The North American tool steel market defied the slump in auto in 2022, but still awaits exit from chip shortage woes to fuel 2023 growth.
With its historically strong connection to the automotive market and the production of stamping presses and dies, it’s a natural assumption to think the struggles in that sector have left the tool steel supply chain gasping for breath.
That hasn’t been the case.
The year, particularly in the first half, has been a strong one for the tool steel sector, which can only be boosted by a return to regular conditions for global automakers.
“The first six months were very busy. In the middle of the summer it started to slow down,” says Rick Resner, president, Hudson Tool Steel, a Cerritos, Calif.-based distributor with stocking locations in New Hampshire and Illinois and sales offices in California, Michigan and North Carolina. “That doesn’t mean it’s bad; it’s just not the full tilt it was for the first six months.”
Michael Marrapese, owner of Cleveland-based Diamond Metals Distribution, agrees. “Everything was spectacular for the first six months, up until the kickoff of all the interest rate hikes,” he says. “The first seven months were record months. When the inflation numbers and interest rates started to skyrocket, people got a little hesitant.”
As with many industrial metals, the good times date back to the exit from the shutdowns. Demand immediately spiked, and those with material were able to profit.
“The market for tool steel has been very active. Having material on hand and supporting our customers with short lead times has kept us very busy,” says Paul Summers, national sales director for Diehl Tool Steel, a Hitachi Metals America subsidiary based in Cincinnati.
“Coming out of the pandemic, a lot of tool steel distributors had cut inventories. As manufacturing ramped up pretty quickly, there was some panic buying where ‘I had to get that bar before the other guy gets it,’” Resner says.
Ron Crouse, president of American Specialty Metals, Willoughby, Ohio, says his company has had a successful past two years in part by being ahead of the curve. “Supply has been an issue for everybody. We increased and ordered out further. I believe we did it soon enough that we caught the front end of the wave.”
According to Tom Bell, vice president of Americas for Germany’s Groditz Steel North America, tool steel consumption in 2022 has been five percent better than 2021, though, like others, he believes there’s been a recent pullback.
So where did the strength come from? Dave Lussier has a theory. He believes China’s pandemic-related supply issues are driving greater activity here. “A lot of people are having problems getting finished parts from China, so they’re starting to buy from local suppliers,” says Lussier.
His company, Tolland, Conn.-based NESSteel, was once predominantly focused on the steel market. But about five years ago, the company moved more into carbon steel due to the shift in demand from its customers. The recent run-up has been a pleasant surprise for NESSteel, which maintained its tool steel inventory in addition to its growth in carbon steel.
“I’m hoping it will have some legs, with carbon dipping due to the economy,” he says.
For the tool steel supply chain, it’s impossible to talk about the segment without discussing imports. The market is dominated by foreign players, with just a handful of domestic players. The Section 232 tariffs that pulled in the product in addition to carbon have been a recurring thorn for many in the distribution community.
“The vast majority of tool steel rounds are produced offshore, and tariffs were a significant factor before the pandemic,” says Carl Bosley, president of SB Specialty Metals, Dallas. “We’ve often wondered why tool steel was lumped in with that.”
“The problem for tool steel is they got swept up in the tariffs and they shouldn’t have been,” Marrapese says. “There aren’t a lot of mills here that manufacture tool steel. We have mills throughout the world we buy from and you have to work around quotas.”
“Tool steels are such a rare thing. You’re lucky to find anyone to make it, let alone worry about where it’s coming from,” he adds.
The challenges brought on by the pandemic have, of course, illustrated the need for more domestic manufacturing of all kinds, what Lussier saw earlier in the year.
“You have a general feeling from large OEMs and Tier 1s that, I wouldn’t say eliminate, but they would be less reliant on foreign sources,” says Bosley. “They’ve brought some of those jobs or parts or programs back into North America to make it more at arm’s reach. No one wants to be on a plane to China to go and look at their tooling.”
Of course, any kind of wholesale shift back to the United States, or just North America, comes with a considerable hitch, at least at the moment. “We hope it will come back. We need people to work though,” Crouse says.
Currently, the quota system has been a little more manageable than the previous methods of trying, and often failing, to get product exclusions. With quotas, distributors have been able to stock up on a lot of products without the 25 percent tariff kicking in.
Even with their objections to them, the industry ultimately figured out how to deal with the tariffs. Bosley likened them to the implementation of surcharges in 2005. The consensus then was the market would never accept them, yet they soon became the norm and the supply chain simply learned to live with them.
“We got hit with the tariffs; everybody did. It was still easier to bring in material from overseas than it was to buy it domestically,” Lussier says.
To Marrapese, the concern now is not how much the product costs, but how long it takes to arrive. “Now the biggest issue is lead times. Stuff we used to get in five to six months is now taking 12 to 18 months,” he says, noting that the various supply chain issues around the globe are particularly onerous on a material such as tool steel with numerous elements such as cobalt, tungsten, molybdenum and more going into them. “When you have ports shut down and COVID shutting things down, it’s hard to get those elements to steel mills and get them all melted down.”
The market was hit with another disruption with the Russian invasion of Ukraine. The Ukrainians run one of the larger mills in Europe. And though the mill continues to operate, production is down and U.S. suppliers may be hesitant to rely on them.
Despite that, the conditions for moving material have improved. “I believe the shipping issues have come around a little bit,” Crouse says. “There are still bottlenecks, but they’re not as bad.”
Marrapese agrees. “They finally have the backlog cleared. We had a lot of steel mills trying to reroute through other ports and then get it on a train to us.”
Freight costs were just one of the factors affecting the price of the material, factors that don’t always move in tandem.
“Energy, scrap, alloy and freight. Everybody knows what’s going on with energy and freight is still an issue, with fuel costs moderately high. Alloy and scrap indexes have actually tipped downward. People see that on the distribution side and think ‘this is a sign of things to come and I’ll be a little more conservative on my replenishment point,’” Bell says.
Looking ahead to 2023, the outlook is mostly positive. Bosley believes the year to come will be “as good as 2022. We’re positioned for it, and I’m confident we’re going to realize it.”
American Specialty Metals has taken the same approach. “We’ve entered some new markets that have opened up new business for us, though we’re still continuing to grow our inventory in anticipation of when automotive does open back up,” Crouse says.
Bell believes many will approach the new year with caution, with fears over falling prices devaluing inventory among other worries. Likewise, Marrapese’s main concern is the possibility inventory hikes and inflation put the brakes on growth.
But Bosley believes pent-up demand will ultimately prevail. The expected growth from both automakers and aerospace markets in the coming year will “significantly temper any type of recession we get into,” he says.
“We expect 2023 to stay strong as the market works its way out of the semiconductor chip shortage and new automotive platforms are introduced,” says Summers. “New OEM platforms focusing on BEV technology and solving the microchip shortage will be factors for continued growth.”
The ever-shifting requirements from the automakers, from the lightweighting frenzy of the past five years to the new movement for electric vehicles, continue to challenge the tool steel sector. “The evolution of high-strength steels and the trend toward larger, more significant body parts through high-pressure die-casting have expanded our product line to service our customers,” Diehl’s Summers says.
“We see the dies getting bigger, the downstream processes getting better,” says Bosley. “That’s technology we as steelmakers have to keep up with.”
Not that he would want it any other way. “That’s the fun part of the business. The minute I’m just selling H13 and D2 and I’m not selling solutions from a technical perspective is the day I retire,” he says.[Caption]Tool steel has enjoyed a healthy 2022 throughout North America. (Photo courtesy SB Specialty Metals)