Specialty Metals Market Update
Business Better, But Still Uneven
By Myra Pinkham
on Aug 1, 2017
Domestic end markets are promising, but Section 232 concerns and raw material fluctuation is curtailing optimism about U.S. specialty steel market.
The U.S. stainless steel market has improved from a year ago, though activity level has not yet reached what many observers predicted. Uncertainty about the future, combined with raw material volatility, is taking its toll upon profit margins.
“Business remains good, but it is a little uneven with an inconsistent pattern of how consumption is being realized,” says John Dobek, corporate vice president for stainless and aluminum at Roswell, Ga.-based Kloeckner Metals. While business sentiment remains generally positive, several external factors are adding unwelcome apprehension, he says. Those factors include the pending Section 232 investigation and the overall political environment.
U.S. stainless steel demand during the first quarter was surprisingly strong, with apparent consumption up 7.8 percent from 2016, according to Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa. This included a 4.7 percent increase for sheet and strip, a 17.8 percent increase for plate, a 70.6 percent increase in long products, somewhat offset by a 57.4 percent decline for pipe and tube.
If this holds, it will mark the first domestic market uptick since 2013, following three straight years of declines. In 2016 stainless apparent consumption was down 7.0 percent, which followed 1-3 percent decreases in 2014 and 2015.
However, the rate of growth started to slow in April, says Markus Moll, managing director and senior market research analyst for Austria’s Steel & Metals Market Research GmbH. “While U.S. domestic stainless production is likely to be up 4-6 percent for the year, mill margins will continue to struggle this year, especially with the headwinds we are seeing in raw materials,” he says.
Moll says exports are behind much of the increase in domestic production. Exports were up 24 percent year over year. While some of those exports were sent to Mexico, including to Outokumpu’s facility, there was also a big pickup of shipments of stainless steel sheet and strip to Europe.
Even though stainless consumption has been solid in most markets, it has been slightly tempered with nickel prices dropping, according to David Yundt, senior vice president, commercial for Main Steel. That decline has resulted in a certain amount of inventory destocking.
“Right now, service center inventories aren’t very heavy, with about 2.9 to 3.0 months of stocks on hand, which is close to historical levels,” observes Bill Sales, executive vice president of nonferrous operations for Los Angeles-based Reliance Steel and Aluminum Co. “But still many companies would like to get them even lower.
Fortunately, distributors are better able to reduce stocks, as they’re engaging in less speculation than in the past, while also finding ways to achieve more inventory turns, Dobek says. On top of that, domestic lead times of just five to six weeks for commodity grades allow the entire supply chain to be managed more effectively. Additionally, companies such as Kloeckner are moving toward more digitization, which also aids inventory management.
The construction market, while not as strong as hoped, has been buoyant enough to drive some stainless demand. Gains in both residential and commercial construction has propelled appliance sales, a major consumer of flat-rolled stainless product. According to the Association of Home Appliance Manufacturers, U.S. shipments of major home appliances were up 3.4 percent year to date through May.
“We expect to see a 6 percent growth in stainless consumption for appliances from 2016 to 2021,” Moll says. And with the trend of reshoring appliance production from Mexico ongoing, more of the stainless steel demand will be met by domestic producers. LG Electronics Inc. is reportedly planning to build a new home appliance manufacturing facility in Tennessee. And Samsung Electronics Co. is expanding its U.S. production facilities to enable the company to shift some of its production of oven ranges from Mexico to the United States, while also considering building a greenfield U.S. washing machine plant.
The fact the oil and natural gas sector has begun to see some recovery after being “completely dead” in 2015 and 2016, has helped some stainless long products used in corrosive environments, says Chip Ostroski, global commodity manager for bar products at TW Metals Inc., Exton, Pa. Baker Hughes Inc. reports that as of June 16 there were 933 drill rigs operating in the United States, up from only 424 rigs a year earlier. But, Plummer says, overall demand for heavy industrial applications, including for the petrochemical industry, is only flat to up 3-4 percent due to inventory balancing.
On the auto side, even though U.S. production has peaked and begun to ease, stainless use in the sector is flat thanks to the strength of sales of light trucks. Plummer says over 62 percent of light vehicle sales now are for light trucks, which, on average, use about 80 percent more stainless for their exhaust systems and trim than passenger cars do.
Moll adds that the ramping up of North American Stainless’ new 100,000-ton-per-year bright annealing line will also help. According to media reports, about 70 percent of the 120,000- to 140,000-ton-per-year U.S. bright annealed stainless market is currently being supplied by imports.
Still, imports continue to have an impact upon stainless steel supply. Total stainless imports were up 12.1 percent month on month and 29.0 percent year on year in April, with much of that increase coming from long products. While imports of stainless steel flat products were down 15 percent in the first quarter, thanks to successful trade action against Chinese imports, year-over-year stainless long product imports were up 25 percent. “This was largely due to restocking of products related to the energy sector, which is beginning to improve after being very weak for the past several years,” Moll says.
There has been talk of circumvention from such countries as Vietnam and Indonesia in response to the Chinese duties, says David A. Hartquist, a partner at Kelley Drye & Warren LLP, the legal counsel for the Specialty Steel Industry of North America trade association. “We are keeping an eye upon the import data for any changes in import patterns.”
Sales says his company is seeing fewer import offers given the price gap between foreign steel and domestic has narrowed in recent months, making imports “not wide enough to be worth the risk. Nonetheless, “to date, we haven’t seen a decline in import volumes in commodity grades.”
U.S. stainless transaction prices have been coming down in recent months, driven by falling raw material surcharges. There have been a few base price increases over the past year or so on flat products, most of which have stuck. However, it appears as if the latest increase, a 5-7 percent bump of base prices for 200-, 300- and 400-series stainless cold-roll, is struggling to gain a foothold.
Rob Cartman, senior metals analyst for Metal Bulletin Research, says some smaller buyers were paying the latest increase in its entirety, but larger service centers weren’t paying it at all or were just paying a portion on it. Competition between market leader North American Stainless and Outokumpu, which has been looking to take some market share for commodity grades, is pointed to as a contributing factor in the inability to pass on the hike. Outokumpu’s push contrasts with other players’ actions, as Allegheny Technologies Inc. has largely exited the commodity stainless market with the closing of its Midland, Pa., facility in late 2015 and AK Steel Corp. has been concentrating on auto-related business.
Unlike sheet, long product base prices have held relatively steady, Ostroski says, with the only recent hike being for aerospace quality grades.
Even without the latest cold-rolled base price increase being 100 percent successful, overall pricing levels have been fairly good, Kloeckner’s Dobek says. “The fly in the ointment has been the volatility of raw material surcharges.”
Nickel prices have been falling in recent months. This is due to a combination of a temporary slowing of Chinese stainless steel production, the recent easing of the Indonesian ore export ban and the belief that certain nickel mines that were slated for closure in the Philippines due to environmental concerns could now remain open, Moll says.
As of mid-June, London Metal Exchange nickel prices had plummeted to about $8,800 per metric ton. The return to lows not seen since early last year is a product of nickel deficits slimming from 70,000 tons last year to expectations of just 10,000 this year, says Jason Kaplan, senior manager of the pricing and purchasing service of IHS Markit.
There is some question whether nickel prices will remain this low. Moll believes nickel has been oversold and it could move back up after the summer, pulling stainless steel transaction prices up with it. Kaplan agrees, noting that with nickel prices as low as they are, it is likely that some mine capacity could eventually been curtailed. However, “it isn’t likely there will be any significant closures this year,” he says.
Reliance’s Sales says the new quarterly ferrochrome surcharge pricing mechanism, which went into effect at the beginning of this year, has had a big impact on stainless surcharges. Chrome surcharges first jumped unexpectedly high in January, then fell in April and are widely expected to come down further in July. “With this mechanism, it is very hard to predict where surcharges are going forward, adding to the confusion in the market,” Sales says. Moll believes some U.S. service centers will bring down some of their stainless steel inventories in May and June in response to the uncertainty.
Further feeding into the ambiguity is the looming Section 232 investigation into the impact of steel imports upon national security. Hartquist says no one knows what will happen with the Section 232 in general, and whether stainless and other specialty steels are likely to be included in the quotas and/or tariffs that the Trump administration could impose.
“It is our expectation that the Trump administration will find that steel in general is essential to national security,” Hartquist says. How broad-based their finding will be and if they will ultimately institute a single common solution or various remedies remains up in the air. “We believe that a higher percent of stainless and other specialty steels go into defense applications than other types of steel,” he says.
During the May 24 Section 232 public hearing, SSINA Chairman Dennis M. Oates said the domestic specialty steel industry must be healthy and profitable to supply critical defense applications. “The survival of the industry is dependent upon the core commodity products produced by our members. This includes basic stainless steel in the form of sheet and strip, plate, bar, rod, ingot and billet,” said Oates, who also serves as chairman, president and CEO of Universal Stainless & Alloy Products Inc., Bridgeville, Pa. “The specialty steel industry cannot exist simply by producing materials for defense applications.”
Some foreign producers are exploring the possibility of establishing production facilities in the U.S., either to be closer to customers or to combat current and future duties. About a year ago a joint venture of China’s Tsingshan and HongWang Stainless made a down payment on land in Texas with plans for a cold-rolled stainless plant. That plant would need to import hot-roll, which Moll says could be difficult with potential new U.S. trade action against hot-rolled coils.
More recently there were reports that Taiwan’s Yieh Group was considering building an integrated carbon and stainless mill somewhere in the United States, possibly to allow them to sell more into the U.S. market without being subject to import duties. “Both of these plans don’t make financial sense,” Moll says, explaining that it would be faster, and less expensive, for an existing mill to expand their capacity than for someone to build a new mill.
Overall, this year will be a better year than last year for the U.S. stainless market, but how much better is still to be determined, Reliance’s Sales says. If tax reform and/or infrastructure investment legislation is approved, the market could see a bump in demand.
“If it becomes more difficult to secure material, that could drive prices up more quickly,” Kaplan says, “But if the Section 232 import quotas or tariffs aren’t imposed upon stainless steel, any price increase will be much more gradual.”