Is frenetic demand just taking a summer breather?

By By TOM STUNDZA -- Purchasing, 7/13/2000 2:00:00 AM

Stainless steel demand is sizzling, even though mill products and processed materials are mighty expensive these days. "From slow growth in demand and overcapacity just a year ago, consumption has picked up, prices have risen, and shortages of supply may be looming if the recent pace of new-order bookings keeps up," says global market researcher Vanessa Davidson at CRU International in London.

The supercharged domestic stainless steel economy, powered by brisk consumer and business spending on durable goods, expanded by an estimated 20% annual rate during the first three months of 2000. Mill and service center business also was strong in the second quarter. Buyer surveys suggest that demand will stay healthy for some months to come.

Yet, somewhat surprisingly, new-order bookings for second-half deliveries of stainless steel and other specialty steel grades reportedly have slowed from the booming pace of recent weeks. That's either because:

• Manufacturers are uncertain about post-Labor Day business and are starting to throttle down. That's because the Federal Reserve Board has boosted its federal funds rate by 175 basis points since last summer in an effort to corral the pace of consumer spending and to keep the economy from overheating further.

• The market is taking a seasonal breather, as buyers are using the summer to eliminate any excess in-plant inventories and recalibrate manufacturing's actual needs for these high-priced steels in the fourth quarter of this year and the first quarter of 2001.

• End users are tiring of seemingly never-ending price escalation-four hefty price hikes on sheet since July 1999, for example, plus alloy surcharges-and are postponing orders so they can look for cheaper alternative materials, particularly aluminum, composites and plastics.

On balance, though, the analysts believe the concerns about second-half demand are being overblown. "There is very strong stainless steel demand in the U.S. and Europe and continued recovery in demand in Asia," notes analyst Michelle Applebaum at Salomon Smith Barney's Chicago office. That's why world production through March was 11% higher than the first quarter of 1999. "That kind of activity isn't going to disappear overnight," she says. Also bullish is analyst Martin Squires of Carr Metals in London, who says "U.S. stainless steel demand overall is so healthy that substantial growth of somewhere around 10% is likely for the year. That would bring 2000's actual use of stainless to 2.3 million tons, the most ever for a single year.

Davidson also sees consumption rising this year, by about 9%, and demand staying high next year. "Underlying consumption will remain buoyant," she says. Analyst Heinz Pariser at Alloy Metals & Steel Market Research in Xanthen, Germany, adds: "Based upon a strong global economy, the prospects for the world stainless steel industry are good. Despite rising stainless prices, partly reflecting the strong increase of nickel prices, speculative stocking at stainless steel service centers and fabricators hasn't yet taken place and that will provide a strong platform for further sales expansions in 2001."

David Blitzer, chief economist at rating agency Standard and Poor's in New York, notes that business investment shot ahead by 25% in the first quarter, the biggest surge in this spending in two years, "as companies have been pouring money into expanding production." This has benefited stainless sales, since the metal is a staple in the production of numerous automotive, aircraft and aerospace parts and food handling, chemical processing, pollution control and medical and health equipment. However, some economists are concerned. "The manufacturing economy has shown no sign of faltering yet, based on available statistics," says independent economist Mark Zandi in New York. "But, there is considerable uncertainty over the impact of the Federal Reserve Board's belt-tightening and its future monetary policy as it works to deflect inflationary pressures by decelerating the still booming economy." As summer heads into autumn, he says, there is a worry that consumer spending could slow, production of durable goods could slip, and manufacturing's need for such raw materials as stainless steel could falter.

It is true that stainless prices are up substantially, both because of the pricebook hikes that have taken effect and because of the alloy surcharges caused by higher market prices for nickel, chrome and molybdenum. With nickel costs rising, demand increasing beyond forecasts, and lower imports reflecting the impact of some favorable trade cases, mills announced two price increases totaling approximately 13% for most stainless steel sheet, strip and coiled plate products. Then, this year, they boosted list prices twice more and added the surcharges. Nickel supplies worldwide are down, also contributing to a rise in prices.

As demand continued to soar in the first quarter, stainless steel sheet prices were on a sharp ascent of 14%-as the market finally accepted two of the price hikes in one gulp. Market prices for cold-rolled sheet grade 301 jumped 18% to $2,090/ton from $1,768 in December; grade 302 went up 17% to $2,135 from $1830; grade 304 increased 15% to $2,020 from $1,750; grade 304L moved up 13% to $2,085 from $1,845; grade 316 increased 13% to $2,500 from $2,210; and grade 316L went up 8% to $2,440 from $2,260. And the mills have proposed another 4%-6% increase for this summer.

No quick end for alloy surcharges?

Note that these prices don't include surcharges for nickel and other alloys. In fact, the market analysts at meps Ltd. in Sheffield, England, say "the alloy surcharge is taking up an increasing proportion of the total selling price of stainless steel." At the start of 1999, none were being applied. By early May, for example, the $594/ton alloy surcharge was 19% of the actual transaction price of $3,094/ton for Type 316 sheet and 23% of the actual transaction price of $2,614 for Type 304. It's almost possible to track the surcharges without a calculator because, while they are designed to reflect fluctuations in raw material prices, actual implementation lags the movement in alloying metal prices and the amount varies by product group (and the percentage of the alloy used in that steel mill product). One large U.S. mill, for example, says that while it planned to charge customers the surcharges based on $2/lb nickel and 35¢/lb chromium in January, "the full benefits of these changes were not realized until late in the first quarter because of existing contracts." And that's not to mention the buyer resistance at the end-user level of the supply chain.

Nickel surcharges on stainless and specialty steel products will be in effect indefinitely, according to consultant Paul Lowrey at Metal Strategies in West Chester, Pa. "Unless the fundamentals of nickel change, surcharges are going to remain in effect for the most part for a long time," he says. Another consultant, Edward Blot of Edward J. Blot & Associates in Canton, Ohio, agrees that the nickel surcharge trigger of $2/lb for flat products would be a constant because the price for nickel has rarely gone below $2/lb. "If it stays consistent with history, you're stuck with surcharges pretty much forever and ever," Blot says.

Blot says that "raw material surcharges are a problem" and "do create issues" for the producers, service centers, fabricators and original equipment manufacturers. He notes that end-users can be divided into two major customer categories-fabricators and OEMs. "The fabricators find themselves in a squeeze between the big mills and service centers and the big OEMs, who will push back acceptance of surcharges as long as possible," he says. Also, there is the alternative for the OEMs of substituting some stainless grades for others whose alloy content is less susceptible to surcharges.

In its latest quarterly report, Corus Group subsidiary Avesta Sheffield in Stockholm, which makes stainless steel sheet and plates and sells them everywhere (including North America), tells shareholders that "demand and prices still are expected to rise during all of 2000." And no other major producer is arguing, but almost all are looking over their shoulders at lower-priced competitive materials.

Buyers have been grousing a lot lately about prices. Although leadtimes have stretched to 4.3 weeks for average delivery from 2.4 weeks this time last year, none of the buyers surveyed last month fear shortages of stainless or such specialty steel grades as electrical steels and tool steels. In separate polls conducted by Purchasing Magazine and the National Association of Purchasing Management, buyers note no problems with supply among distributors and see foreign stainless as plentiful. This perception is rooted in fact. Although punitive duties ranging up to 60% were imposed in July 1999 on imports of stainless steel sheet and coiled plate from companies in 10 foreign countries, Commerce data show imports so far this year continue to supply 18% of the sheet market and 40% of the plate mart. In fact, foreign suppliers still control 27% of the total domestic stainless and specialty steel markets. Atop that, data from the Steel Service Center Institute show stockpiled stainless at 445,000 tons at the end of the first quarter. That's just under the record-high level of 447,000 tons at the end of last year.

Demand is strong everywhere

"Demand is still excellent even though prices continue to climb," says a service center executive in the Southeast. "That's the sign of a good market, I guess." Updated data for the U.S. shows that net supply of stainless steel last year was 2.54 million tons, with net use of about 2.09 million tons. That was comparable to supply of 2.48 million tons and use of 2.06 million tons in 1998. For stainless and all specialty alloy grades, net supply was about 3.16 million tons, with actual use of about 2.6 million tons. This also was comparable with 3.11 million tons of supply in 1998 and 2.58 million tons of use. The market is healthy, according to insiders, but even they are leery of accepting the 10% end-use growth to 2.3 million tons. Most specialty steel marketers seem more comfortable with 7% year-on-year growth, or 2.23 million tons.

This year's sheet market, the biggest selling product area, is showing good sales. Strong North American automaking continues to boost the need for stainless-based exhaust systems. And, according to Anirvan Banerji, co-director of research at the Economic Cycle Research Institute in New York, "stainless is becoming increasingly important" in housing products and computer industries. However, half of this product line goes to market through distributors. Some service center CEOs have told Purchasing Magazine that tonnage and implementation of sales price increases both have slowed this summer. "Distributors are becoming nervous, especially as many have high inventories," agrees the market analysis by meps. "Atop that, while demand for coiled plate is strong, the cut-plate market remains weak with only halting signs of an improvement." That's probably because a significant increase in the cost of alloys used has brought the surcharge to 30% of higher transaction prices.

Stainless steel bar sales, while improving, remain a very tough sell. While mill order books are much improved from last year, there is still significant overcapacity and prices still have a long way to go to make up for the deterioration of the past several years. Consultant Ed Blot says supply of stainless bar fell 5% to 236,000 tons in 1999 from about 249,000 tons in 1998. This followed a record 260,000 tons in 1997. Excess inventories at service centers, mills and end users, Blot adds, caused much of that decline in sales. So far this year, it looks as if the supply excess has worked itself through the supply chain. "We have seen demand for stainless steel bar rebound remarkably in the past six months," says Andrew McElwee, sales VP for specialty alloys at Carpenter Technology in Reading, Pa., the largest player in the market. He says demand, at least for cold-finished stainless bar, is up almost 6% from a year ago.

Analyst Pariser reckons that world stainless steel production has risen from 6.9 million tonnes two decades ago to 17.7 million tonnes in 1999. This year, he projects output of 18.5 million tonnes. And, given a global productivity rate of 87.5%, that means the industry will produce 16.2 million tons of usable mill products. That would be an increase of 4.5% from 15.5 million tonnes last year. World demand for stainless is expected to grow by 5%-7% annually-"if not higher"-for some time to come, suggests Minoru Tanaka, president of Nisshin Steel in Japan and chairman of the International Stainless Steel Forum.

"Rust resistant, durable, clean and completely recyclable, stainless steel finds applications in plants and equipment to protect the environment, helps create germ-free conditions in the food industry and hospitals, and is used in many household items for clean and healthy living," Tanaka says. One newly available stainless, for instance, features anti-microbial properties.

Demand in most of Asia, except Taiwan, is outpacing predictions. Although Taiwan's economy has begun recovering with double-digit growth in exports and imports, analysts say the stainless steel sector has barely benefited because the mainstay buying construction sector had long been in a slump. "Taiwan's stainless steel production is too dependent on the construction sector," says steel market researcher C.S. Chen at China Steel Corp, Taiwan's largest steelmaker. That Taiwanese problem fits right in with Tanaka's view that "stainless producers must develop new markets."

Where specialty steels are going

Specialty steels, a relatively small but distinct segment of the overall steel market, include stainless steels, high-speed and tool steels, electrical steels, high-temperature alloys, magnetic alloys and electronic alloys. Common end uses include jet engines, air frames, electrical energy, automotive, chemical processing, oil and gas, construction and mining, machine and cutting tools, appliances and food equipment, transportation and medical. Specialty steels are made with a high alloy content, which enables their use in environments that demand exceptional hardness, toughness, strength and resistance to heat, corrosion or abrasion, or combinations of these characteristics. They usually are grouped for production and sales in "families."

Stainless steel, which represents the largest part of the specialty steel market, contains elements such as nickel, chrome and molybdenum that give it unique qualities of resistance to rust, corrosion and heat; high strength; good wear characteristics; natural attractiveness and ease of maintenance. Stainless steel is used, among other applications, in the automotive, aircraft and aerospace industries and in the manufacture of food handling, chemical processing, and pollution control and medical and health equipment.

Tool steels contain elements of manganese, silicon, chrome and molybdenum to produce specific hardness characteristics that enable them to form, cut, shape and shear other materials in the manufacturing process. Heating and cooling at precise rates in the heat-treating process bring out these hardness characteristics. Tool steels are used in the manufacture of metals, plastics, pharmaceuticals, electronics, optics and paper and aluminum extrusions.

High-temperature alloy steels are designed to meet critical requirements of heat resistance and structural integrity. They generally have a very high nickel content relative to other types of specialty steels. High-temperature alloy steels are manufactured for use generally in the aerospace industry.

High strength, low alloy steel is a relative term that refers to those steels that maintain alloying elements that range in versatility. The alloy element of nickel, chrome and molybdenum in such steels typically exceed the alloy element of carbon steels but not that of high-temperature alloy steel.

Today, stainless steels are used in a myriad of applications, from the kitchen sink to car mufflers. For years, industry insiders have said that OEMs could support a 4% average annual increase in demand. That's been the case since 1992 in the U.S., although growth had been saw-toothed and inconsistent-ranging from no growth some years to as high as 18% in others. Part of the reason for the solid growth rate in consumption can be traced to the auto industry's conversion to chrome-bearing stainless for exhaust systems. Now, there's more being used to make fuel lines, airbag canisters and brake lines. Stainless steels also are a mainstay in production of commercial jetliner parts, medical replacement parts, electronics components and equipment used by various process industries.

Because the metal's surface can be highly polished, it's also finding more uses in architectural decorations and in such building uses as elevator doors. High-grade stainless steels contain nickel as well, improving their metalworking properties. And that has the marketers looking to boost sales to fabricators of parts used in heavy appliances and specialized machinery. Lately, there have been many new uses for stainless steels as replacements for high-carbon, low-alloy and galvanized steels.

New acid-resistant stainless grades are going into machinery and parts for pulp and paper production and processing. New construction uses for water-resistant stainless grades include concrete reinforcements, fasteners, hooks, wall ties and even bridge parts. There also have been new uses found for food processing, heavy-duty modular cooking equipment, catering equipment and pharmaceutical equipment. New types of pumps, drilling and waterjet-cutting machinery can be found bearing stainless steel as well. And a recent marketing initiative by the industry's trade group has opened up two major markets-building & construction and infrastructure-for expanded specialty steel applications.

The International Stainless Steel Forum, an arm of the International Iron and Steel Institute, has agreed to work with the Nickel Development Institute, Tanaka says, "to ensure that our customers and society at large be provided accurate, scientific and comprehensive information on environmental and health issues of stainless steel." Peter Johnston, executive general manager of nickel at producer WMC Resources in Australia, says the stainless steel and nickel industries share "common interests and must continue to work closely together to promote and defend applications for nickel stainless steels." Two-thirds of the world's nickel production is used to make stainless steel and two-thirds of newly smelted stainless steel contains nickel, "so the long-term growth of markets for nickel depends heavily on the continued growth of stainless steel applications," Johnston says.

But there are threats to stainless steel from alternate materials and from "misinformation and faulty science that is being used "to influence regulators and the public with regard to environmental threats posed by nickel and, by insinuation, nickel stainless steels," says Johnston. The current chairman of the Nickel Development Institute says "it's important, therefore, that the stainless steel and nickel industries continue to cooperate and provide sound, science-based information" for potential consumers of stainless steels and nickel-based superalloys.

Market at a glance

Demand: Skyrocketing. U.S. stainless steel demand overall is so healthy that substantial end-use growth of 9% or 10% is likely this year. That would bring 2000 stainless use to 2.3 million tons, the most ever for a single year.

Supply: No shortages seen. Domestic suppliers have underutilized capacity since foreign mills supplied 25% of the 1999 market. Despite numerous trade complaints, tariffs and duties have dropped imports by only 2% off their supply peak of 27% in 1998. So, service centers entered 2000 with record-high stockpiles awaiting orders.

Prices: Inflating. The all-product transaction price average fell in 1999 for the fourth consecutive year, but already has risen to 1994's average price. Domestic mills vow they will keep trying to boost prices until they are back to the last peak of 1995. Analysts think it will happen. Atop that, alloy metal surcharges have added 25% to transaction costs of the metal.

Reliance enters new stainless niche

Reliance Steel & Aluminum, the fourth-largest metals service center company in North America, has entered a new supply niche, non-prime stainless steels. Los Angeles-based Reliance has acquired Toma Metals Inc., a privately held service center in Johnstown, Pa., that handles secondary and excess prime material for customers who don't require prime stainless mill products. Toma "is not your typical stainless operation," says Reliance CEO Dave Hannah. "It's a niche like no other niche that we have." Among the many metals processing and distribution companies it controls, Reliance also owns stainless service center Phoenix Metals in Atlanta, but that firm specializes in mill-prime materials.

Nickel supply concerns boost prices

Nickel prices on the London Metal Exchange already had moved from $2.75/lb in January to $4.75 in June when bankers at hsbc Group began projecting a second-half surge in prices. "A combination of supply disruptions and strong demand could give nickel prices a short-term lift before they ease back in the second half of the year and into 2001," says a report from hsbc's Global Mining Division.

Producers were operating at full capacity and are stretched to satisfy demand. "Yet, LME inventories are so low and demand is set to remain so firm that the market price remains highly leveraged to any unexpected supply problems," notes the hsbc report. Last year, the world used 1.12 million tonnes of nickel. The "most optimistic" forecast to date suggests a 2.5% growth to 1.15 million tonnes. That's because there's no new capacity coming online and because of possible supply disruptions in Canada.

The investment bank has forecast average nickel prices at $4.30/lb for 2000, and then falling to $3.38/lb in 2001. End-use demand remains very strong and the stainless steel sector, which uses 85% of the nickel supplied annually, is reporting full order books for the next two to three months in Europe and for the next two months in the U.S. "The outlook for stainless steel prices remains positive even if nickel prices weaken in the second half as expected," hsbc says.

STEEL TRADE WARS/Uncle looks at Japanese stainless tube sales tactics

Commerce's International Trade Administration believes that Sumitomo Metal Industries and Sanyo Special Steel of Japan have sold stainless steel round hollow tubing in the U.S. at prices as much as 157% below home-market prices. In a preliminary ruling in April, Commerce has decided to pursue the complaint filed by a coalition of U.S. stainless steel pipe producers and the Steelworkers union. Also under review in the complaint is the allegation that other Japanese stainless tubemakers have dumped product by as much as 62%. Sumitomo and Sanyo have refused to cooperate with the investigation.

Round seamless stainless steel hollow products are used in nuclear and conventional power plants, stock lines for petrochemical industry, pharmaceutical production lines and food processing equipment, and sanitary tubing for the dairy and food industries. Domestic producers are: Altx, Watervliet, N.Y.; American Extruded Products pmac, Beaver Falls, Pa.; DMV Stainless USA, Houston; Pennsylvania Extruded Tube and Sandvik Steel, both of Scranton, Pa.; Salem Tube, Greenville, Pa.; and Wyman-Gordon's Buffalo operations.

AK Steel has antimicrobial-coated stainless for food equipment

AK Steel has introduced a new steel coating for stainless steels that has proven effective in suppressing the growth of more than 650 species of microbes. AK Steel says the antimicrobial coating will not wash off, lose its antimicrobial effectiveness under contact or abrasion and remains effective at temperatures up to 1,472 degrees Fahrenheit.

The targeted uses of the new HealthShield-coated antimicrobial steels are cookware, serving and processing equipment, food and beverage dispensers and cutlery. The steelmaker also sees uses in the manufacture of heating, ventilating and air conditioning equipment (hvac), medical equipment, laboratory equipment, home appliances and other human-contact steel products, notes Richard Wardrop, CEO of Middletown, Ohio-based AK Steel.

Similar efforts to promote antimicrobial claims in plastic products were challenged by federal authorities. They questioned the effectiveness of biocides in killing germs in contact with the surface of a toy or cutting board, for example.

According to HealthShield Technologies, the Massachusetts-based biotechnology firm that developed the new antimicrobial compound, HealthShield antimicrobial contains silver zeolite that is long lasting and extremely durable. With zeolite incorporated into AK Steel's flat-rolled steel, encapsulated silver ions act as an ion pump providing the controlled time-release of silver ions in the environment. This ion exchange inhibits microbiological activity on the surface of the product.

A buyer's guide to stainless steel

Stainless steel is essentially a low-carbon steel which contains chromium at 10% or more by weight. It is this addition of chromium that gives the steel its unique "stainless"-i.e., corrosion resisting-properties. The chromium content of the steel allows the formation of a rough, adherent, invisible, corrosion-resisting chromium oxide film on the steel surface.

Stainless is among the strongest of metals; normal tensile strengths range from 75,000 to 125,000 psi. Increased chromium content and the addition of other elements such as molybdenum, nickel and nitrogen enhance the corrosion resistance and other useful properties of the steel. Under normal conditions, stainless also is unlikely to pit, tarnish, or deteriorate in any other way. According to data from the Stainless Steel Industry of North America trade group, the key benefits of stainless steel are:

Corrosion resistance: Lower alloyed grades resist corrosion in atmospheric and pure water environments, while high-alloyed grades can resist corrosion in most acids, alkaline solutions, and chlorine bearing environments, properties which are utilized in process plants.

Fire and heat resistance: Special high chromium and nickel-alloyed grades resist scaling and retain strength at high temperatures.

Hygiene: The easy cleaning ability of stainless makes it the first choice for strict hygiene conditions such as hospitals, kitchens, abattoirs, and other food processing plants.

Aesthetic appearance: The bright, easily maintained surface of stainless steel provides a modern and attractive appearance.

Strength-to-weight advantage: The work-hardening property of austenitic grades that results in a significant strengthening of the material from cold-working alone and the high-strength duplex grades allow reduced material thickness over conventional grades, and therefore cost savings.

Ease of fabrication: Modern steel-making techniques mean that stainless can be cut, welded, formed, machined and fabricated as readily as traditional steels.

Impact resistance: The austenitic microstructure of the 300 series provides high toughness, from elevated temperatures to far below freezing, making these steels particularly suited to cryogenic applications.

There are more than 60 grades of stainless steel. However, the entire group can be divided into five classes. Each is identified by the alloying elements that affect their microstructure:

400 Series Martensitic: Typical grade is 410 straight chromium (12%-18%) magnetic and can be hardened by heat treatment. Typical uses are fasteners and pump shafts.

400 Series Ferritic: Typical grade is 430 straight chromium (12%-18%), "low" carbon, magnetic, but not heat-treatable. Typical uses are appliance trim and cooking utensils.

200/300 Series Austenitic: Typical grade is 304 chromium (17%-25%)/nickel (8%-25%), non-magnetic, not heat-treatable. Can develop high strength by cold work. Additions of molybdenum (up to 7%) can increase corrosion resistance. Typical uses are food equipment, chemical equipment and architectural applications.

Precipitation-hardening: Typical grade is 17-4 chromium (12%-28%)/nickel (3%-9%), martensitic or austenitic. Develop strength by precipitation-hardening reaction during heat treatment. Typical uses are valves, gears, and petro-chemical equipment.

Duplex: Typical grade is 2205 chromium (18%-25%)/nickel (4%-7%) and up to 4% molybdenum. More resistant to stress-corrosion cracking than austenitic, yet tougher than fully ferritic alloys. Typical uses are pipelines, pressure vessels and shafting.