Enter the buyers' market
The commodity stainless steel market remains weak, driven by downturns in such consumer-oriented markets as automotive and appliances. Prices, therefore, are softening.
By Tom Stundza -- Purchasing, 3/12/2009 2:00:00 AM
Stainless steel purchasing has been falling rapidly, keeping supply loose, leadtimes the shortest since early 2004 and prices the softest since the spring of 2006. In a nutshell, the fact of "incredibly weak economies in North America, Japan, China and western Europe underlies why the metal's demand is falling so precipitously worldwide," according to analyst Jim Lennon, chief of Macquarie Bank's commodities research unit in London.
"Most of the parts I buy are made from stainless steel," says Mark C. Bialk, a buyer/planner in Brown Deer Wis., for the ITT Sanitaire wastewater treatment equipment-making unit of ITT Water & Wastewater. "We don't need to buy much stainless steel these days since we are projecting 2009 sales of our products to be lower than in 2008." He's not alone since only 15% of the metals buyers polled planned to increase purchases this quarter.
Market researchers report that original equipment manufacturers are buying very little stainless steel, no matter what the product group. Some manufacturers had such a poor production fourth quarter of 2008 that they have no requirements for replacement metal for the first three months of this year. Atop that, mills and service centers are trying to reduce their inventories, which already are at low levels, reports Kuni Chen, analyst at Merrill Lynch & Co., in New York. Although the Metals Service Center Institute reports that stocks in the U.S. and Canada were only 407,500 tons at the end of 2008, Chen believes that distribution industry inventory rebuilding is unlikely in the near term.
The director of supply chain management for a manufacturing firm in Virginia tells Purchasing that he "has been engaging our top vendors to push down prices across the board but especially for parts machined from stainless steel." He adds that "demand for our products is extremely weak as our customers are working down inventories and are trying to wait for prices to hit bottom." And, according to economists, the economic stimulus projects will be geared more toward carbon steel plate, structural and rebar grades and will take some time to have any effect on stainless steel use.
In a related development, Germany's ThyssenKrupp Group is delaying by a year the start-up of production at the new $1.6 billion stainless steel plant it is building in Alabama. Instead of coming into operation in late 2009, the stainless cold- rolling phase won't be commissioned before late 2010. At the group's annual shareholders' meeting in January, CEO Ekkehard Schulz said the rescheduling has been caused by a "massive drop in demand" for stainless steel in North America.
Stainless steel demand has weakened
These comments are typical since stainless steel use dropped 14% to 1.53 million net tons last year from the previous year and 28% below the cyclical peak of 2.11 million net tons in 2000. The outlook for standard stainless products in 2009 calls for very weak purchasing and very competitive pricing. "Nickel surcharges on stainless steel nickel have dropped significantly over the last few months," says Bialk, "and still are down." In fact, as long as demand remains dormant and costs of nickel, chromium and other key raw materials continue to slide, most market analysts suggest transaction prices for stainless steel product will keep declining until they touch bottom around midyear.
And then, "prices will remain depressed until there is some meaningful change in demand," which could be by late 2009 or early 2010, says analyst Sal Tharani at Goldman Sachs Group in New York. "Prices are falling rapidly and should bottom in the first half of 2009 and then remain low until economic conditions rebound in 2010 and 2011," agrees economist John Anton at IHS Global Insight's Washington offices.
Stainless steel prices have plummeted from their all-time record peak—due as much to the drop in purchasing as the collapse in the cost of nickel from an average $16.87 in 2007 to $9.57 in 2008 and $5.26 in January, 2009. Mill executives point out that they use raw materials surcharges and other pricing index mechanisms to offset the impact of increased costs of such raw materials as nickel. However, when prices are deflating, competitive factors limit their ability to institute or maintain such mechanisms. That's why a suggested increase in the mills' basis values for January didn't materialize.
Basis prices for stainless products are so poor they are only just covering costs. And, since nickel prices still are falling, most analysts expect the nickel surcharge—which is down 64% in a year from $1.48/lb in January 2008 to 54¢ in January 2009—to decline even more in coming months. So, as far as transaction prices are concerned, the Purchasingdata.com outlook for 2008 stainless steel price averages sees Type 304 cold-rolled sheet at $1.89/lb, as compared with $2.03 in 2008. Anton is more bearish and expects Type 304 cold-rolled to average $1.76/lb.
Some stainless steel flat-rolled producers have attempted to post a 6.5% surcharge increase on March sales but the continued slippage in raw nickel costs and a continued fall in chromium values may have made the proposed increase moot. Also, there are reports from traders that Chinese material has been offered here at low levels because domestic Chinese stainless prices have continued to ease in recent months due to weak demand there.
The major end markets in North America for stainless steel are the chemical process industry, oil and gas, electrical energy, automotive, food equipment and appliances, machine and cutting tools, construction and mining, aerospace and defense, and electronics, communication equipment and computers. The current economic environment for buying by companies in these industries remains bleak. "We expect 2009 to be challenging," admits L. Patrick Hassey, CEO of major supplier Allegheny Technologies in Pittsburgh. He suggests that "weak demand from many of our end markets will continue through the first half."
Paul Kasriel, senior vice president and director of economic research at Northern Trust Corp. in Chicago, supports Hassey's pessimism by stating that "spending for personal consumption, residential investment and business equipment has collapsed so manufacturing businesses are desperate to reduce their inventories." Atop that, Kasriel says that "with the U.S. recession having spread to the rest of the world, even demand for U.S. exports is now contracting" and that has slowed manufacture of stainless-containing products.
Domestic stainless steel supply comes from such producers as ATI Allegheny Ludlum, AK Steel, Carpenter Technology, North American Stainless (owned by Acerinox of Spain) and Outokumpu Stainless Plate Products (owned by Outokumpu of Finland). Imports come from Arcelor Mittal plants in France, Belgium and Germany; Mexinox of Mexico (a group member of ThyssenKrupp of Germany), Ta Chen International of Taiwan and various Chinese producers.
"These producers and master distributors in the U.S. will continue to try to offload material, often at very low negotiated prices," reports market researcher Peter Fish at MEPS (International) Ltd. in Sheffield, England, who notes that offers from overstocked producers in the Far East still aren't competitive with current domestic market prices. He adds that these market conditions aren't expected to improve during the first half of this year. He projects that the global stainless steel market will remain weak in 2009, "given a lack of supply consolidation and exposure to still weakening end markets" in Asia, the largest consumption region.
Foreign markets are soft as well
Analyst Ed Meir at MF Global in New York agrees that "global demand looks very sluggish with no sign yet of any turnaround and several stainless producers are warning of poor results as a result." Finland's Outokumpu and Japan's Nisshin Steel and Nippon Steel & Sumikin Stainless have told investment analysts that they were making severe production cutbacks to prepare for a period of prolonged demand weakness. "The past weeks have shown that there is no marked improvement in stainless steel demand," says Outokumpu CEO Juha Rantanen in a statement. "Unfortunately, it is now evident that the production cutback measures we announced in December are not sufficient in this situation."
In South Korea, stainless hot-rolled sheet production in 2008 was down by almost 25% from 2007. Producers in Taiwan continue to restrict output: Tang Eng is producing at around 40% of its normal level while Yusco is operating at between 50% and 60% of capacity. In Europe, production has been reduced significantly because of the slump in auto and appliance manufacturing in Sweden, Spain, Italy and Germany.
Also, in a related development, Kazakh mining group Eurasian Natural Resources Corp., one of the world's biggest producers of ferrochrome, recently posted a 22% fall in fourth-quarter production and reiterated a gloomy forecast for 2009. Demand for ferrochrome, a key ingredient in stainless steel production, has slid as steelmakers have cut back production amid the global economic downturn. The firm said in a statement it still saw "no immediate prospect of an improvement, at least for the first half of the year, and that it anticipated reduced production volumes and pricing pressures to continue into 2009." In January, contract prices for ferrochrome for the first quarter tumbled 57% due to weak demand.
| 2006 | 2007 | 2008 | |
| (*) India, Brazil, South Africa, Eastern Europe Source: MEPS Stainless Steel Review |
|||
| European Union | 9,370 | 8,115 | 7,910 |
| China/Russia | 5,550 | 7,405 | 7,330 |
| Japan | 3,900 | 3,705 | 3,605 |
| United States | 2,500 | 2,170 | 2,040 |
| South Korea | 2,200 | 1,910 | 1,735 |
| Taiwan | 1,685 | 1,425 | 1,410 |
| Others (*) | 3,015 | 3,070 | 2,770 |
| 28,220 | 27,800 | 26,800 | |
Stainless Steel Prices All Over the Map
06/18/2009
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