Monthly Stainless Steel Briefing
February 2012
2012 - Year of Industry Consolidation
The (since a long time) expected further consolidation of the European stainless steel flat industry has started this January when Outokumpu and ThyssenKrupp have reached an agreement about a takeover of Inoxum by the Finnish stainless steel producer. But it will still take some time before the new combined player becomes reality – Outokumpu expects that the deal will be completed until the end of this year. Particularly, the EU anti-trust authorities have to be convinced before.
The (since a long time) expected further consolidation of the European stainless steel flat industry has started this January when Outokumpu and ThyssenKrupp have reached an agreement about a takeover of Inoxum by the Finnish stainless steel producer. But it will still take some time before the new combined player becomes reality – Outokumpu expects that the deal will be completed until the end of this year. Particularly, the EU anti-trust authorities have to be convinced before.
The market environment has become somewhat better for the stainless steel industry in recent weeks. Increasing raw material prices and attempts to lift base prices have set the stage for an up-stocking in some European markets. This will also help to improve profitability of the stainless steel mills in the first half of this year. Nevertheless, base prices have increased in first two months of this year but not as much as expected a few weeks ago. The strong price competition in the European market after some difficult months seems to restrict base price increase options at the moment. The market situation is also completely different between Germany and Italy for example. Whilst the latest economic indicators even show that there is no crisis at all (vice versa it even seems that Germany could be on the way back to the next boom phase soon), the Southern European markets remained depressed.
European ex-stock market prices have already been increased in January 2012 – price increases have been driven by stronger market activity (distributors in Europe have lifted prices by ~50 € in January to ~2,730 € per t (304, 2 mm CR Sheet), amid more or less unchanged alloy surcharges (Nirosta: from 1,347 € in December 2011 to 1,443 € in January 2012). From February on, surcharges will climb substantially – but base prices will most likely grow only marginally (alloy surcharges in February: + 145 €, other price components: only around +20 €). Market prices (304, Sheet) will remain most likely below the 3,000 € mark in Q1/12. This will lead to better profit situation of the European mills – but not to a return of rosy pre-crisis days.
The European market is currently becoming more attractive for suppliers from China and other Asian countries again. Prices differences of around 300 € and more (at a further growing gap) will invite them to strengthen their supply efforts to the European market. It is expected that the Chinese stainless steel market will grow slower this year than in previous years – thus, the big mills there will more focus on markets abroad. The bad news is: European mills cannot expand base prices as much as it might be needed to return to healthy profit territory. The good news is: the market mechanisms will work – especially Outokumpu/Inoxum could prove that their strong position will not hamper the market.
After de-stocking in most of 2011, stocks will be replenished in the supply chain in HY1/12 – especially the pipeline in the flat product market is comparatively empty. Thus, buyers plan to refill their stocks in the first months of this year – even in Italy, a moderate up-stocking is very much likely. In Germany, stock levels have dropped to a stock reach of 50-55 days in the meantime (cold rolled flat). Due to the still uncertain business environment, it is however expected that European buyers will remain cautious. Thus, it is very much likely that the up-stocking activity will only be of temporary nature and will end before the summer. In the case of stagnant or falling nickel prices, a de-stocking phase in the second half of this year is likely.
European stainless steel crude steel production grew in 2011 by only 1% compared to the previous year. Particularly, December production was extremely weak (less than 500 kt after almost 700 kt in November). In total, production fell by around 600,000 t from HY1 to HY2/2011, and reached only around 3.4 million t in HY2/11 after over 4 million t in the previous quarter. The industry hopes however for two strong quarters in 2012 due to expected up-stocking. It is assumed that reported expanded lead times in early 2012 are partially results of December production cuts at mills and only to a certain extent caused by the improved market conditions.
The graph below illustrates that supply and demand are not always perfectly synchronised. In principle, demand is more stable than supply (except the market collapse in HY2/08). European mills plan with an improved demand in Q1/12 – but will not expand supply substantially in the next months in order to further stabilise market prices. This leads to longer lead times (at the moment up to 2 months) but also improves the supply opportunities for other market participants (stockholders, importers) – in the case they can supply faster.
Capacity situation: the graph on the following page supports the thesis that consolidation is necessary in Europe. Even with a reduced capacity (reduction of shifts), the European stainless steel industry was not able to return to pre-crisis utilisation levels since 2009. It has to be mentioned that the graph includes long product capacities as well – the real capacity utilisation level is even somewhat below the shown level (long product mills are above average). Even in the improved fourth quarter 2011, the European mills remained at a capacity utilisation of only 65%. Only in three quarters since 2008, the utilisation has been above the 70% line (quarterly average 2011: 67%). Pre-crisis utilisation levels will remain out of reach in a saturated market. The planned closure of two meltshops in Germany until 2016 will substantially improve the capacity situation in the industry to a sustainable level of way above 80% utilisation.
