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US consumption could still lead the stainless pack

Keywords: Tags  U.S. stainless steel market, Allegheny Technologies Inc., Carl Mouton, LME, nickel prices, Reliance Steel & Aluminum Co., Bill Sales, Metals Service Center Institute O'Neal Steel Inc.

Despite this year’s worrisome volatility in nickel prices—including precipitous drops during the summer—many in the market remain confident that a return to higher levels could provide a renewed glimmer of hope that the U.S. stainless steel market will regain at least some of the momentum it has lost.

But this isn’t guaranteed, given concerns about the impact of continued economic weakness in Europe and Asia, still-high U.S. unemployment rates, the hotly contested presidential election, rising imports and increasing domestic production capacity.

Overall, the domestic market has fared better than stainless markets in most other regions of the world. In fact, business had been holding steady at a good demand level until late April or early May, according to Carl Moulton, senior vice president, international, at Pittsburgh-based Allegheny Technologies Inc. (ATI) and chairman of the Stainless Steel Industry of North America (SSINA).

The market has since softened. “Currently, there is a gloomier economic outlook worldwide,” Moulton said, adding that the effect of the nickel price decline can’t be overemphasized.

After peaking at $21,880 per tonne on Feb. 8, the London Metal Exchange three-month nickel price fell to $16,090 per tonne at the start of June, then inched slightly higher throughout the month before retreating to a year-to-date low of $15,530 per tonne in early August.

While nickel prices had been expected to bottom out and rebound, industry observers said this is unlikely to affect stainless buying patterns until higher prices are sustained.

Stainless transaction prices followed nickel and other alloys lower, even with mills hiking base prices a few months ago. The bulk of the stainless transaction price is comprised of raw material surcharges, which reached their lowest level of the year in August.

“Given what has been happening over the last several months, service centers and their OEM (original equipment manufacturing) customers have been working down their inventories and just purchasing the items that they know they need,” Bill Sales, senior vice president of nonferrous operations at Los Angeles-based Reliance Steel & Aluminum Co., said.

By the end of May, U.S. service centers had whittled down their stainless steel inventories to 2.5 months’ supply, according to the Metals Service Center Institute, and although it inched up to 2.7 months in July, several distributors said they would like to see their inventories move even lower again.

“No one wants to get caught with high-priced inventories,” said a product manager at O’Neal Steel Inc., Birmingham, Ala.

But the question remains how much leaner distributors can be even with mill lead times as short as six weeks. Other issues will be whether master distributors will have adequate stocks and if they will start hedge buying if nickel prices continue to rise.

At the beginning of the year, flat-rolled mills narrowed the window of visibility on their alloy surcharges to one month vs. two months previously to minimize pre-buying in anticipation of price increases. “This new mechanism has served us well,” Moulton said.

However, Dennis Oates, chairman, president and chief executive officer of Universal Stainless & Alloy Products Inc., Bridgeville, Pa., who is vice chairman of the SSINA, said that while he sees how this lessens the exposure to “the vagaries of speculation,” his company and several other long product producers didn’t follow suit. “I don’t see it as being that critical as long as there is a vibrant supply chain,” Oates said.

“I don’t think we are seeing the impact that we thought we would” with the new mechanism, Bob Mraz, vice president of sales and marketing at TW Metals Inc., Exton, Pa., said. “I don’t see it influencing how service centers and our customers are buying.”

Sales agreed. “I think at some point the mills might throw the whole thing out” and either rework it to give greater weight to base prices or just use one flat price, he said. “That could change the buying pattern.”

The new surcharge mechanism could help keep U.S. imports lower, according to Markus A. Moll, managing director and senior market analyst at Steel & Metals Market Research GmbH, Reutte, Austria, as could the ramping up of ThyssenKrupp Stainless USA LLC’s mill in Calvert, Ala. (part of ThyssenKrupp’s Inoxum group, which is expected to be sold to Outokumpu Oyj), as its capacity will displace imports from its parent and sister companies.

“No one wants to take a chance on the long lead times of imports with the relatively low U.S. price, which—for 304 cold-rolled coils—is only around $400 below the Chinese price,” Moll said.

Nevertheless, Christopher Plummer, managing director of Steel Strategies Inc., West Chester, Pa., noted that preliminary import license data shows that stainless imports have risen.

According to the Commerce Department’s Import Administration, stainless import license applications totaled 115,472 tonnes in July, up 15.7 percent from 99,840 tonnes in the same month last year and 10.1 percent ahead of preliminary June imports of 104,875 tonnes.

Moll attributed the increase to orders being placed when the market was stronger, which bodes well for a tapering off in stainless imports over the next few months.

Underlying stainless demand is actually fairly steady, especially for contract business, according to Brad Hite, president of Stainless Sales Corp., Chicago, who is particularly bullish about the automotive market. He pointed to the push for more-fuel-efficient lightweight vehicles and a shortening or cancellation of some of the usual summer auto shutdowns.

Oates also noted that many end markets, like energy and power generation, aerospace and transportation, are “still bopping along.”

U.S. manufacturing is generally said to be holding up better than elsewhere in the world. The Federal Reserve Board reported that U.S. industrial production was up 4.7 percent year on year in June.

However, the Institute for Supply Management’s manufacturing purchasing managers’ index fell to 49.7 percent in June and 49.8 percent in July—the first readings below the break-even 50-percent mark since July 2009. The orders component of the index in June saw its steepest fall since October 2001, according to Nigel Gault, chief U.S. economist at IHS Global Insight, although he said that such a steep reversal without an obvious trigger suggests that some of the deterioration in orders might reflect volatility rather than a sudden collapse.

There also is some concern about new production capacity with the Inoxum mill in Calvert continuing to ramp up, and ATI bringing on new capacity next year, Hite said.

The additional capacity isn’t needed, Moll said, noting that the U.S. market is already in overcapacity. U.S. stainless capacity utilization is only 61 percent, he said. While that is up slightly from 59 percent in 2011, it is based on nameplate equipment capacity, which often doesn’t equal the real capacity of a plant, few of which are operating on a 24/7 schedule at the moment.

Nevertheless, the ATI capacity won’t be coming online until next year and will be focused on premium products rather than commodity grades, and even the effect of the ThyssenKrupp ramp-up will be limited, according to Moll.

Moulton maintains that U.S. supply and demand is in better balance than it was 10 years ago, and while there could be a short-term negative effect, the investments in new capacity were made for the long term.

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