With both global prices and sales of steel steaming away over the last twelve months, the sometimes overlooked stainless market has been quietly contracting. The market contracted by 2.9% in terms of production last year to 27.6 million tons according to the International Stainless Forum. But the reasons for the decline – a sharp fall in nickel prices, appears counter-intuitive to us. We expected the fall in stainless demand in the second half of 2007, due to the rise in nickel prices in the first half of the year, as manufacturers switched from stainless to other products. There is a lag in these situations and production is hit only 6-9 months after the price spike. Western Europe and Africa reported a 13.3% decrease in stainless steel production to 8.7 million tons during 2007 while the Americas reported a 15.2% decrease in production to 2.5 million tons.
Asia, on the other hand, saw stainless steel production rise 6.3% to 16 million tons in 2007. China is now the world’s largest producer. Its production rose 36% to 7.2 million tons. While at the same time, the Chinese government has actively tried to curb exports of semi finished steel products by adjusting the incentives and penalties for exports. The result has been a decrease in exports of semis and an increase in exports of stainless containing components and products.
In Europe, imports of products fabricated in Asia from Asian produced stainless material have surged 11% even though the European market for such products is growing only slowly. These imports are replacing products previously made in Europe to the tune of 750,000 tons per year of stainless steel according to the Steel Business Briefing. At the same time, sales of stainless steel in Europe have slumped and distributors are being urged not to drop prices for fear of a price collapse. In a speech to the Eurometal meeting in Budapest this month (which would have been interpreted as collusion here in the US) Jacques Dham, CEO of ArcelorMittal Distribution called for distributors to focus on adding value rather than dropping price ” funny I thought that’s what distributors had been trying to do for the last 20 years!
Mills in all geographic areas have excess capacity and although they are facing significant raw material cost pressures on the supply side, this excess capacity will weigh on the market in 2008/9 impacting sales prices. The price spikes in nickel in 2006 and again in 2007 saw consumers switch from high nickel content 300 series to 200 and 400 series which contain chrome but little or no nickel.
However the resulting surge in demand for chrome combined with supply disruptions in South Africa due to power outages and in China due to bad weather earlier this year, has resulted in an unprecedented increase in chrome prices. Russian ferro chrome shipments to Japan for the second quarter are reportedly at twice the price of the first quarter partly due to anxiety over supplies following an explosion at Samancor’s South African LC FeCr mine in February but also due to the overall market tightness. We have seen Chinese domestic spot ferro chrome prices surge 50% in just 3 months and spot prices for charge chrome are running at 50% over the contract prices, which themselves were set only 3 months ago. Even so, the Chinese are better placed than most to contain the rising cost of their raw materials, with basic raw material exports reduced due to export taxes the home market has access to sufficient supplies of nickel pig iron to meet 300 series production. Chinese pig iron trades only on the nickel content, the iron comes free making pig iron a very attractive source of both metals in stainless making when iron ore costs have doubled since last year on the spot market. This may explain China’s significant advantage in supplying finished stainless components into the European market, see above.
Will we see stainless prices come off this year? As with steel, the producers are caught between rising raw material costs and weakening demand. The balance lies partly in the speculative money in the commodities markets and partly in the fundamentals of Asian demand. Our take is weakening demand will eventually affect raw material costs and prices will come off but to what extent this will be represented in the base price remains to be seen.