Will supply constraints hinder a growing market?

Staff -- Purchasing, 12/9/2004

Purchasing of stainless-steel bar products is at its highest level in four years. That's why activity continues to be described by market insiders as "fairly brisk." Market data released by the Specialty Steel Industry of North America trade group shows that U.S. stainless steel bar consumption is expanding by 5% this year, which would bring the annualized buy for 2004 up to 197,853 net tons from 184,529 tons in 2003.

But rather than being able to enjoy that brisk sales pace, the market is struggling to be able to meet the demand. Buyers say that supply is somewhat tight, leadtimes are stretched out to six weeks and that there is no sign that prices won't continue to escalate. As a purchasing agent in Illinois for a power transmission products maker complains, there is a "lack of bar stock from regional mills that meets promised delivery dates." Even stainless-steel fabricators "are having trouble getting material to produce the items we need," says the buyer for a Minnesota vegetable packaging products firm.

Imports are high—but deliveries can take as long as five months. And, with production problems at the domestic mills, some service center managers are finding that some domestic leadtimes have been extending lately to 8 to 10 weeks. There's also uncertainty in the global stainless steel sector. While production is expected to break records this year, some regions of the world are complaining about second-half oversupply.

Based on anticipated high imports, expected stockpiling by service centers, and probable expanded production by domestic mills, "little price relief is expected over the remainder of this year" in the U.S., says economist John Anton at Global Insight's Washington offices. And, even the buyers polled in November see no immediate slippage in pricing for stainless bar products.

But, with imports holding a 39% market share and the debate over the rate of demand growth next year, some end-use buyers are forecasting a loosening of U.S. market conditions next year. Looking ahead, Anton suggests that "modestly lower input costs, along with rising supply, will allow prices to retreat modestly in 2005, although a substantial portion of recent gains will be retained."

The industry is hoping that Anton is right after what's it's gone through in 2004. Service centers, for example, have been hit hard on pricing, with purchase prices from the mills having risen an average 70% in the past 12 months, but sales prices realized from buyers up only about half that. And buyers have seen transaction prices to end-users increase by more than 34% in the past year.

"Stainless steel is a major purchasing headache due to the fact that the pricing keeps going up," agrees the purchasing manager of a metals and resins fabricator in Alabama. Several buyers point to hot-rolled stainless bar, Grade 304, being sold into the October spot market at an average $2,628/ton (including alloying and scrap surcharges). "Much like the specialty carbon and alloy- steel bar markets," says a steel-bar marketing consultant, "the effect of mill closures in the recent past and the delayed effect of the Section 201 import restraints in 2002 and 2003 have caused a continued upward pressure on prices and supply in 2004."

Richard H. Brown, vice president of Timken Latrobe Steel, explains that "increasing energy and operational costs, along with other key factors, have made it necessary for these price increases." The Latrobe, Pa., subsidiary of Timken Corp.—along with the Talley Metals subsidiary in Hartsville, S.C., of Carpenter Technology's Specialty Alloys Operations in Reading, Pa.; and Universal Stainless & Alloy Products in Bridgeville, Pa.—all boosted stainless-bar prices by yet another 8% for November sales. Dudley J. Merchant, vice president of sales at Universal Stainless, comments: "This price adjustment is needed to offset continuing increases in energy, including sharply higher electric power rates, transportation and manufacturing supply costs."

There are market rumors that European markets and China are taking all the available supply of stainless bars this year.

But, that's close to impossible. First, demand in Europe is healthy but growth pales against the rate evident in the U.S. Second, China hasn't been a factor in the world stainless-steel market since late spring when that country's government froze credit and imposed numerous economic programs to slow overheated internal growth. Atop all that, stainless consumption is below forecast in South America and China, yet production is growing well ahead of world demand.

Analysts note that four markets drive stainless-steel demand: autos, construction, food services, and machinery, with the biggest two being machinery and motor vehicles. Looking ahead, some analysts believe U.S. stainless bar demand will grow by another 5% as business investment improves heavy-machinery production enough to offset any slippage in automotive and light-truck production. However, more than one analyst sees demand growth weaker than this year, describing as fair domestic stainless-steel consumption in the second half.

Here's why: The rise in oil prices is causing a downward revision in the long-term light-vehicle production forecast. Annual production is between 3% and 4% lower than originally projected. "Instead of rising slowly through to 2009, production has hit a shallow trough this year," says Anton, "and should hold at a slightly improved level through 2007." Still, such other end markets as off-road vehicles and big-rig trucks are faring better than light vehicles. Also, nonresidential construction finally is recovering from three years of weakness, and will rise even faster in 2005. So, while residential construction is likely to weaken mildly next year, Anton believes the fall won't be deep enough to cause a significant problem for stainless bar demand.

"Still, the strongest market for stainless bar—and most other production-grade metals—is machinery," Anton continues. "That's because business investment is rebounding well from the manufacturing recession of recent years. Above-trend growth should continue through 2005 as companies make up for lost time."