Too Much Tool Steel
 
By Dan Markham, Senior Editor

Distributors have experienced mostly flat tool steel demand in 2015, though they remain hopeful for a turnaround next year.

The continued strength in North American automotive production has not produced a banner year for tool steels. Though automakers and their suppliers account for a majority of the tool steel market, the industry has experienced mostly flat conditions in 2015, pulled down by other factors, say industry participants.

Activity in tool steel, the material used to make dies, knives, saw blades and other products employed in processing metal, has been mostly quiet this year. More troublesome, it’s getting weaker as the year comes to an end.

“We’ve been a little disappointed with the year. We had higher expectations for 2015 than how it appears to be working out,” says Jackson Milhollan, president and CEO of Precision Marshall, Washington, Pa. “We’ve still got a quarter to go, but business is sluggish.”

“We’ve been growing through this year, but we’ve opened four new plants. Those four plants are starting to slowly increase their tool steel sales in their areas,” says Jim Walsh, tool steel manager for Pennsylvania Steel, Bensalem, Pa. ‘So as a company our tool steel sales will be up from 2014, but we know the market is pretty flat and very competitive.”

Even those distributors who enjoyed a more robust start to the year have seen market conditions deteriorate entering the second half. “The first three quarters were very good for us, but the fourth quarter is starting a little soft,” says Ronald E. Crouse, Jr., president of American Specialty Metals, Willoughby, Ohio.

The outlook for 2016 is slightly more optimistic, though the timing of any upturn is unknown. “The folks we pay attention to are projecting anywhere from February through May of next year. It will probably be closer to April or May when things loosen up a bit,” says Frank Mullen, chairman of Griggs Steel, Troy, Mich. “Our business is primarily in the metal cutting industry, and the tooling programs just seem to be put on hold or slowed down.”

“I’d be more optimistic for next year if it wasn’t an election year,” says Walsh. “A lot of people like to sit tight in an election year and not propose or release any new projects.”

The culprits for the softness are not surprising, as they mirror conditions in other steel sectors. Declining prices, a glut of inventory due to heavy import offerings, a strengthening dollar choking exports and uninspiring domestic manufacturing are drags that offset the gains in the still-healthy automotive sector.

“The supply chain is saturated. There’s too much material available,” says Crouse, summing up the biggest issue facing tool steel manufacturers and distributors.

On the pricing front, the chief issue is the surcharge, which serves as a major component in the domestic price. Many of the commodities that go into tool steel production, such as vanadium and tungsten, have declined precipitously over the course of 2015, cutting the surcharge on most products in half. In a supply chain where inventories run from 3-6 months, that has left a lot of distributors in very difficult positions. 

Coupled with an oversupply situation and a consistently competitive market, distributors and mills are challenged to remain profitable. “You’ve got people doing irresponsible, unsustainable things, pricing-wise,” says Mullen. “It’s not unlike any other downturn, but some stuff you just shake your head at.”

Fortunately, Milhollan notes, the sluggishness was not preceded by a run-up in price, as has characterized other slowdowns. “The industry is a little more wary and running their businesses conservatively, which helps when you have a bit of a downturn.”

Though much of the material sitting in warehouses is from overseas, that’s largely unavoidable. The domestic tool steel market is dominated by foreign players, with as much as 80 percent of the supply coming from offshore.

By and large, the major domestic tool steel makers—Universal Stainless, Crucible Materials and Carpenter, through its Latrobe Specialty Steel unit—have opted to focus their efforts on certain niche products that offer better margins, while leaving the commodity grades to foreign suppliers.

The issue with foreign supply isn’t the global leaders. “Some of the best material in the world is made offshore, but it depends where you get it. There are world-class mills out there, but there are mills you need to stay away from, especially in China,” Mullen says.

As China’s industrial economy has slowed, more of that product has ended up in the U.S., creating the inventory overhang, experts say. There’s no firm consensus on when that oversupply will ease, particularly considering all the tool steel still sitting on Chinese docks awaiting a foreign buyer.

Dave Lussier, sales manager for NES Steel, Tolland, Conn., is quite pessimistic about the domestic tool steel industry. “We still carry a full line, but there’s not a lot of demand. Up until about 15 years ago that was our bread and butter, but as the industry changed in the area we had to change with it.”

The actions of some foreign suppliers give reason for more long-term optimism. Some overseas companies are not just shipping material here, but have established a physical presence to serve the market. Austrian producer Bohler-Uddeholm is a major player domestically, as is German distributor Bestar, which has four U.S. operations.

Last month, Japan’s Hitachi Metals took the next step toward a greater domestic presence with the acquisition of leading U.S. distributor Diehl Tool Steel of Cincinnati. Hitachi had been supplying material to the Japanese automakers and their suppliers for several years, but wanted to expand beyond serving the transplants.

“Our plans are to expand beyond our traditional customer base, the Japanese-owned automakers and their Tier 1 and Tier 2 companies. We felt Diehl Steel was the best fit in terms of existing equipment, room for growth and reputation in the market,” says Tom Bell, a specialty steel group product head for Hitachi America. Hitachi plans to keep Diehl Tool Steel’s management team, led by President and Chief Operating Officer Mike Sheehan, in place.

The investment “symbolizes our confidence in North American automotive production and North American manufacturing, which will lead to greater numbers of tools being made in the Americas,” Bell says.

Bestar is also bullish on the North American market, though it believes the continent has yet to realize its potential. “In North America, the drive to reshore manufacturing is under way, not necessarily with commodity items but with more high-tech/high-touch manufacturing where high levels of expertise and technology are required. We are likely in an intermediate period where manufacturers in the U.S., Canada and Mexico are in the process of rebuilding their manufacturing capabilities and getting equipment and employees best situated to meet the coming challenges,” says Alan Zwickel, global sales manager of Bestar LLC, Atlanta.

Day says the size and scope of the domestic tool steel market is difficult to define, with companies such as his relying on a variety of sources to track it. Hitachi estimates the transportation market, including auto, truck and heavy equipment, accounts for about two-thirds of the market.

The transformation to more lightweight vehicles is having some beneficial effects for the tool steel market. As automotive companies continue to use higher strength steels and other materials, the tooling grades must be improved to meet performance expectations. This is good for both the industry as a whole and the domestic producers that are now specializing in higher-grade material.


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Sunday, November 19, 2017