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Stainless market loses confidence as volatility remains

Keywords: Tags  North American stainless steel market, LME nickel, stainless steel imports, ThyssenKrupp AG, Vale SA, AK Steel, James Wainscott, International Stainless Steel Forum Richard J. Harshman

The domestic stainless steel industry saw a strong pickup in the first quarter of this year, but volatility in the nickel market and some concerns about the softening of overall demand have created a gulf between the optimists and those who worry that the rest of the year might be a struggle.

Well-stocked stainless scrap consumers reportedly bought less in March as they waited to see where the nickel market would land. Earlier in the year, stainless mills were said to be taking a lot of scrap on the back of solid order books, with one foreign-owned mill reportedly unable to secure enough material (AMM, Feb. 23).

The slowdown in buying came as stainless scrap prices fell due to a decline in the London Metal Exchange cash nickel price that began in early February.

"We’ve seen a little bit of a breather because of the drop in nickel prices," one supplier source said. A source at another suppler said, "Demand is a little bit down. Buyers are satiated with supply at the moment."

Some scrapyards are said to be sitting on material because of the lower broker buying prices. "The flow of material is not that good right now; people are sitting on it a little longer," one broker said.

The fall in nickel has led some distributor customers to revert to a more normal ordering pattern. "The recent rush to buy has come off a little bit, but nothing dramatic. If you’re a buyer, there’s no advantage to waiting with your purchases. You might save a few pennies on the surcharge, but nobody is delaying their purchases (because of that)," a Midwest service center executive said.

Imports also remain a concern for domestic stainless steel producers. While U.S. stainless consumption rose 26.3 percent in 2011 compared with the previous year, according to figures from the Specialty Steel Industry of North America, imports also shot up—gaining 18.1 percent.

Imports could decrease somewhat with the ramp-up of ThyssenKrupp AG’s stainless facility in Calvert, Ala., as product from the mill will replace imports from the company’s operations in Germany and Italy. The Calvert ramp-up seems to have caused little concern about overcapacity for domestic producers, and business so far this year was generally said to be better than a year earlier.

"We’ve been ahead of last year, much to our surprise," said a buyer at one original equipment manufacturer. "Our consumption of stainless has been up more than 5 percent."

But not all observers believe those increases are indicative of where 2012 might move. The North American stainless steel market will struggle this year to repeat the explosive growth in consumption seen last year, according to an industry analyst.

"For some reason, the United States was the world’s China last year," Markus Moll, managing director and senior market analyst at Austria’s Steel & Metals Market Research GmbH (SMR), said in late March at the Metals Service Center Institute’s specialty metals conference in Bonita Springs, Fla. As a result of strong U.S. demand growth, stainless consumption in all of the Americas rose by about 19 percent last year, far higher than SMR’s projected 6 percent, he said. Such a growth rate is unlikely to be sustained this year, however, as the market returns to levels seen before the economic crisis hit in 2008.

"The U.S. stainless market is seeing a V-shaped recovery," Moll said, adding that higher stainless consumption in the fabrication market and the use of stainless in new applications led to the growth spurt. All regions will slow in 2012, he said, with consumption in the Americas now projected to grow 4 percent—about 140,000 additional tonnes of stainless—this year, while Chinese growth will be around 5 percent vs. 8 percent last year.

But Brazil’s Vale SA sees demand for nickel improving in 2012 on the back of better sentiment in the stainless steel market. "After some slowing in the fourth quarter of 2011, the demand for stainless steel is improving again as we enter 2012, with orders increasing in the Americas and Europe," the Rio de Janeiro-based company said in an earnings report.

Nickel prices this year will depend on the pace of global project ramp-ups and the level of Chinese nickel pig iron production, Vale said, although the company sees the downside supported at $17,000 per tonne ($7.71 per pound) due to production costs for nickel pig iron in China.

Vale shipped 252,000 tonnes of nickel last year—its highest level since 2008—at an average price of $22,680 per tonne ($10.29 per pound), generating revenue of $5.72 billion. Production totaled 242,000 tonnes in 2011, a 35.1-percent increase from the previous year, with the company’s Canadian operations showing strong growth—a 64-percent jump to 154,000 tonnes—after being hampered by strikes in 2010.

Prices for bellwether 304-grade cold-rolled stainless were roughly on par in Europe and the Americas last year, with Chinese producers about 25 cents per pound lower, a smaller margin than seen previously. "This is a level where it is still attractive for the Chinese mills to deliver to the U.S. market, but just about," Moll said.

China’s share of flat-rolled shipments to the North American market decreased to 17 percent last year from 20 percent in 2010, even as producers there continue to dominate global output, with seven of the 20 largest producers of flat-rolled stainless based in China, according to Moll. Only two American producers were in the top 20, and none was in the top 10. Stainless consumption in Brazil, Russia, India and China exceeded that of the rest of the world for the first time last year, he added.

The catering and appliance segment was the biggest global consumer of stainless in 2011, accounting for about 38 percent of the world market, while in the United States the transportation sector made up the biggest share at 26 percent, Moll said.

Digging deeper into the numbers does reveal a longer trend upward. World stainless steel output rose by 3.3 percent in 2011 as a strong fourth quarter compensated for some destocking in the third quarter, the International Stainless Steel Forum (ISSF) said in late March.

World production reached a record 32.1 million tonnes last year, the ISSF said. "China has remained the driving force in stainless steel production, with growth of 11.9 percent in 2011. The country produced 12.6 million tonnes of stainless during the year" compared with 11.3 million tonnes in 2010. Excluding China, however, production in Asia fell by 2.7 percent to 8.8 million tonnes last year from 9 million tonnes in 2010. Stainless production in Western Europe and Africa totaled 7.9 million tonnes in 2011, unchanged from the previous year, while the Americas produced 2.5 million tonnes, down from 2.6 million tonnes in the same comparison.

Most production in 2011 was 300-series stainless steel (with chromium and nickel), which accounted for 58.2 percent of world production, according to ISSF figures. Chromium steel (400 series) represented 28 percent of the total, while 200-series (chromium and manganese) stainless output accounted for 13.8 percent.

"Over the past few years, the stainless steel market has seen major changes in the grades of stainless produced. Chromium-manganese grades have become increasingly important in this time," the ISSF said.

In the United States, executives have displayed differing views on the stainless market.

"Service center buyers remain very cautious in their buying approach and are reluctant to place large orders at this time. They’re purchasing only to meet their immediate needs," James Wainscott, chairman, president and chief executive officer of West Chester, Ohio-based AK Steel Corp., said in late 2011.

Allegheny Technologies Inc. (ATI), Pittsburgh, reported 2011 revenue of $5.18 billion. While that was up 22.8 percent from $4.05 billion in 2010, it fell below the $5.4-billion to $5.5-billion range the company had projected after the release of its third-quarter results due mainly to weaker sales to the commodity stainless sector amid buyer uncertainty caused by the European sovereign debt crisis.

"The end-market demand is really very weak. Base prices for standard-grade sheet today are at levels that I really don’t believe are sustainable for anybody. They’re lower than during the trough of 2003, which was a really bad market," Richard J. Harshman, chairman, president and chief executive officer of ATI, said during his company’s third-quarter earnings conference call.

The key sources of anxiety for many distributors and consumers alike are the uncertainties surrounding demand due to the European debt crisis. "If some of that uncertainty clears up in 2012, then we’ll see some improvements on base prices," Harshman said.

The performances of the key end markets for stainless products have been mixed and are likely to remain so.

There has been some improvement in automotive, where stainless is used mainly in exhaust systems. Production numbers are improving, with Wainscott pegging 2011 auto output at 12.9 million vehicles, up from 11.9 million in 2010 but still only at about 70 percent of pre-recession peaks.

Other bright spots have been the commercial aerospace, oil and gas, process equipment and food processing markets, Moll told AMM, predicting strong growth in those sectors going into 2012.

The appliance market, on the other hand, has been weak, with appliance maker Whirlpool Corp. announcing in late October that it was laying off 5,000 workers due to continued market weakness. Part of the malaise has to do with the continuing slump in the construction market, with new housing starts pegged at just 590,000 units last year, only marginally higher than 587,000 in 2010, according to Wainscott. In comparison, new housing starts never fell below 1 million prior to 2007, he said.

Moll said demand from the defense sector likely will take a hit in 2012 due to reduced federal spending.

Staff Report

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