainless market experienced in the first quarter is fading, compared with the very strong market a year ago, says Markus Moll, managing director and senior market research analyst for Austria’s Steel & Metals Market Research.

After seeing apparent consumption grow by about 26 percent in 2011, it currently is down about 2.7 percent year on year, says Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa.

Experts point to some positives in the U.S. stainless market, led by a fairly strong manufacturing economy. May’s U.S. industrial production, while down a slight 0.1 percent from April, remained 4.7 percent ahead of year-ago levels, bolstered in part by the re-shoring of certain manufacturing that had been outsourced to Asia.

“As they are working to develop a middle class, it is becoming more expensive to do business in China and India,” says Bob Mraz, vice president of sales and marketing for TW Metals Inc., Exton, Pa. “There is also the issue of quality and the difficulty in doing business there. As that delta narrows, people are bringing some work back to the United States. It isn’t all of the manufacturing that had been outsourced or even a preponderance of it, but it is a decent amount.”

Dennis Oates, chairman, president and CEO of Universal Stainless & Alloy Products Inc., Bridgeville, Pa., says he perceived a marked change in his customers’ buying patterns beginning in May. Oates also serves as vice chairman of the Specialty Steel Industry of North America, Washington, D.C. “Earlier in the year, buyers had become a little overoptimistic, but they are now trying to get their inventories back to more comfortable levels.”

The usual summer slowdown kicked in a little earlier this year, likely prompted by concerns over the ongoing European debt crisis, the easing of growth in China and India, and the political gridlock preceding the U.S. presidential election, says Bill Sales, senior vice president of nonferrous operations at Reliance Steel and Aluminum Co., Los Angeles. “I’m not sure how much of the slowness we currently are seeing is due to falling prices or to weak demand,” he adds.

Underlying demand in the U.S. is fairly steady, especially for contract business, says Brad Hite, president of Stainless Sales Corp., Chicago. Actual demand is comparable to a year ago, Moll agrees, with even the lagging building and construction market seeing slight improvement.

The problem is the gloomier economic outlook worldwide, says Carl Moulton, senior vice president, international, for Allegheny Technologies Inc., Pittsburgh, who is chairman of SSINA. “Also you cannot overemphasize the effect of the drop in nickel prices, which tends to create a short-term disruption in the market,” he adds.

The average London Metal Exchange nickel cash price for June fell to about $7.54 per pound from the most recent peak monthly average of $11.04 per pound in February, taking the price of stainless down with it. This is the lowest nickel has been since the fourth quarter of 2009, notes Amy Bennett, principal steel consultant for Metal Bulletin Research.

“Our biggest concern is when nickel will hit bottom,” Hite says. Declining stainless transaction prices have put pressure on margins. “I’m just praying that once it does, our shipment tonnage will remain high.”

Much of stainless steel’s strength last year was due to service center restocking, but stainless inventories at U.S. distributors were down about 10 percent year to date through May due to caution about the future, Moll says. Service centers have cut inventory levels to a very lean 2.5 months of supply and, with prices still trending down, are unlikely to build them back up any time soon.

In fact, Reliance’s Sales says many would like to work them down even lower in the current pricing environment, where raw material surcharges have been falling and are expected to decline once again in July.

“Buyers are looking to wait another month or two so that they can get the lowest price,” Oates says, noting that mill lead times have shortened a little as a result.
Meanwhile, service centers and their OEM customers continue to live hand to mouth, just buying what they need. With mill lead times of just six to eight weeks, there is no need for distributors to bump up inventories, Sales says.

Service centers have been buying metal mainly among themselves—from master distributors or competitors vs. buying forward from the mills, Moll says. Confirming that trend, Mraz notes that TW Metals has seen a robust increase in business from other, smaller distributors.

Such inventory sharing and destocking cannot continue much longer, predicts Moll. He sees a possible pickup in the fourth quarter, both domestically and globally, prompted by the new Chinese stimulus package. “Nickel pricing could find strong floor level resistance at about $7.25 per pound. I think we have seen the trough and that there will be some restocking in the fall.”

Despite the current slowing of business activity, true underlying demand continues to hold up in a number of end-use markets. Energy, petrochemical, automotive, aerospace and power generation all have shown signs of strength. Consumer- or construction-related sectors, such as appliances, food service and kitchen sinks, have been weaker, suppliers report.

Moll says the strongest driver of stainless steel demand probably has been the chemical and petrochemical process industries. Shipments of pipes and tubes used by that sector have increased about 40 percent year on year.

The energy and power generation markets also are booming, according to Plummer at Metal Strategies and Oates at Universal. Energy pipe and tube is up about 33 percent over 2011, Plummer says. The pickup in power generation demand, coupled with low natural gas prices, is leading to improved orders for land-based gas turbines, Oates adds.

Hite is particularly bullish about the automotive market use of stainless alloys with the push for more efficient, lightweight vehicles. Some of the normal summer auto shutdowns have been shortened or canceled, promising increased demand for materials of all kinds.

North American automotive production was up a very impressive 20.9 percent year to date through April, Plummer reports. Based on announced auto production schedules, full-year 2012 light vehicle output could grow 17 percent to about 14.9 million passenger cars and light trucks, the highest it has been since 2007. Production could hit 15.4 million vehicles next year, each of which contains 50 to 60 pounds of stainless on average, most going into exhaust systems.

Other transportation markets, including rail cars and truck trailers, also are holding steady, suppliers say. Companies that have held off on purchases will soon have to replace aging truck trailers. With the economy gradually turning around, there is a need for more rail cars to accommodate the freight being shipped.

The appliance market is normally a major user of stainless steel, but appliance demand continues to bounce along the bottom, hurt by a housing market that remains 75 percent below 2005 peak levels. According to the Association of Home Appliance Manufacturers, domestic shipments of washers, dryers, dishwashers, refrigerators, freezers, ranges and ovens were down 6.3 percent year to date through May, compared with the first five months of 2011.

Hite applauds the mills’ attempt to increase base prices earlier in the year. Given the declining nickel prices, the market needed the increase, he says, even at the risk of attracting more Asian imports that could drive prices back down.

Deterring low-priced imports is a new surcharge formula adopted by the major flat-rolled stainless mills late last year, which narrows the window of visibility to just one month vs. two months previously, Moll says. Stainless buyers are less likely to risk ordering long-lead-time foreign steel when they can no longer see that far forward.

The ramp-up of the new ThyssenKrupp Stainless USA mill in Calvert, Ala., has had a similar effect as its output is displacing some imports (including from its parent and sister companies), as well as steel from domestic competitors, he adds.

Nevertheless, import license data shows total stainless imports were up 11.2 percent in May to 115,636 tons, compared with 103,959 tons a year earlier. The same import license data through June 8 shows the uptrend continuing.

Allegheny Technologies spokesman Dan Greenfield says this surge of imports, as well as the current economic outlook, has made it difficult for domestic stainless mills to raise base prices. Moll says this recent increase in stainless imports was the result of orders that had been placed earlier in the year when the market was stronger, which bodes well for a tapering off of imported stainless in the next few months.

“No one wants to take a chance on the long lead times of imports with the relatively low U.S. price for Type 304 cold-rolled coils, which is about $400 below the Chinese price,” Moll maintains. Hite says his company, like other service centers, is looking to buy imports directly from the foreign mills to get a better buy. “When you buy through brokers, the price is close to the domestic price,” and is usually not worth the risk, he says.

In general, the mills have been trying to stick to their guns with the base price increases they announced a few months ago (through a 2 percent reduction in their functional discount). That’s especially true when it comes to smaller volumes, Sales says, though there has been room for negotiation with larger orders.

Some observers express concern about how new production capacity may affect pricing, given the additions at ATI and the ramp-up of the Calvert mill, which is expected to be acquired by Outokumpu with the rest of ThyssenKrupp’s Inoxum unit. (Both ThyssenKrupp and Outokumpu declined to comment for this article.)

Moll says the market already faces overcapacity, but he doesn’t think the new production will have a major impact. ATI’s capacity won’t come on line until next year and will be more focused on premium products rather than commodity grades, while the effect of the ThyssenKrupp ramp-up will be limited.

“No one makes capital investments if they feel they can’t sell steel,” ATI’s Moulton says. “Supply and demand might be out of balance in the short term, but the investments have been made with the long term in mind.”

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