High costs for raw materials have boosted some stainless steel transaction prices by 40% from five years ago; in fact, on average, they are at the highest levels since 1989-1990. This recent spate of sustained elevated prices for stainless steel has caused some buyers to reassess their relationships with suppliers. And, their attitudes have been buttressed by delayed deliveries of the expensive specialty steel products.

Many large steel-using companies in the industrial Midwest try to negotiate long-term contracts as protection against market volatility—or they arrange quarterly buying-needs reviews or try to limit the amount bought in the pricing-unpredictable spot market. Now, Purchasing surveys and conversations with smaller-volume stainless steel buyers on both coasts show they also are purchasing more than usual as a pricing hedge or shopping around for new supplies and/or new suppliers.

But it isn't as easy as it sounds, according to buyers. That's because few steelmakers have been increasing stainless production to meet higher demand. Also, foreign steelmakers that once served North America have been looking elsewhere for sales opportunities over the past 18 months or so. And, even so-called full-service metals distribution centers look at stainless as a specialty item; in fact, service center shipments of stainless steel are just 4% of total steel shipments. But, if buyers chose first-stage processors as sources, they can pay as much as three times what the stainless products would cost from service centers.

"We are doing what we can to maintain equilibrium in a marketplace beset lately with volatile pricing and uncertain deliveries," says Mike Kartsonis, the president of Dynamic Fabrication, a precision machining firm in Santa Ana, Calif.

Mike Kartsonis, president of Dynamic Fabrications, studies some of the company’s stainless steel supply.

Stainless steel product costs are nearly four times more expensive than carbon steels. Stainless steel prices currently are being buoyed in large part by tightness on the supply side, notably from a number of unscheduled short-term production outages, and not solely by strong demand. Operating rates at the major U.S. mills are close to 100% because domestic order books are full through the third quarter, due to the fact that annualized demand has risen by 9% vs. 2005 while imports are sliding for the second consecutive year.

Some analysts and most buyers believe the recent 6% run-up in base prices of stainless steel sheet, strip, continuous-mill-plate products and tubulars—and the 21% increase in raw materials' surcharges to 85¢/lb—have been overzealous and may be due for a sharp midsummer correction because the costs of alloying metals are sliding. But that hasn't stopped some stainless mills from increasing prices yet again. Talley Metals, a subsidiary of Carpenter Technology Corp. which sells stainless steel bar products, wants to increase base prices by 5¢/lb in July. Talley also plans to join other firms adding a surcharge for the copper used to make some specialty alloy products.

Unlike their corporate procurement cousins who source carbon steel mills products in tons, stainless steel buyers usually purchase the higher-cost materials in pounds or square feet. Hence, the specialty buyers rarely have the heft to push for lower prices. And since steel alloyed with nickel, molybdenum, chromium and other high-cost materials are engineered into final products, buyers are unlikely to attempt any large-scale material substitutions.

Buyers are perplexed by the recent MEPS (International) Ltd. short-term forecast for stainless steel transaction prices projecting accelerated increases: "Nickel prices will be the major factor behind the increases, as the massive jumps registered in the spring will have an effect on the stainless steel surcharges this summer," says MEPS. "So, price increases announced by the producers are likely to be accepted because material availability is restricted and delivery leadtimes extend to the fourth quarter."

At a recent investment conference, Universal Stainless & Alloy Products president Mac McAninch noted that "the pricing strategy of the stainless mills has been an extremely difficult task to achieve." He asserted that "without the surcharges, chaos would have occurred in the marketplace while we tried to develop a fair and transparent pricing program." No surprise the buyers reject this view as a self-serving pity party.

"Developing economical bills of materials for my customers is what drives me crazy," says Dynamic Fabrication's Kartsonis, discussing the listing and costs of all raw materials and intermediate processed parts needed to manufacture final products. "Costs and availability from the mills are real problems," he says, for his privately held firm.

Lee Industries buys around $4 million worth of stainless steel product annually to make stainless steel processing vessels in various industries. Byron says the company's biggest buy of stainless steel is grades 304 and 316, plain and L series, used to make tanks, processors, mixers and blenders.

Federal Reserve Board surveys of manufacturers through May have found little evidence that high material costs are leaking more broadly into the manufacturing economy. However, both Kartsonis and Byron expect that to change in coming weeks.

"We have raised our selling prices in recent months, or plan to do so shortly," due to rising commodity costs, says Kartsonis. "We used to be able to estimate costs of the end product; we can't do that anymore. Tension is being generated in the marketplace by suppliers' attitudes on pricing. This will continue to get worse. There are all kinds of costs that have to be passed along to customers—raw materials costs, environmental costs, health and safety costs and freight costs."

Byron notes that stainless Type 304 and Type 316 cold-rolled sheet prices he uses have risen 48% since a temporary discount period at the end of 2001. "In fact, there have been steady increases in transaction prices since late 2003—when surcharges began to take hold in force," he says. "There was only a short period when the market was stable since then and, somehow, my company will have to make up for the high costs of stainless steel."

Both buyers are plagued with an inability to gauge long-term stainless pricing: "Prices for stainless steel used to be good for 90 days; two years ago, that dropped to guaranteed prices for 30 days; a year ago, the price became okay for seven days," says Kartsonis. "Some specialty grades now are being priced at time of delivery and that is making it difficult to quote fabrication prices. Each specialty material—stainless steel, high-grade aluminum and even certain specialty carbon steel—has its own supply, delivery and pricing issues."

So, buyers such as him and Byron are changing buying patterns. The rising world price of nickel on futures markets—from almost $6/lb at the end of 2005 to almost $10 in May—prompted buyers to place extra orders for stainless steel. "We now are trying to keep as much metal as possible on hand," says Byron. "In May, we bought 14,000 lb of stainless steel welding wire before an 18% price hike on June 1. The distributor will hold one-third, Lee will hold one-third and the mill will hold one-third."

Usually, job shops buy for the job not for stock. We used to buy for the order," says Kartsonis. "However, we now have had to stockpile some materials." His firm is stocking up on coiled round bar because, while his customers don't order 1,000 bolts a month, the firm can't afford to buy a coil of round bar—or be sure it will arrive on time—whenever it gets an order for bolts.

Dynamic Fabrication's steel buyer, Kathy Shanner, buys as many as 100 different types of stainless steel for the firm's numerous fabrication applications. "And another big problem," she says, "is the backup in deliveries." She says regional West Coast leadtimes have expanded to 12 weeks from mills for benchmark sheet grades of nickel-chromium Type 304 used extensively in the chemical, refrigeration, paper and food industries. "Lately, it appears that everybody—mills and service centers—is out of 304 material, so we've ended up hunting for stainless back East."

Molybdenum-bearing Type 316 bars are almost impossible to find, with mill leadtimes out near 22 weeks. Leadtimes also are extended greatly for titanium-bearing Type 321 used to make parts for chemical and industrial equipment and tantalum-containing Type 347 used to make products that must withstand high temperatures. Also tough to get quickly are the aerospace 17-7 series with aluminum content and the Alloy 52 and Alloy 600 high-nickel alloys used in chemical, nuclear, aerospace and other applications requiring high strength and good corrosion resistance at high temperatures.

Shanner says that with commercial aviation manufacture expanding again, stainless steel and 7000 series, high-strength, aerospace-alloy aluminum have joined titanium as "real bears for availability." She says that "when everybody is out, everybody is out; everybody is waiting and everybody ends up hunting product in the Midwest—and it's not always there, either."

Some shortages are developing for bars because of strong demand and low inventories. Leadtimes from domestic mills in May were reported out to August and European mills were quoting November or December deliveries to U.S. customers. That's why Byron has found problems getting mill guarantees of quickly deliverable stainless steel to meet corporate needs of repeat business with customers.

Byron agrees that obtaining materials from mills—due to product allocations and plant shutdowns to get capacity utilization rates higher—have made mill sourcing very difficult. And, it's not over yet; North American Stainless, for example, will be down for maintenance for most of August. Byron does hold regular meetings with his Top 20 suppliers and his company does conduct regular quality assurance audits. And he always tried to keep inventory around three months of supply, but that is expanding. "We tried to get into JIT (just-in-time) but it was a nightmare caused by the uncertainty of getting material when needed." He says that's because most Lee Industry bookings are one-time special-orders.

So, Byron buys most stainless steel flats and round bar products through annual contracts with service centers. For pipe and tube, he shops around among service centers and fabricators but mostly buys from service centers. Byron visited the domestic stainless steel plants but Lee isn't big enough per order to be a regular mill buyer and he "has history and is more comfortable with service centers." Besides, "mill deliveries have become terrible, with sheet products moving out from eight weeks for delivery to 16-20 weeks." He says that JIT "gets all messed up when deliveries get stretched out like that."