Chains on steel

The stainless steel market’s half-year rally continues to be inextricably linked to production trends in Asia. This was the observation of three speakers who delivered presentations as part of the Bureau of International Recycling (BIR) Autumn Round-Table Sessions held in Paris in late October 2014. The presentations were part of the divisional meeting focusing on stainless steel and specialty alloys.

During that session, the recycling and trading company executives said Asia’s influence on the stainless steel scrap market cannot be underestimated, even with signs of strength in the U.S. stainless industry in 2014. Furthermore, going forward, all eyes will continue to be on Asia when it comes to stainless steel.

Bharat Mandloi, managing director of Cronimet Abcom Pte. Ltd., based in Singapore, delivered a presentation focusing on China’s influence on the stainless steel market as well as that of other countries that are part of the Association of Southeast Asian Nations (ASEAN). Cronimet Abcom is Cronimet’s recently acquired Singapore business.

Other session speakers included Tobias Kammer of the trading company KMR Stainless in the Netherlands and André Reinders of the Dubai, United Arab Emirates-based trading firm Nicrinox FZE. Both speakers discussed the state of the stainless steel sector and scrap trade in recent years, the most recent developments in Southeast Asia and the United States and what they expect for 2015.

On all points, the presenters predicted that China and in fact the entire Southeast Asia region would continue to have a growing influence on the global trade of stainless steel scrap, even amidst positive production patterns and demand from mills in the United States and Europe.
 

A strong start in 2014

A fundamental point shared by the speakers was that more than 50 percent of stainless steel production worldwide now occurs in China. Kammer also observed that 2014 was a record year for the stainless steel industry, with crude production output of roughly 44 million metric tons.

However, in his remarks, Reinders offered the distinct statistic that one Chinese mill alone (Tisco) produces more stainless steel than the combined total of all mills in the United States.

Another key point all three speakers observed: China is not very focused on the use of scrap for its stainless production. As evidence of that fact, Kammer added, “Scrap prices from time to time are even lower than the prices for NPI (nickel pig iron) in China.” In contrast, he noted, the large western mills use significant proportions of scrap as a raw material, with recycling ratios of roughly 80 percent.

In light of this key difference, Kammer said his company has kept an eye on the profitability of its stainless steel mill customers in Europe and the U.S. He said many of these mills were able to earn a profit in 2014.

Kammer also said most of the big economies, including those within Western Europe, saw a very good start to the year, which is one reason nickel prices rose as they did during the first half of the year. It also was proof, he added, that demand for stainless products was very healthy early in 2014 and that the mills had full order books throughout the year.

“I think the U.S. had one of the strongest half years in many decades,” Kammer said. It was the first time in recent memory that stainless scrap from Europe had been exported to the U.S.

However, in the second half of the year, many key economies dropped, as witnessed in PMI (Purchasing Managers’ Index) levels and in nickel prices, Kammer said. He noted that large differences in scrap prices around the world in certain periods of the year can be a concern to stainless steel producers. However, he also argued that higher scrap prices could signal stronger order books and the likelihood of mills being able to charge higher prices for their products.
 

Asian supply

Stainless mills also continue to scrutinize the supply picture in Asia. The presenters observed that China exhibits some of lowest scrap utilization ratios of all stainless steel-producing countries at approximately 30 percent or even less, Mandloi said.

Because of this, he added, “As much as [Chinese mills] are important for the production of stainless steel, their relevance to scrap imports or exports has been relatively nonexistent over the last few years.”

Mandloi pointed out that over the last 14 years, Asia’s stainless steel production capacity has increased significantly, which has in turn made the entire region a distinct force driving the stainless steel market on a global basis.

“In excess of 70 percent of stainless steel production in the world is in Asia,” Mandloi said, “and out of that 70 percent, more than 50 percent is China alone.”

He said India’s role in the stainless steel production sector also has been an interesting development, with the country focusing more heavily on the production of 400 and 200 series stainless as opposed to the more widely produced 300 series.

Interestingly, Mandloi said, India’s stainless steel mills, on average, now exhibit some of the highest scrap utilization ratios of all Asian countries.

“India, over the last two years has become the largest stainless steel scrap importer in Asia,” he said. Meanwhile, he noted, there has been a reduction of imported scrap to Korea, Taiwan and Japan.

Another unique aspect of the Indian stainless steel industry, Mandloi said, concerns the type of stainless steel production that is in place there compared with the rest of Asia.

“India somehow has taken on a more strategic leadership on long products and chosen not to go into large-scale, large capacity production on flat products, which are already over capacity,” he said.

Toward this end, Mandloi explained, the country has concentrated more heavily on global marketing, distribution and branding of its long products. As a result, he added, India has been seemingly less affected by the competitive market and overcapacity on the flat product side, much of which has been based in China.
 

Cost factors

The use of nickel ores from Indonesia has been China’s modus operandi for lower cost stainless steel production, at least thus far. But with the export ban on these ores imposed by Indonesia in early 2014, much speculation has persisted about when China’s stockpiles would be depleted, thus changing the cost structure for its mills.

Mandloi said some 80 percent of the nickel ores used by China have in recent years come from Indonesia, another factor that changed stainless steel’s economics.

“China went through the NPI route, reduced their imports of scrap and obviously ramped up their production in a huge way,” he said.

Now, Mandloi continued, the global stainless industry is experiencing another change, with the Indonesian ban still in force while that country installs NPI production capacity within its own borders. He said three new plants are expected to be ready by early 2015.

“We will see a change of NPI being angled into the supply chain and the dynamics of the scrap business as we move into next year,” Mandloi said.

He also discussed the scrap generation picture of the ASEAN region, another major factor affecting stainless steel. He said in excess of 30,000 metric tons per month, most of it new scrap, is now generated by the manufacturing sector within the region, serving as a high-quality and growing source of supply.

The region’s shipping advantages are another market influence, he said. What many don’t understand is that the ease of moving goods throughout the region is one of its little-known secrets. Mandloi said ocean shipment of containers within Asia, among countries such as Korea, Taiwan, India and Japan, offers short transit times and very cheap freight rates.

“It competes extremely well if you compare it to a similar model in Europe where material is moving by rail or barge,” Mandloi said. “Having different countries separated by water and sea actually poses no disadvantages in terms of logistics and logistics costs.”

This logistics situation, Mandloi said, creates an interesting and dynamic spot market business “because we have the ability to deliver material within a week or 10 days.” It also means traders and processors in the region are reluctant to commit long-term. He says Asia’s stainless scrap market is “largely spot-market driven, largely unblended scrap, and the majority of it is new production scrap.”

Mandloi added, “There is a larger reluctance to buy long-distance material, so if the material has to come from Europe or USA, it cannot come at the same value. It has to be at a discount to justify the additional transit risk.”
 

Future outlook

Another key question Mandloi pondered was whether the commodities super-cycle of the last several years has now come to an end. While analysts settle on both sides of this camp, Mandloi says one telling statistic is the Bloomberg Commodity Index, which recently reached its lowest level in five years.

Commodities such as crude oil, coal, iron ore and copper each have declined in value, with some down sharply. These changes may benefit those entities that use commodities for production but hurt those that produce these commodities.

Along with this, Mandloi said, access to finance has also taken a back seat, with many investment banks exiting from the commodities sector completely.

However, on a fundamental basis, Mandloi said, nickel has, by many accounts, a strong supply story moving into 2015.

“We have seen a fair amount of destocking happening,” he said. “Most of the mills, especially in Asia, are running low inventory.” Mandloi added that the financial markets are also at lower levels in terms of support for the sector.

“This could at some point coincide together and create a situation for a reversal,” Mandloi said.

Meanwhile, Kammer said that for 2015, KMR was convinced the Indonesian ore ban would hold and that nickel would become more expensive for China’s stainless steel mills.

“We have seen investments into nickel smelters, but it will be a couple of years before those are in place,” he said. “For sure the Chinese will lose the era of cheap nickel,” Kammer added.

Ultimately, Kammer said, that was a good development. And while nickel’s short-term view is not as optimistic, he added, longer-term improvements could be in store for 2015.

The author is managing editor of Recycling Today Global Edition and can be reached at lmckenna@gie.net.