As with other commodity metals, the stainless steel segment is stressed as supply can’t keep up with surging demand.A late-spring announcement out of the Far East in late April signaled the current state of the global specialty steel market as well as anything. The Chinese government removed a 13 percent rebate on stainless and some other products, reducing it to zero in most cases, a decidedly new approach for the world’s industrial giant.
Rather than encouraging exports, as the rebate mechanism is designed to do, the shift demonstrated how the Chinese leaders were determined to keep the country’s production of stainless products inside their borders. This, as any executive in the metals industry knows, is not how the production leader typically operates.
“Officially, they say it’s to prevent further investments in overcapacity and they want to align the domestic market with domestic production. It’s a nice change, but it’s probably because of the shortage situation we have in Europe and North America,” says Markus Moll, a veteran stainless analyst from Austria’s Steel Market Intelligence.
The Chinese decision was warmly greeted by Joe Gibbons, president of Great Plains Stainless, which operates a distribution site in Tulsa, Okla., in addition to facilities in Chile and New Zealand. “Our inventory just became 13 percent more valuable immediately,” he noted, while adding the repercussions from the rebate pullback will be felt for quite some time.
Increased inventory value notwithstanding, the decision by the Chinese only put a further chokehold on a supply situation already struggling for air.
Since the start of spring, the stainless market has joined other commodity metals looking at rapidly escalating prices and steadily dwindling material availability. That’s the byproduct of numerous factors, resulting in the typical “perfect storm,” which is perfect for some, stormy for others.
As is usually the case, the situation today dates back to the start of the pandemic. Producers ramped down as a result of the global shutdowns, perhaps more than was absolutely necessary.
“I don’t think demand ever got as low during the pandemic as people thought it was going to be. I think they geared down out of self-defense, and it’s a lot harder to gear up than it is to gear down,” says Bill Gouveia, vice president for Atlantic Stainless, North Attleboro, Mass.
Jeff Kirchner, co-owner of High Performance Alloys, Tipton, Ind., says there were “only three months where demand was really low. And we were coming off a historic 2019 sales year, so the comparison of the two is not fair. One year where the country was open and people traveled and the next when some states decided to shutter everything.”
While the second quarter of 2020 represented the first real downturn in economic activity since the 2008-09 fall, that’s undeniably where the comparison with the Great Recession ends. “My partner Randy and I were saying, ‘it’s starting to taste a little like 2008. Then we very quickly realized it was nothing like 2008,” says Jeff Haas, president and partner of Cleveland Metal Exchange, Twinsburg, Ohio.
One notable facet of the early days of the pandemic was how it created such uneven conditions. Many prominent stainless end markets, most notably appliance, enjoyed robust demand growth almost immediately, while other markets such as aerospace and oil and gas went dormant.
The supply chain responded to the uncertain conditions by trying to destock, leaving distributors hard-pressed to meet any demand growth. It’s a common story in the commodity metals markets, says Rodney Rice, business development director for the UK’s Langley Alloys.
“A period of lower demand is normally associated with destocking in the supply chain, followed by a surge in demand and excessive production lead times,” he says. “Fortunately, we decided to continue accepting deliveries throughout, and are actually blessed with higher stock levels than normal, making us well-placed for a recovery.”
Entering the recent stretch with a nice healthy supply of material was crucial, executives say. “We carry a much larger inventory than most people would, so we’ve been able to satisfy our customers and new customers and be profitable,” says Lance Brown, president of Brown Metals, Rancho Cucamonga, Calif., a specialist in custom-slit and thin gauge stainless steel and high-temperature alloys And these conditions, overall, produce a situation tailor-made for profitability, particularly for the producers.
“The pendulum has completely swung the other direction. For the last five years, the mills were always on the short end and it was a buyer’s market,” says Moll. “It’s completely changed to a supplier’s market.”
Since the start of the year, and the gradual opening up of economies around the world, demand in most of the quiet markets have caught up to those already booming.
“We’ve never taken an economy from zero to 60 in 60 days, and that’s pretty much what we’ve done here,” says Stephen Wolff, president of National Kwikmetal Service, a Des Plaines, Ill.-based service center that specializes in stainless products. “That’s going to create some imbalances, and those imbalances will work themselves out as we progress into the third and fourth quarter.”
The demand strength is generally across the board, with one notable exception. “We have not seen commercial aero return to normal levels, but that issue started with a different problem in 2018,” says Kirchner. “I’m reading positive outlooks for travel and hospitality industries. How long that will take before airlines return to regular maintenance and replacement is unknown.”
Most other markets, however, are already on the uptick. Included there is oil and gas, which had been moribund during the oversupply situation that dominated all of 2020. “The oil and gas guys have been doing well, because there’s a lot of pent-up demand there,” says Gibbons.
The view is the same stateside.
“Our traditional markets have been energy related and we are anticipating improvements in oil and gas capex. All of our key segments are trending positive right now,” says Frank Alvin, vice president of commercial for New Castle Stainless Plate, an Indiana-based producer. New Castle Stainless serves the power gen, chemical processing, water processing, storage tanks and bridge market in addition to oil and gas.
“Across the board, demand is very strong. We have customers buying material out to the fourth quarter. And it’s ferritics, it’s austenitics, it’s high-nickel products. There’s no place I see any weakness right now,” says Wolff.
The result of this is a run on material the production industry is not entirely equipped to handle, a situation exacerbated somewhat by the ongoing strike at nine Allegheny Technology Industries facilities.
“I think we need ATI to come back, though even when they do and get things through the pipeline, I think you can add six months to that date,” says Brown.
The ATI work stoppage might have been more damaging to the supply chain in the past, Moll notes, before the Pittsburgh-based company decided to focus primarily on high-value specialty products. “They’re leaving two-thirds of what they did before to North American Stainless and Outokumpu,” he says.
Still, with or without ATI, material is getting increasingly difficult to find.
“Early on, nobody wanted to believe it was happening, and nobody believed it could be prolonged or get worse. Here we are now, where pretty much every pound of metal that the larger service centers are getting is going right to contracts. There is very little transactional inventory available to anybody in the entire market,” says Haas.
Gouveia agrees, and notes how it’s putting a strain on all supply chain players.
“The master distributors are caught in a bind, where they’re now getting calls from people who don’t normally buy from them and want to buy huge amounts of their inventory. That’s a nice thing, but by the same token they want to keep a level of inventory to support the people that buy from them all the time. It’s a fine line to walk,” Gouveia says.
Brown is balancing on that tightrope as well. “We’ll get calls for 20,000 pounds. I can’t spare that, but I can spare a few,” he says. “I definitely prioritize end users over resellers, because I know when things go back to normal, they’re not calling me back again.”
Everyone in the supply chain is getting accustomed to hearing from new or long-forgotten customers. “We’ve always been strong at developing new customers, but right now through our SEO and SEM type marketing, we’re hearing from new customers at a record pace,” says Wolff, who adds that he views the conditions as an opportunity.
Likewise, Gouveia adds, “It’s challenging on so many fronts, but I’d rather have these problems than the problems we had a few years ago.”
With supply at a premium, price has become a bit of an afterthought. “It’s take it or leave it. It’s not about negotiating price,” says Moll.
“This gives them a perfect opportunity to raise prices; not that I would dare suggest mills are raising prices beyond what is necessary,” says Gouveia. “But it’s really tough to remember a universal rise in prices the way this is. The price of stainless flat-rolled products is nuts, and that’s extending into bar products.”
Scarcity of material is not the only issue driving the price up. Inputs such as nickel are also on the increase, and transportation costs are up substantially.
“Transportation costs are up dramatically. A load used to be $1,500, now it’s $6,000,” says Gibbons, whose company does a lot of international shipping. “The rule of thumb used to be freight was 1-2 percent of your cost of inventory; now it’s 5-6 percent.”
How long these prices remain high remains uncertain, though Moll concludes the current environment is “not sustainable.” He believes there will be a downward correction on nickel in the fourth quarter.
Gouveia says there are too many moving parts to pinpoint when the shift will come, a view shared by some others.
Ultimately, however, it could be up to the final consumer of the metal.
“I think the only way it breaks is when Julie and John want to buy a dishwasher and they’re paying 30-40 percent more. Eventually, that backs all the way up through the supply chain,” Haas says.
The impetus for change probably won’t come from a major shift on supply. There are no new mills in the works, so capacity won’t get a boost from a new producer. Obviously, China could reverse course and begin prioritizing exports again, though that is likely a long way off.
Whatever the remainder of the year holds, all of the players express optimism about the long-term health of the material. “The outlook is very positive for stainless in general and plate mill plate in particular,” says Alvin. “We expect to see infrastructure spending in addition to CapEx spending in the energy, chemical and processing segments.”
“The long-term outlook remains positive. Oil and gas remains a large market segment, but we’re seeing more inquiries in geothermal, desalination, tidal and also hydrogen as an emerging market segment,” says Rice. “Wherever the environment or processes involve aggressive conditions, there will be a demand for products to meet these requirements.”
And the short-term outlook may be benefitting from a phenomenon most often seen following wartime.
“Any time a culture goes through collective trauma, immediately after that there’s a certain sense of enthusiasm in the market,” Gibbons says. “That’s the way the market feels right now.”
Caption:
A slab ingot is forged at High Performance Alloys’ facility in Tipton, Ind.
(Photo courtesy High Performance Alloys)