Buyers report that domestic stainless sheet mills are refusing to quote deliveries beyond the first quarter on the assumption that the government's Section 201 investigation will result in tariffs that will reduce imports and allow them to push some market prices higher.

Import competition has triggered reduced production, mill shutdowns and lower spot-market pricing. H. L. Kephart, chairman of the Specialty Steel Industry of North America, the domestic industry's trade group, anticipates that the Bush Administration "will recognize the need for strong, effective trade relief on specialty steel products, particularly in light of the recession." Some supplier forecasts for 2002 project lowered imports at a time when demand perks up, which will allow them to recover a majority of last year's 20% drop-off in market pricing.

The base price for stainless steel sheet Type 304, a benchmark grade, dropped by 24% last year to an annual average of $1,339/ton. Reduced transaction prices were also evident for plate, bar and tubular products. Dennis M. Draeger, chief executive of producer Carpenter Technology Corp. in Wyomissing, Pa., candidly admits that there is "a more intense pricing environment due to excess capacity within the industry." Market mavens suggest that only recent production cutbacks by domestic suppliers have prevented additional price erosion.

Base prices for Type 304 cold-rolled sheet have been stable at $1,232/ton (without alloy surcharges) since September and buyers report that now there is little difference between domestic prices and those quoted by offshore suppliers. Since stainless demand has reduced sales and prices for nickel and cobalt, alloy surcharges have been decreasing. Buyers report that the surcharges for the first quarter have "dropped off the map." In January of 2001, cold-rolled Type 304 cost $1,624/ton delivered ($1,322 for the coil plus a $302 alloy surcharge). In January of 2002, that coil cost $1,268 delivered ($1,232 for the coil plus a $36 surcharge).

Buyers surveyed by the magazine expect the stainless steel economy's recovery from recession to be a slow, grudging climb. "Heavy manufacturing may have hit bottom," says Eric Johnson, purchasing manager at Titan Air Inc. in Osseo, Wis. "But, it is questionable how long manufacturing will be at the bottom," he adds. His company, for example, which uses carbon and stainless steel products to build commercial and industrial heating and ventilating equipment, "has shifted the 2002 outlook from positive and aggressive to concerned and cautious."

Titan Air also makes electric, steam, hot water, chilled water and evaporative coolers. Since new-order entry recently has begun to decline, Johnson has backed off on rebuilding raw materials inventory. "Our buying program is geared toward reducing in-house raw materials inventory," he says, "so we will continue to buy only what we need for manufacturing when we need it."

In a similar vein, Lance Dreissen, purchasing manager at Northland Stainless Inc. in Tomahawk, Wis., recently negotiated first-half tonnage requirements with his three suppliers "at about the same volume" as the second-half of last year. Atop that, he says the trio of service centers "held the line on first-half pricing" at second-half, 2001 levels, which were down substantially from the first-half of last year. Northland Stainless makes pressure vessels, specialized tanks and processing equipment for the chemical, pharmaceutical, defense, paper, food and beverage industries.

More than half of the stainless steel bought annually comes to market through service centers and specialty processors. The slowdown in buying has given purchasing groups a chance to reorganize their sourcing strategies with this supply segment. For example, Sundyne Corp. in Arvada, Colo., is reducing its stainless steel bar supply base by two-thirds this year, according to Karen Cook, materials manager.

"Purchasing stainless has always been a struggle" for the maker of engineered pumps and compressors for the hydrocarbon and chemical processing, pulp and paper, water treatment, power generation, and sanitary processing industries. "We don't buy in the volume of aerospace or other large stainless-using industries," she says. So, the subsidiary will be using the buying leverage of other United Technologies Corp. companies to reduce its supply base and materials costs from a smaller, more-select group of service centers.

In a "normal year," domestic metalworking purchases an average 2 million tons of high-priced stainless steel. Approximately 60% of the flat-rolled sheet products, the largest category, are sold by domestic and foreign mills to service centers, which have slitting, cutting or other processing facilities, with the remainder sold directly to end-use customers. Stainless steel is the material of choice for many applications because of its resistance to corrosion as well as its aesthetic qualities, which enable it to be polished to a satin or mirror finish.

However, overall purchasing of stainless steel mill products crashed by better than 18% last year, and early-2002 purchasing remains extremely soft. "Very weak economic conditions have led to a significant reduction in demand for commodity stainless steel," agrees Douglas A. Kittenbrink, executive vice president of Allegheny Technologies Inc., which operates Allegheny Ludlum, the nation's largest stainless producer. He projects "continued weak demand for stainless steel sheet and plate due to the weak U.S. industrial economy," at least until midyear.

Several market insiders see no immediate pickup in shipments to such key end-use industries as appliance, automotive, food preparation equipment, aerospace and information technology products. "Our stainless steel business continued to be impacted by weak demand in several consumer and industrial markets,'' acknowledges Draeger of Carpenter Technology. Recently, he told Wall Street analysts that he "remains cautious about the near-term market, due to a sustained slowdown in demand in the consumer and industrial markets." And that's why the stainless steel industry's shipping rates haven't changed in months.

Imports of stainless products continued to hold a 26% share of the U.S. market last year, "even as consumption has declined," says Kephart of the Specialty Steel Industry of North America. "So, the domestic mills, especially the flat-rolled sheet and plate producers, are struggling to compete with these imports in this weak economy."

Allegheny Ludlum, for example, permanently idled a stainless steel melt shop in Houston, Pa., at the end of December, eliminating nearly 250,000 tons of annual capacity. "With the uncertain economic outlook, we are staying focused on cost reduction," says Jim Murdy, president of the steelmaker. "We determined that this melt shop could no longer be operated economically in the highly competitive global stainless steel market."

However, service center inventories of stainless steel products were 454,000 tons at the end of November. While that was lower than the 521,000 tons at the start of 2001, it still represented a very high 4.4-month's worth of supply. This is well above the 3.6 months average over the past five years.