Increased Stainless Steel Demand May Not Be Enough to Clear Inventory Surplus

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Although stainless steel demand is expected to grow moderately this year, service centers are flush with inventory which is putting pressure on US mills.

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Combined with successive months of declines in nickel prices, service centers are only purchasing what is absolutely necessary. Both domestic mills and Asian mills have robust North American inventories, a stark contrast from a year ago when lead times went beyond the standard 6-8 weeks, causing service centers to seek alternative sources.

Technical Issues Hurting Mills

Another exacerbating factor in last year’s supply was Outokumpu’s technical issues with its cold-rolling mills and a lack of alternative domestic supply led service centers to seek other sources. With lead times extended, the domestic mills were able to pass through several base price increases in 2014.

With higher US base prices and the strength of the US dollar, Asian imports did not subside. Asian producers need other markets for their surplus material as Chinese demand is weak and both Europe and India have taken anti-dumping actions against China.

End market demand is strong for automotive,​ residential​ appliance and food service/food processing equipment. The only market that appears to be suffering is energy which is due to the low price of oil. Stainless demand is decent according to many sources and stainless base prices will remain under pressure.

Inventory Backlog

The North American market​ ​is ​saturated with inventory​ ​so​ lowering the base price will not spur on demand.  Until service centers reduce their inventory backlogs and nickel prices start to improve, service centers will not buy, regardless of price. Service centers need to focus on getting their inventories in check before they resume anything resembling regular buying patterns. ​​Unfortunately, the mills are under pressure to book capacity which oftentimes leads to acts of desperation.​

​​Despite imports and declining nickel prices, Acerinox, corporate parent to North American Stainless, still improved its net results 24% for the first quarter compared to Q1 2015.

Allegheny Technologies’ flat-rolled products segment sales increased 6% in Q1 2015 compared to Q4 ’14, a feat the Pittsburgh-based producer accomplished despite lower raw material charges.

AK Steel’s President and CEO, James L. Wainscott, stated in its Q1 2015 financial results, “Despite the negative effects of imports on AK Steel’s results, the company experienced strong sales in automotive markets and generated positive EBITDA of $57.5 million.”

Outokumpu reported €2 million underlying earnings before interest and taxes; however, Outokumpu Coil Americas’ underlying EBIT deteriorated to €-28 million from €6 million in the previous quarter. Outokumpu also revised its full-year delivery estimate for Coil Americas downward.

Price Outlook

Outokumpu Coil Americas is in the hot seat to turn that around as all of the segment’s technical issues have been resolved.  Outokumpu’s first quarter guidance published April 23rd, announced the Alabama mill’s production volumes would be similar to 2014 at 540,000 tons as opposed to the anticipated 620,000 tons. Stating Asian imports, the technical issues last year and lower order intake, Outokumpu stated that Coil Americas business continues to disappoint.​
My opinion is that there will be further deterioration of the base price, which will not make the mills any busier and devalue service center inventories, weakening the overall supply chain. Mills and service centers will exact their pound of flesh when the market improves, continuing the antagonistic relationship between producers and consumers of stainless steel.

Domestic mills should stop the madness and remain staunch in their base pricing. Unfortunately, if history repeats itself, one of the mills will feel the heat and succumb to the need for short-term success and, therein, further weaken the North American market.

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