Specialty steel producers have been expecting buyers to re-enter the market for stainless steels in early 2008, but buying continues on an as-needed basis. The stainless-using manufacturing sector has been contracting so there have been lighter shipments of stainless steel lately in the U.S., Europe and Asia. Atop that, nickel prices increased by more than 60% in 2007 from 2006, boosting stainless steel transaction prices by better than 40%, which has kept many North American buyers from making any commitments, fearing they will be stuck with overpriced stainless steel in a recession.

"The stainless steel market has been very weak for some time," writes Michael Gambardella at J.P. Morgan Securities in New York. "Buyers have held off purchasing as they wait for falling nickel prices to result in lower stainless prices." That hasn't happened, though, since nickel prices may have slipped by almost 50% since last May but monthly stainless prices aren't quite 25% lower.

Some analysts believe stainless steel prices have likely bottomed as nickel and ferrochrome surcharges are expected to rise shortly. That's evident as several stainless mills are pushing to boost sales prices up again in April and May even though demand for bellwether stainless steel sheet "has been only fair in recent weeks," notes the latest market report from MEPS (International), "with buyers increasingly concerned about the manufacturing economy." And that fits with the latest Purchasing Business Conditions Survey, which shows that less than a third of the steel buyers polled are planning to increase purchasing in the near future.

The weak dollar has made the U.S. an unattractive destination for foreign-made steel so imports of stainless sheet and strip dropped 19% in 2007. Analyst David Lipschitz at Merrill Lynch & Co. points out that overall fourth-quarter stainless steel imports dropped by more than 22% from the same months of 2006. He expects weak imports to continue in 2008. Yet, the market is so weak that even with service center inventories 9% lower than at the start of last year, recent delivery leadtimes have shrunk to about five weeks.

That's because service centers may have bought this specialty metal in the first two months of 2008 but buyers at end-use firms generally sat on their wallets—even though prices averaged $2.08/lb for Type 304, cold-rolled sheet, down from the $2.44/lb average for all of 2007.

According to Gambardella, nickel and ferrochrome are surcharge-input costs in the pricing of stainless steel which typically feed through on a 60-day lag. So, based on the recent monthly increases in prices of ferrochrome (up 8%) and nickel on the London Metals Exchange (up 9%), the market analyst expects stainless steel prices to rebound in March or April. But, it's still questionable whether this attempt by U.S. stainless producers to boost surcharges for alloying metals by 11-15¢/lb will work. Already in doubt are some market assumptions that the announced higher surcharges stimulated stainless buying in February by service centers attempting to book orders ahead of the price increases.

Sheet purchasing has crashed. Total stainless steel demand dropped by almost 7.5% to 3.12 million tons in 2007, triggered by a 12% collapse in end-use buying of sheet mill products, according to available industry data. Sheet trends are important because they make up 72% of all stainless steel use. A new report by GFMS Metals Consulting agrees that "a number of factors—especially slowing economic growth—could undermine the domestic stainless steel market and affect production as this year progresses." The London-based analysts also suggest that continued slippage in demand "could prove to be a trigger for a downward correction in stainless sheet prices."

Lipschitz at Merrill Lynch also projects "continued weakness in the commodity stainless steel business." He has lowered his 2008 business and profit expectations for stainless steel suppliers "based on a delayed restocking in the stainless steel market due to recessionary concerns as well as the continued overhang from the delayed delivery date of the Boeing 787." (Although the Dreamliner has received substantial publicity for its use of composite materials in structural and finish applications, the wide-body jetliner also will use substantial amounts of titanium and stainless steel.)

Recent stainless steel inventories have been at their lowest levels since the end of 1999, and are down more than 40% from a year ago. Lipschitz says "service centers have been delaying orders with a recession in sight," which is making planning difficult for the mills. Producers "raised production somewhat on the back of slightly higher orders received in October and November," the analyst says, which has resulted in a supply overhang. So, the U.S. mills now "are waiting to receive solid order books over a prolonged period before hiking output," he adds.

Demand for steel plate, shapes and tubulars has been strong from the energy market—especially the oil and gas and power generation segments. However, flat-rolled purchasing has been significantly lower lately from such market segments as automobile and light truck, heavy truck and truck trailer, aerospace, machinery and other industrial products, consumer goods and medical components. Sheet and strip averages 72% of the total stainless steel marketplace.

Management at Carpenter Technology in Wyomissing, Pa., expects continued strength in energy market sales and resumption of sales growth in the aerospace market in 2008 to reflect the scheduled increase in projected commercial jet deliveries, according to a report to the Securities and Exchange Commission.

However, against the background of slowing economic growth, GFMS Metals Consulting agrees that "recovery in stainless steel demand has yet to materialize" so far this year and is pessimistic about purchasing growth anytime in 2008. Even Carpenter, a stainless steel producing company, adds in its SEC filing that shipments to end-use markets outside energy and aerospace "are expected to remain depressed."

Analysts at Natixis Commodity Markets believe the weakness in the stainless steel markets worldwide will remain in effect throughout the first quarter of the year. The seasonal slippage in demand in China has been exacerbated by severe winter snowstorms that have reduced metalworking and disrupted logistics in numerous provinces. And, there has been worldwide substitution pressure that has boosted demand for low-nickel 200 series material, which was caused by inflated 300 and 400 series prices triggered by the record-high level of nickel prices.

According to the International Stainless Steel Forum, the recent global weakness in stainless steel demand has translated into increased world inventories of stainless even with the fourth-quarter cutbacks in production in China, South Korea, Japan, Western Europe and North America. European metalworking companies are reducing production and even the most optimistic stainless analysts don't see the global stainless market likely to rebound until much later this year.