A Little Tarnished

Producers of stainless steel and the scrap brokers and processors who supply them, as with most other metals, have been part of a sudden downturn that is reflected in statistics summarizing industry activity.

Nationally, America’s end markets consumed some 40 percent less stainless steel in February of 2009 compared to the same month in 2008. With the automotive and construction sectors being two of the largest markets for stainless steel, those numbers reflect the downturn in those two industries.

Globally, the fourth quarter of 2008 brought similar tidings to the industry. The International Stainless Steel Forum (ISSF) in its 2008 review summarizes, "Beyond the normal seasonal factors of our industry, 2008 [had this] pattern: excellent first half, extremely depressed second half."

Looking at quarterly slices of 2008 and 2007 provides a clear snapshot of how suddenly the production of stainless steel and the demand for raw materials needed to make it changed in late 2008.

In the fourth quarter of 2007, the world produced more than 6.9 million metric tons of stainless steel, with Asia churning out nearly 4 million metric tons of that, according to the Brussels-based ISSF.

Production in the third quarter of 2008 was more tepid, but still respectable at 6.3 million metric tons globally and more than 3.7 million metric tons of stainless steel made in Asia.

But the figures for the fourth quarter of 2008 demonstrate the dramatic drop off. In that three-month slice, global production sank to 4.8 million metric tons, with Asia producing less than 3 million metric tons.

In North and South America, the fourth quarter 2008 drop-off was even steeper, with production declining nearly 40 percent compared to the fourth quarter of 2007.

"Due to overstocks, reduction of excess inventories bought at inflated prices, complete stops of purchases from distributors and some end users, in a matter of weeks we moved from a bright future to a gloomy environment," comments the ISSF in the write-up accompanying its numerical summary.

"The figures for the final quarter [of 2008] showed the full impact of the world economic crisis over the stainless steel industry," continues the ISSF write-up. "Production in the fourth quarter was down 30 percent to 4.8 million metric tons, the lowest quarterly production figure since the second quarter of 2004."

The Specialty Steel Industry of North America (SSINA), based in Washington, D.C., reaches back further for a statistical comparison in the United States. "The close of 2008 was marked with the lowest consumption of total stainless steel products since 1992," the trade group representing stainless steel and specialty alloys producers comments in its 2008 summary.

The impact was felt at the scrap trader level as well. "Intrinsic values for high-temp complex alloys are 50 to 60 percent of the value of a year ago," says Robert Rappaport of GreenMetal Traders LLC, Worcester, Mass.

"The larger issue is mill demand, or lack of demand, rather than intrinsic values," says Rappaport, "particularly in regard to stainless steel demand, which is consumer-driven."

As with many widely traded metals, after the sudden decline in manufacturing output in the fall of 2008, attention to inventory levels increased.

The first four months of 2009 were marked by a steady increase in nickel inventories registered through the London Metal Exchange (LME). The LME tracks its nickel inventory daily.

A look at inventories (known as "stocks" in LME terminology) at several points in 2009 indicates that the nickel supply inventoried may have peaked in late April, after steadily running up the previous four months. The figures for select dates in 2009, in metric tons:

The LME inventory figure is one of several that draws a picture of an industry sector that suffered a shock to the system in the fall of 2008, spent several months continuing to suffer, and then may finally have bottomed out in mid-spring of 2009.

"It does appear that the panic of the fourth quarter of 2008, going into January and February of 2009, has ended," says Rappaport. "While prices and values are lower, business is being conducted at this current level."

Pricing and demand for some high-temp alloys and other specialty metals are tied to the fortunes of the aerospace industry, which have been mixed in recent financial quarters.

"While Boeing and Airbus have good backlogs (Boeing’s is approximately 3,000 planes through 2015), there have been significant cancellations of new orders and push-outs in 2009," says Rappaport. "This obviously affects the engine manufacturers, fabricators and sub-contractors," he adds.

Additionally, Rappaport notes that some of the cancellations and holds have been for larger, materials-intensive airplanes such as the Boeing 787 and Airbus A380.

As an industry operating globally at roughly 70 percent the pace it was at in late 2007, the stainless steel sector can hardly be described as sunny.

Even as of late May, some factors still point to trouble ahead, such as South Korean steelmaker Posco announcing that it was cutting its stainless steel prices by 19 percent, in part in response to "falling prices of imported products," according to the company.

Metals producers in North America are also decrying imports, with a group known as the Stainless Steel Tube Trade Advancement Committee (SSTTAC) pointing toward imports of stainless steel pipe and tube that it says have shown "substantial growth in early 2009 over 2008."

According to David A. Hartquist, the SSTTAC’s legal counsel, "Despite the substantial economic downturn globally and in the United States, imports from China increased almost 20 percent in the first two months of 2009 compared to the same period in 2008. China remains by far the largest foreign supplier of the material produced by our member companies."

From a scrap trader’s viewpoint, Rappaport says the demand from China for scrap feedstock is noticeable. "The Asia-Pacific market represents about 30 percent [of the global market], and demand looks to be stronger than from the United States and European markets," he says.

Overall, says Rappaport, "markets are weak," and finding scrap to even fill the fewer number of orders can be difficult. "Nickel-alloy scrap is in short supply as dealers move this regularly." He says he does not see rampant speculation in stainless alloy scrap. "There are dealers that are holding large quantities of titanium and fewer dealers holding high-nickel-bearing scrap."

Rappaport, asked if he sees any trustworthy forecasts for where specialty metals are heading in the rest of 2009, replies, "The short answer is no."