Stainless Market is Picking Up
Steelmakers enjoy rising markets and higher prices, while distributors strike a more cautious tone
By Dan Markham
on Jul 27, 2018
Mid-year 2018 is a good time to be a stainless steel producer in North America. Demand for most major end markets is healthy, Section 232 and steadily rising raw materials costs have led to increased pricing, and tax and regulatory reform have resulted in business operators keeping more of those profits.
“Generally speaking, the business climate is very upbeat and optimistic,” says Dennis Oates, chairman, president and CEO of Universal Stainless and Alloy Products, Bridgeville, Pa. “All in all, when we look at our markets, they’re all flashing green.”
“For the foreseeable time, stainless steel will be a very good business for U.S. mills,” says Markus Moll, who analyzes the global specialty steel market for Austria’s Steel & Metals Market Research.
Moll estimates stainless steel apparent demand in the U.S. has been up 9 percent through the first four months .
Some of that supply is going to fill depleted distributor and end-user stocks. “Just refilling it creates some paper demand, which can be a little misleading going into next year,” Moll says. “Some of the dynamics we have seen are not sustainable.” He estimates real demand growth will be closer to 4 percent.
Still, it’s a healthy increase and one that’s being shared across the board. Oil and gas is among the most promising of these sectors, several executives say.
“With the price of oil coming up and the rig counts expanding a little, we’re seeing strength in oil and gas,” Oates says. “It’s nothing like 2013-14, but compared to 2015-16 and the early part of 2017, we’re seeing a fairly active oil and gas market.”
“Oil is staying around $60-65 per barrel, so there’s a lot of activity there,” says James Coursey, president of Premium Alloys, a Houston-based specialty metals service center that supplies the energy industry. “We’re trying to make sure we have the stock available when the opportunities come.”
Mike Stateczny, president of New Castle Stainless Plate, sees strength in on-shore applications such as LNG and LP terminals. The U.S. cost advantage in natural gas continues to spur activity also, he adds. New Castle Stainless Plate is the newly created company after Outokumpu divested the Indiana mill to six employees and private equity firm D’Orazio Capital Partners LLC.
On the other end of the energy sector, Stateczny says there is some question over the future of nuclear energy. “New Castle Stainless Plate provides material for the cleanup and storage of spent nuclear fuel assemblies, so this is an area we’re watching closely.”
Other markets are also enjoying strength. Universal Stainless has extensive business with the aerospace industry, and Oates sees nothing but clear skies there. “The Boeing and Airbus backlogs everybody knows about, but equally important is the aftermarket, which has been growing well above trend,” he says.
Additionally, smaller markets such as construction, petrochemical, automotive and industrial are all showing various levels of growth. “No particular market segment seems to be far outperforming others,” says Johnny Hsieh, president of stainless steel master distributor Ta Chen, Long Beach, Calif.
One potential growth area, Stateczny says, is with infrastructure. The material’s attributes make for a strong life-cycle case with engineers and builders, if the industry can get sometimes short-sighted municipalities to think long term. “New Castle Stainless Plate has teamed up with other interested parties to ensure duplex stainless grades continue to be included in all important standards and specifications and that design and engineering professionals are aware of the significant strength benefits of duplex stainless, as well as the obvious advantage of stainless in regard to corrosion resistance.”
The mills are also poised to benefit from price increases thanks to the 232 tariffs. Moll says that the U.S. price is 20 percent higher than it was in May 2017, and only about 7 percent of that is due to raw material increases. “The overwhelming part of that is coming from real price increases,” he says.
Oates, however, believes the effects will be more muted for specialty metals producers than it is on the carbon side. “A lot of our products require very specific customer specifications. We’re somewhat insulated from some of the import issues.”
But Moll says that imports will soon begin moving downward. Imports climbed about 12 percent through the first four months as companies tried to get material in ahead of any tariffs. Most of those gains will be given back over the course of the back half of the year. But they won’t be closed off entirely. “They’ll still be able to get material from the same sources as before Section 232. They’ll just pay a higher price.”
Tax reform and some unleashed pent-up demand have also contributed to healthy bottom lines for the mills thus far in 2018,” Oates adds.
While the mills are enjoying the current conditions, distributors are expressing a little more caution. “Understandably, everybody is thrilled with their first- and second-quarter profits, but we understand this is not the new normal and realize that inventory costs will quickly catch up with selling prices,” says Hsieh.
Bill Gouveia, vice president of Atlantic Stainless, North Attleboro, Mass., says business has been quite good through the first half of the year, but he’s concerned about the outlook. Uncertainty regarding the rapidly changing trade environment is making forecasting more difficult than normal.
“In some ways, 232 has had a positive effect, as it’s pushed some people to do some projects faster,” Gouveia says. “Our fear is we’re experiencing tomorrow’s profits today. We’re not really making anything more; we’re just trading the timeline a little.”
Hsieh agrees about the disorientation in the chain. “The best way to describe the supply chain condition would be ‘perplexed.’ Everyone seems to be confused and anxious as to how 232 will ultimately manifest itself. People are just trying to navigate the waters immediately in front of them.”
That works for companies such as Ta Chen or, on the pipe and tube side, Prudential Stainless & Alloys, Avenel, N.J. Uncertainty at the distribution level is good for master distributors. “I would expect our long volumes to remain strong as service center continue to try to work with lean inventories and mill depot inventories are de-emphasized,” Hsieh says.
“Our overall number of both orders processed and pounds shipped have increased,” says Gary Ostermueller, general manager of Prudential Stainless. “These are better indicators of overall market conditions than just looking at sales dollars.”
For service centers, it isn’t just cost uncertainty that creates concern. Unlike their carbon steel counterparts, producers of specialty metals run much closer to capacity levels. Additionally, many have targeted high-value products, leaving some products unavailable domestically except from overseas producers.
“You not only have to worry about price, you have to worry about capacity,” Gouveia says. “When you talk about shifting more materials to the domestic mills, that’s great, but a lot of the domestic mails can’t handle it. That has everybody on our end worried about where they’re going to get material to sell next year.”
Coursey says the availability tends to vary. “There are a few pockets you can get quickly, but there are certain sizes and grades where we’re being pushed out half a year minimum. It’s definitely becoming challenging in certain areas.”
And these issues work together. “Prudential Stainless and Alloys purchases specialty and odd-ball items, not the typical high turnover ones, so it takes a mill longer to fill our orders. Since recent costs are changing so frequently, many mills are reluctant to quote us on products they may not produce for several months,” Ostermueller says.
Of course, there is also concern whether the tariffs on the metal will result in more finished goods imports. “You have a lot of product categories that travel very easily in containers, such as fasteners, flanges, fittings and flow-control products, and on the flat-rolled side, sinks and automotive components,” Moll says. “You can easily import them.”
New Castle is taking steps to curtail that end-around solution, joining with its fabricator customer base in the Coalition of Energy Equipment Manufacturers to lobby for “tax policy and appropriate remedies to ensure our members maintain the ability to design, engineer and fabricate in the U.S. We deem this to be as great a national security threat, as well as a challenge to our energy independence, as the dumped steel, much of which is already covered by tariffs and other remedies in addition to the Section 232 actions,” Stateczny says.
The solution, and the ultimate test of the success of 232, is to deliver more capacity domestically, so U.S. producers can capture more of the market. Moll says the U.S. needs about 1 million more tons worth of capacity, or “one big furnace,” to more adequately handle the domestic demand.
“The key question is who is the most likely to build that,” he adds. “My guess is either North American Stainless, because they have the best cost position, or if it gets approval from the directors, Allegheny to replace Chinese or Indonesian slabs with their own material.”
Still, even if the tariffs remain in place long enough to convince the U.S. production community to invest, it’s a long time between an announcement and a new furnace coming on line. “It takes between 20-30 months from a decision to build a plant until it’s commissioned. That means 2020. So we’ll have higher prices as long as these tariffs are in place,” Moll says.
Supporting higher prices is a slight upward trend in some of the key raw materials. Nickel has been moving up steadily, driven in part by increased use in battery applications. Moll predicts that this acceleration in usage will ultimately lead to a change in the pricing mechanism, one that separates chemical and metallurgical nickel. “In reality, something will happen with the price mechanism, and stainless steel producers and nickel suppliers will find another way to base price on real supply-demand situation,” he predicts.
Additionally, Moll says, the existing nickel price should be generating additional nickel pig iron production in China. It’s not, which indicates the Chinese have actually gotten serious about cracking down on polluting NPI producers, many of whom are shutting down instead of facing heavy fines. “We were expecting over 500,000 tons of NPI this year. If we’re lucky, they’ll reach 400,000 tons,” he says.
Chromium, on the other hand, likely peaked in pricing in the second quarter, Moll says, and will come down softly.
“We are watching the base metals closely. I see prices still going up, but nothing too volatile unless something political happens,” says Coursey.