Stainless buyers' strike is longer than expected
Analysts see purchasing held up by weak economy
By Tom Stundza -- Purchasing, 10/24/2007 10:12:00 AM
Stainless demand has not yet returned, according to market reviews by several analysts who had expected purchasing and pricing to rebound this month or next. Lower nickel prices since the peak in May “haven’t yet enticed stainless steel buyers back into the market as quickly as had been anticipated,” admits analyst Mike Gambardella at J.P. Morgan Securities in New York.
Entering the final quarter, stainless steel buyers remain anxious because of reduced demand in a slow-growth economy; producers are anxious because an earlier price spike drove many buyers to alternative materials. “The Middle America stainless steel economy is beginning to feel the slowdown,” agrees Jim Nations, president of Mid-America Stainless in East St. Louis, Ill., a manufacturer of stainless steel fabrications and food service equipment. He and other market insiders see continued softness in sales to the automotive, major household appliances, residential construction, ship building, electrical and material handling equipment and industrial, metalworking and construction machinery sectors.
Stainless steel depots are full throughout North America, mills have seen new-order bookings evaporate and early autumn prices for workhorse grade Type 304 cold-rolled sheet are collapsing, Purchasing.com has reported. Market reports from buyers show a dramatic slide of 27.5% this month to an estimated average of $3,945/net ton. Now, based on information presented to analysts by stainless steel producing firms earlier this month, Gambardella and other market mavens who had suggested that commodity flat-rolled stainless steel purchasing would perk up this quarter now foresee no buying surge “until further industry inventories are worked down in the first quarter of 2008.”
U.S. service center inventories have continued to decline over the past few months and entered October at 536,400 tons, or 3.4 months of supply, the lowest tonnage in stock since 520,100 tons in January 2000. CIBC World Markets analyst Mike Willemse thinks that “any modest increase in end-market demand could cause North American steel prices to surge.” However, analyst Mark Parr at KeyBanc Capital Markets in Cleveland points out that “specialty producers are suffering from restrained buyer behavior in the face of raw material volatility, particularly nickel.”
Interestingly, Finnish stainless steel giant Outokumpu may lead the way in adjusting the way stainless steelmakers calculate the alloy surcharge on its products—“to bring more stability in the stainless steel market and to reduce the effects of the raw material price volatility.”
Currently, most stainless steel company calculates the alloy surcharge, which reflects changes in prices of key material inputs such as nickel, on the average raw material prices two and three months prior to delivery. Starting with stainless steel deliveries for January 2008, Outokumpu will have an alloy surcharge based on the 30-day average price of raw materials calculated back from the previous month's 20th day.
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