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Tool Steel Outlook

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Tool Steel Sector Wants to Turn Page on 2013 Like many sectors, the tool steel segment of the supply chain has experienced a mostly flat market in 2013. Executives have much higher hopes for 2014 and years to come, provided lawmakers get out of the way. By Dan Markham, Senior Editor Despite a boost from a strong North American automotive industry, the market for tooling products remains fairly inconsistent, according to distributors and manufacturers of tool steel, the material used by OEMs to create dies, cutting tools and other items for industrial production. Industry executives suggest the market for most steels has been just so-so, with good months followed by slower periods, and healthy end-use customers sitting next door to companies muddling through. All are in agreement that some semblance of sanity out of Washington will go a long way toward creating a more stable, healthy environment. “A lot of the people making presses are doing quite well, and a lot of that is auto related,” says Mark Mullen, president of Troy, Mich.-based Griggs Steel. “But other sectors are not so robust.” “It’s been fair, not bad, not good,” says John Packard, president and CEO of BTS Patriot, Dover, N.H. “And we’ve been in this cycle for probably 18 months.” With the seasonal slowdown approaching, executives don’t expect much of an uptick before year’s end. There is some optimism for 2014, however. Jack Milhollan, president of Precision Marshall Steel, Washington, Pa., says most of the trends are positive for tool steel. Though automotive has been strong the last two years, the average age of vehicles on the road remains at historic highs. Moreover, the U.S. has begun to build vehicles for export, driving demand even higher. Additionally, most forecasts call for growth in the residential construction market, which will spur demand for appliance-related tooling. “Our expectation is that 2014 will be better for industrial America, not just the tooling industry,” Milhollan says. That thought was echoed by Brian Norris of Sandvik Coromant, the Fair Lawn, N.J.-based manufacturer of carbide-based tooling products. “Next year will be a lot like this year, whether its machine tools, cutting tools, workholdings, fixtures, anything related to the metalworking process. It’s not necessarily going to be a rerun of 2013; there will be some improvement,” says Norris, Sandvik’s vice president of business development, Market Area Americas. The one cloud hovering over the optimistic outlook is the continued political wrangling in Washington. Executives are unanimous in their opinion that the ongoing issues involving Congress and the Obama administration are putting a serious damper on industrial development. “Our business is directly related to aerospace, defense and automotive, as is everyone else in the tool steel business. Whether you’re in it or not, you’re affected by it,” says Packard. “And we’ve had a triple whammy between the sequestration, the Affordable Care Act and the government shutdown. None of those are good for businesses.” Milhollan believes the nation’s elected officials pose the greatest threat to improvement in the economy in 2014. “There’s no real reason to think next year will be worse, unless some big mistake is made on the political front,” he says. Unfortunately, industry leaders have come to expect the worst out of Washington. “The whole system doesn’t appear to be able to function properly, which creates uncertainty in the market for all kinds of things,” Mullen says. “People are not going to make substantial investments if they really don’t know what is going to happen going forward, whether that has to do with the cost of healthcare or the general economic outlook.” Longer term, the prospects are positive, at least for tooling products. The energy renaissance and return of manufacturing to North America have most executives optimistic. “There are reshoring initiatives being undertaken, and there is reshoring [of manufacturing] going on. It’s not a huge wave, but the trend is taking place,” says Mullen. “Nearshoring” of manufacturing from overseas to other parts of North America is also a reality, he adds. “Mexico will be a huge winner in the next 10 years.” Norris is even more optimistic about reshoring. “It’s the wage competitiveness of our workforce. How long has it been since the U.S. could say that? We have a highly skilled workforce, with competitive wages, and we have the infrastructure to make things and move things very easily.” Also working in the long-term favor of tool steel is its users’ desire for greater productivity. The industry has responded with high-quality alloys that offer new tooling options. The quality of the steels in the industry is better than it’s ever been, Milhollan says, with the lower-grade material being washed out of the chain. “It’s the customer’s demand for productivity,” Norris says. “They recognize the need for effective utilization of their capital equipment and their labor. If the proper cutting tools are employed, it has a tremendous impact on the profitability of their fixed assets.” Any resurgence in U.S. manufacturing and its demand for tool steel would be welcome news. As all attest, the market isn’t what it used to be, both upstream and downstream. Dave Lussier, sales manager for NESSteel Inc., Tolland, Conn., says he’s seen a steady decline in the use of tool steels by customers over the past decade. Tool steel sales once represented about 50 percent of NESSteel’s business. Today it’s only 10-15 percent. Cutbacks also have occurred on the mill side of the business. “The tool steel market is a shadow of what it used to be as far as production is concerned,” says Packard. Moreover, even a revived domestic economy and corresponding spike in demand for tool steel and related products is not expected to dramatically shake up the supply situation. “There’s too much foreign product coming in at very competitive numbers,” says Murray. “It used to be primarily European product, but now we’re seeing more product from Asia. I think it will become even less attractive for North American mills to produce.” That opinion is shared by others in the depleted supply chain. “The Chinese are getting a larger presence here, and that’s going to continue. The suppliers are groping for position. I don’t see that changing in the near future,” says Thomas Susini, president of Susini Specialty Steels, Natrona Heights, Pa. Packard says the shifting supply chain has become a basic part of doing business. “We go to Europe and Asia to buy. That’s been happening for quite some time. The deliveries are longer, but we’ve factored those into our deals.” What also contributes to the declining supply of domestically made commodity grades is the conscious decision by producers to concentrate on more high-value specialty products. “For their own business reasons, they’re choosing to focus on higher-end products exclusively,” Mullen says. “If tool steel is $2 per pound, and you can make a product that sells for $5 or $6 per pound, you’re going to concentrate on the $5 to $6 product,” Murray agrees. This trend also plays out on the demand side as more customers seek higher-quality steels that provide the best value over the long haul, versus a low-cost but short-term alternative, Milhollan says. Such an emphasis on more high-end niche products is on display at Murray’s parent company, Wyomissing, Pa.-based Carpenter Technology Corp. One of the largest specialty steel makers in North America, Carpenter announced in October that it plans to construct a new superalloy powder facility in Alabama. Carpenter’s desire is to focus on “the top 1 percent of the specialty steel market. This is the area with the greatest opportunities for differentiation and the highest barriers to entry,” says Carpenter’s President and CEO Bill Wulfsohn. Other producers favor the same strategy. Murray points out that it’s not just the price difference that discourages more mills from producing commodity grade tool steels, but the potential tonnage. “Stainless is not terribly expensive for some of the grades, but there’s volume in stainless. If you look at the tool steel market in North America, it’s estimated at 110,000-120,000 tons per year. It’s not a big market, so it’s not going to attract a lot of domestic mills.” That fact has its pluses and minuses, he says. “For those of us in it that’s good news because we won’t see some of the big companies coming in the market. But there’s also not a lot of room to grow. It’s just a good steady market,” he says.