As we continue to republish our highest-rated posts of the year during the holidays, we look back at the February announcement that Allegheny Technologies, Inc., exited the commodity stainless steel business.
Knowing what we now know, and considering that stainless prices have recovered and entered a bull market, you do have to wonder if ATI made the right call. Our Katie Benchina Olsen will continue to cover the latest developments for both ATI and the stainless market in the new year. — Jeff Yoders, editor
For the foreseeable future, Allegheny Technologies, Inc. (ATI) is out of the flat-rolled stainless commodity business as well as the grain-oriented electrical steel (GOES) market.
ATI will be focusing on global markets with high barriers to entry. As we reported last month, ATI is reducing its exposure in commodity products by idling its Midland, Pa., plant, a commodity stainless facility, and its Bagdad GOES production facility in Gilpin Township, Pa.
Earlier this week, ATI reported in its earnings call a net loss of $378 million for 2015 as compared to a net loss of $2.6 million in 2014. ATI’s flat-rolled products business segment is to blame for the staggering losses. Operating losses for flat-rolled products were $242 million for 2015. For this reason, Rich Harshman — ATI’s chairman, president, and CEO — stated that ATI is taking “rightsizing actions” to return the segment to profitability as quickly as possible and “execute our strategy for sustainable long-term profitable growth.”
ATI is “simplifying and streamlining” its flat-rolled operations by focusing on optimizing its Brackenridge, Pa., facility which houses the hot-rolling and processing facility, a $1.2 billion investment. ATI is seeking to better focus its efforts on the products and global markets that require and value the company’s technical and manufacturing capability leadership.
Harshman emphasized that it made no sense to continue to produce products which were not providing positive contribution margins.
“The future restart of the Midland and GOES operations respectively will depend on future business conditions and ATI’s ability to earn an acceptable return on invested capital on products produced at these operations,” he said.
ATI is also committed to reaching a “fair and competitive labor agreement” with the United Steel Workers of America. ATI’s union workers have been locked out since August as the company negotiates a new labor contract for all of its operations.
Harshman said the objective is to have a cost structure and enhanced product mix that enables ATI’s flat-rolled products to be a profitable and more competitive business. ATI expects to return its flat-rolled segment to profitability by the middle of 2016 by focusing on its specialty coil and plate products enabled by the hot-rolling and processing facility. These products are 48-inch-wide, nickel-based alloy sheet; titanium and titanium-alloy products and specialty alloy products; and engineered and precision-rolled strip products.
What market segments are going to be impacted by ATI exiting the commodity stainless market? ATI stated in the earnings call that it would be exiting the automotive exhaust systems market. AK Steel already provides the lion’s share of the stainless exhaust systems market, anyway, which is dominated by 409, the most humble of stainless steels.
Between AK Steel and North American Stainless (NAS), automotive exhaust systems manufacturers will be well-supplied in 2016. Although ATI is exiting exhaust systems applications, they expect growth in automotive, high-temperature applications which use nickel-based alloys and specialty alloys produced at the aforementioned hot-rolling and processing facility in Brackenridge.
ATI will be reducing its presence in food service equipment, construction and mining, as these are applications that utilize commodity stainless steel alloys. ATI met its 2015 bill of materials commitments for commodity stainless steel alloys, but did not quote any bills of materials for 2016 as the base price has eroded too much, and a contributing factor was uncertainty created by the lockout.
Service centers and original equipment manufacturers were forced to lock in base prices for all or part of 2016 with NAS, Outokumpu Coil Americas, and AK Steel, supplemented with some import products that have always been in the US flat-rolled stainless market.
Market Reentry? When? If Ever?
Even if the 304 base price reaches $0.50 per lb., will ATI reenter the commodity market considering the price of nickel? ATI stated in its earnings call the December 2015 base price was around $.45 per lb., making the net 304 price under $0.84 per lb. Even with the January base price increase, the January alloy surcharge makes the net 304 price around $0.82 per lb. Does the $0.50 per pound 304 base price even make sense when surcharges are so low?
Using the February 2016 alloy surcharge, the net price of 304 at ATI’s desired base price of $0.50 per lb. is $0.8321 per lb. That is a stark difference from 2014’s base price of $0.60 per lb. and an average surcharge of $0.78 per lb., making the net price $1.38 per lb.
NAS and Outokumpu Coil Americas appear to be the only American-made choices for nickel-bearing commodity stainless steels. Not only has ATI exited the commodity stainless market, AK Steel has also been limiting its participation in the chrome nickel market.
Imports are drying up, as well, as net prices are now at levels that are below many import mills’ cost of production. With the threat of anti-dumping lawsuits looming last year, traditional import mills into the North American market are steering clear. Combined with service center destocking and last year’s plummeting nickel prices, imports have started to decline. Even when the market improves, don’t count on Midland’s capacity to come back onstream. ATI has made it clear that Brackenridge takes precedence over Midland. The next question is whether ATI can move Midland’s direct-roll anneal and pickle line, which is the commodity workhorse and the 60-inch-wide cold-rolling mill.