Modest Recovery

After starting the year solidly, stainless steel production collapsed during the latter part of 2007. The catalyst was a significant drop in the LME (London Metal Exchange) nickel price. MEPS, a steel consulting group based in the United Kingdom, estimates 2007’s global output at 27.5 million metric tons, a 2.5 percent decrease from the figure for the previous 12 months. Substantial cuts were made in the final two quarters of the year. The decline affected all regions of the world, with mill order books all registering pronounced declines. At the six-month point, crude steel output was 1.33 million metric tons higher than the figure for the same period in 2006. MEPS estimates that, year on year, a reduction of 2.1 million metric tons took place in the last six months of 2007.

E.U. supply in the third quarter of 2007 declined by more than 30 percent compared to the same period in 2006, according to MEPS. Supplies fell by larger percentages in the United States and South Korea. The decline was slightly less pronounced in Japan, which posted a 20 percent reduction. Even the Chinese joined in the action. Production curbs continued into the final trimester.

MEPS says it believes the inventory depletion phase will come to an end in the first quarter of 2008, adding that mill delivery lead times are starting to extend from the extremely short offers being made just a few months ago. MEPS says it expects customers to reorder more in line with real requirements.

The group forecasts that global stainless steel output will rise to 29 million metric tons in 2008. This is associated with an increase of more than 5 percent compared to the anticipated outturn in 2007 and 3.5 percent above 2006’s previous record production.

World average stainless transaction prices for all flat products declined in January 2008. Asian values weakened further as distributors continued their attempts to offload stock bought at previously higher prices. This resulted in poor activity for Asian mills. Exports from East to West were

Prices in Europe slipped as increases in basis values only partly offset lower alloy surcharges. E.U. demand for coils was patchy, as customers were cautious about rebuilding their inventories. North American figures eased upward and were significantly above those in the rest of the world in January. This was attributed to alloy surcharge rises. Concerns about the economy and the potential threat from imports kept basis numbers in check. The anti-dumping suit from the E.U. caused Asian producers to concentrate on exports to the U.S. market. World demand for plate was much stronger than for coil products.

World average stainless selling values are forecast to move up through to the middle of 2008. Gaps in distributor inventories in the West are expected to be replenished. There is apprehension regarding the economic outlook for 2008, and a U.S. recession has not been ruled out. Consequently, stock building is likely to be limited. However, U.S. stainless demand should remain strong through to April. The summer is predicted to bring uncertainty, with some downward pressure on basis figures expected during the third quarter.

Transaction values in Asia should move up slowly through to the second quarter as output curbs begin to take effect. Market conditions should be better in the second quarter in light of seasonally higher demand. Exports to the West are also predicted to increase. However, demand increases in Asia could be tempered by worries about the Chinese market after the Olympic Games.

Gaps in distributor inventories in Europe are expected to be replenished, increasing demand on the mills. This should enable E.U. producers to push through further basis price advances. The alloy surcharge system will be simplified soon when Acerinox, the Spanish producer, introduces a system for calculating alloy surcharges similar to that undertaken by the three other major mills. This should bring more consistent pricing to the European market.

The revival in the world stainless steel market should spur nickel prices to move higher in the short term. However, weaker demand for primary nickel from China is forecast for 2008. This, coupled with a difficult economic climate in the West, is likely to lead to nickel cash values on the LME staying below the $30,000-per-metric-ton mark. New capacity, due on stream later this year, could force nickel prices lower during the final two quarters of the year. As such, E.U. and U.S. alloy surcharges for austenitic grades are forecast to begin falling towards the end of the second quarter—despite increased chrome, molybdenum and scrap costs. Stainless transaction values also, therefore, are predicted to fall during this period.

Weaker demand and reduced nickel costs will result in world stainless transaction figures remaining significantly below previous highs. This is expected to be the case for austenitic grades in all regions. Overall demand from end users is improving and should remain firm for the next few months. However, new projects could be jeopardised by financial constraints and may lead to reduced consumption later in the year.

The rise in stainless prices in the early part of 2008 is expected to be erased during the second half of this year. Oversupply in China is likely to cause exports to increase, once again. Reduced demand, as a result of a weaker world economy, could also add further negative pressure. Consequently, average values this year are forecast to be lower than those in 2007. North America is predicted to record the largest falls. The 2008 average cold-rolled coil transaction figure for type 304 is forecast to decline year on year by more than 17 percent. The MEPS world price is predicted to decrease by approximately 13 percent.

With the volatile markets for stainless steel, the potential for significant substitution to other, less-expensive materials is a concern that has been expressed during the last several years. However, MEPS notes that most of the substitution for high-value stainless steel has already taken place or is under way. Most of these changes were done in response to the sky high nickel prices seen last year. Although there is still the possibility for some further substitution, this is not likely to impact the stainless market significantly going forward as it has in the past.

Another factor, yet to be determined, is the question of any impact that new facilities will have on the stainless steel market. MEPS notes that the impact on the market for the new start ups is still unknown at this time. Further, China already has an overcapacity of stainless steel producers. If this continues, it could lead to some smaller, less-efficient facilities closing.

Although the impact of new capacity will undoubtedly play a role in the stainless steel market going forward, the role of hedge funds and investment houses, which exacerbated the stainless steel and nickel markets during the past several years, will be less prevalent. Such speculators still are playing a large role in the nickel market, which was more evident in 2007 when nickel prices climbed above $50,000 per metric ton.

Finally, while nickel-bearing grades continue to be in demand, ferritic and duplex materials are showing improved growth potential. The energy industry is expected to continue to be a strong end market this year. Additionally, most steel-consuming sectors are showing growth, though it is slower than it has been during the past several years. One area where the slowdown will be most acute is in the residential construction market, which, MEPS writes, is likely to continue at a low level of activity.

The author is senior and Internet editor of Recycling Today and can be reached at dsandoval@gie.net.