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Following the collapse of nickel pricing and unprecedented worldwide liquidation of stainless inventories, specialty metals producers and distributors see healthy demand in most end-use markets going forward.
By Dan Markham,
Senior Editor
When the bottom fell out of the nickel price in mid-2007, the results could have been catastrophic for the stainless steel industry. But as service center and mill executives survey the landscape after 12 turbulent months, they see an industry that escaped largely unharmed.
“After all the destocking the market went through in the second half of last year and the madness that ensued, you saw varying stories through the first quarter of this year,” says Chris Zimmer, vice president of sales and marketing for Universal Stainless and Alloy Products, Bridgeville, Pa. “Now we’re seeing some strong bookings and our backlog continues to grow every month.
The 15-month run-up in nickel, during which the commodity jumped eightfold from its traditional $3 per pound price, came to a screeching halt in May 2007. Within a few months, the price of nickel dropped from its high of $24 to about $14 per pound. This caused the price of stainless alloys to plummet by 26 percent.
What followed was an unprecedented drawdown in stock levels. For the remainder of 2007, and through the first quarter of 2008, the entire stainless steel supply chain took inventories down to bare-bones levels.
“The industry did everything it could to manage its inventories down,” says Zimmer. “You had a lot of folks drawing fat out of the pipeline to manage the dropping nickel.”
Now that stainless prices have stabilized, ordering has returned to more normal levels, says Bob Mraz, vice president of sales and marketing for TW Metals, Exton, Pa. Though his company’s customers are keeping a watchful eye on the fluctuating price of nickel and other raw materials, those factors are not really affecting their buying habits.
While most U.S. companies reduced inventories over the past year, the destocking phenomenon was not restricted to the North American market. Distributors all across the globe cleared their floors of high-cost material as the stainless price dropped. In fact, the situation was more dramatic in Europe, analyst Markus Moll told attendees at the Metals Service Center Institute’s Specialty Metals Conference in March.
“Supply chain management is not as efficient in Europe,” said Moll, who analyzes the worldwide stainless market for Steel & Metals Market Research in Austria. “We like to gamble.”
But the volatile prices have deterred even the most reckless of gamblers. Continued uncertainty about the nickel price, which dipped again in the second quarter, has made most players cautious in their stainless purchasing.
“Speaking as a generalization, the distribution channels have balanced their inventories relative to demand and the risk of holding stock priced to reflect volatile raw materials,” says Mark Weberding, vice president of marketing and sales for Latrobe Specialty Steel, Latrobe, Pa.
For the domestic industry, drawing down inventory over the past year was made easier by the weakness of the U.S. dollar, which promotes exports. According to Moll, specialty steel sales from the U.S. to Europe grew 78 percent in 2007, while imports declined 1 percent. NAFTA country sales to Asia jumped 52 percent, while imports fell 17 percent.
“We’re seeing more and more international buyers coming to the U.S.,” says Mraz. “It’s a bargain to shop here these days.”
Such bargain hunting aids service centers in two ways. Companies such as TW Metals are growing their international presence, selling material directly to foreign customers in a variety of industries. Additionally, the weaker dollar has given a boost to domestic manufacturing, which is also exporting in greater numbers.
“About one-third of what we do is going to be exported in one fashion or another,” says Mraz. “We see that portion of the business as very dynamic.”
Specialty steel imports are not expected to increase significantly, if at all, over the course of 2008. That includes material from China, now the world’s largest stainless producer. China is in the middle of a dumping case in Europe and will not use the North American market to unload excess material, Moll predicts. “One dumping case is enough.” Instead, he expects the Chinese to curtail production growth for the first time since the country began its historic ramp up to global leader status.
Altogether, worldwide stainless production is expected to hit 29.3 million tons in 2008, a 2.6 percent increase from the 27.7 million tons in 2007, according to figures from the Brussels-based International Stainless Steel Forum. The ISSF projects production in the Americas to increase 3.7 percent in 2008 after an 11.8 percent decline in 2007.
Among end-use markets for stainless steel, the strength of aerospace continues to spur considerable optimism. “We’re in a hot market, one of the areas that has shown strong, steady business,” says United Performance Metals’ Wayne Ferguson. UPM, a subsidiary of O’Neal Steel, was created with the merger of Ferguson Metals and Aerospace International Materials in December 2007.
The aerospace sector, which has been running well for several years, was dealt a blow in 2007 with delays in production of the Boeing 787 and the Airbus A380, though that setback was relatively minor and hardly a surprise, Mraz says. “With every major program ever launched by the major airframers, there are always delays. These are complex machines with a global supply chain, so you tend to expect these sorts of things.”
Moreover, he notes, these major projects account for less than 3 percent of the aerospace industry, which also includes the steady performing business jets, regional jets, very light jets and military aircraft segments.
While the airlines and their passengers may be feeling the impact of higher jet fuel costs, the metals supply chain is not seeing any negative effect. In fact, Ferguson and Mraz note, the higher costs are likely to trigger production of more fuel-efficient aircraft.
“People are really looking for fuel efficiency. They’re looking for planes that are well suited for the routes they want to run, with load factor a key,” Mraz says. “If a 737 averages 90 seats filled out of 120, they’re going to look for a 90-seat plane. It’s all about getting the right-sized plane for the right route. That creates opportunities.”
Other markets enjoying healthy conditions despite the weak U.S. economy include military spending and energy, says Weberding at Latrobe. The Pennsylvania mill is continuing to produce material and moving forward with the vacuum induction melting furnace and vacuum arc remelting furnace capacity expansion plans at its Latrobe facility despite an ongoing labor dispute.
On the energy front, Mraz says there is considerable growth in alternative energy markets, with deep-well drilling, wind, solar and biofuel options holding considerable promise for specialty metals distributors.
The downside to the energy market is a concern looming over all industries. With fuel prices continuing to climb, executives are worried they will ultimately put the brakes on the entire economy. “There must be some magical tipping point where the gas price becomes so obscenely expensive, the other dynamics don’t even matter. If there’s anything that concerns us, it would be a force on a macroeconomic scale that starts a series of unintended economic consequences,” Mraz says.
Meanwhile, producers and distributors of stainless steel products—nicked but no longer bleeding—are glad to have survived their close shave with the plummeting price of nickel.
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