Demand versus supply: stainless steel demand will continue to grow moderately in the next months – driven by stable demand from end users and increasing demand from stockholders. It is expected that de-stocking will come to an end in Q1/12. In the case, Europe can avoid a recession – flat product re-stocking is very much likely in Q2 in order to re-fill the supply chain. Stock levels for cold rolled sheet are in Germany already low (stock reach less than 55 days). Thus, re-stocking will become likely soon in Germany. But, mills are planning to keep production at low levels set the stage for base price hikes. However, the situation is not homogeneous throughout Europe as the demand development in Spain and France are rather stagnant and Italy and the U.K. could even be negative.

Markets outside Europe: against earlier expectations, the surprisingly strong US market (+15-20% in 2011) continues to outperform Europe at the beginning of 2012. On the other hand, China and other Asian countries showed slower growth at the end of 2011. All in all, it is expected that a 5-6% market growth outside Europe remains likely for 2012, whilst Europe’s real demand will grow by only 2% in a ‘best case’ scenario.

Production: stainless steel production by European mills has reached a level of 7.4 million tonnes in 2011 (equal to 2010). Also in most other countries - exceptions have been Japan and Taiwan – 2011 production soared last year. All in all, global supply grew by 3% to around 35.3 million t. Most of the growth came again from China as shown in the diagram below.
 

Demand versus supply: the graph illustrates the ongoing de-stocking in most part of the world. Demand is higher than demand in Q2 to Q4 this year. This has particularly a negative impact on mill activity after the bullish first quarter this year. The current low nickel price does not invite to re-stock at the moment. There is a high risk that prices could fall deeper before the price turning point will be reached. Thus, distributors for stainless steel commodities will remain hesitant – at least until the end of this year. Moreover, the fourth quarter was always a period of de-stocking. This will not change in 2011.

The US stainless steel market was the positive surprise this year. Whilst other markets such as Europe and Other Asia (Japan, South Korea, Taiwan) suffered from little dynamics in the second half of this year, reported shipments of U.S. suppliers into the domestic market grew by around 30% in the first nine months of this year...and it seems that this momentum will continue in the first half of 2012.

Stainless steel production world-wide was only 300,000 t below the previous quarter in Q2/11. In Q3, mainly the European mills suffered from low capacity utilisation levels, whilst China, India and South Korea continued to produce on Q2 levels and above.

Stocks: the up-stocking phase for flat products (sheet, plate) ended in the first quarter in Europe. Due to falling Ni prices since then, stock reach for cold rolled commodities dropped to ~60 days recently. At the beginning of the year, the stock reach was still at 70 days. All in all, this drop is less strong than expected because sales from stocks have slowed as well. It seems however that there is a minor risk that buyers could be without material soon. As long as the market situation is not changing completely, buyers will remain hesitant with new orders for stocks. The supply chain is still not so empty that buyers will change this policy without reason. A reason for a change in this case has to come from the Ni market. Q1/12 would be the right time for such a stock replenishment signal. The situation in the US market is completely different. Buyers had to temporary up-stock in the mid of the year, when it became obvious that the market will develop better than expected.

Mills: European mills have reduced production levels in Q3/11 to a level of 60-70% of capacity to keep supply and demand synchronized. It is expected that Q4/11 will not be much better than the previous quarter. Order intake from distributors and end users remained unchanged on a low level in recent weeks. Mills speculate in a certain improvement in the course of Q1 due to a certain refilling of stocks.

 

Real demand will reach pre-crisis levels until the end of this year in Europe and America. The high growth rate in the US is explainable with the fact that the market there seems to be still in a recovery phase at a time where Europe’s dynamics is already slowing. But the U.S. market showed also some (surprising) strong developments in a few market segments including process equipment, oil/gas industry, food processing and transportation. At the end of 2011, both markets will have reached a level around 95% of the pre-crisis level. In the case of both countries it will take until 2013 before the 2008 level will be reached again. All other world-regions have been on pre-crisis levels (or above) since 2010.

Stocks: the up-stocking phase for flat products (sheet, plate) ended in the first quarter in Europe. Since the second quarter the market is in a (slow) de-stocking phase. As usual long-products trail flat products by 1-2 quarters. However, the stock reduction was not significant, as ex-stocks sales also declined since the second quarter. Thus, stock-reach for cold rolled flat has only slightly dropped from ~70 to 65 days since the beginning of the year. It is expected that stock levels will be kept low until year end. In the US, the situation is different. Sales from stocks have accelerated there in the third quarter 2011, urging distributor maintain strong buying at the mills in order not to risk any material shortfalls.
Based on the assumption that raw material markets will bottom out in Q4, there is a good chance that stocks are being refilled in the first half of 2012. Despite a softening market, the supply chain needs a re-fill.

Mills: European mills have reduced production in Q3 to a level of 60-70% of capacity to keep supply and demand synchronized. It can be expected that the production will increase in Q4, but rather moderately.  In general, the industry showed fast action. Short term work agreements have been put into action again – a lesson learned from 2009.  Flexible production systems seem to be the answer to increasing demand volatility. The fast reduction of supply prevented the European market from an even stronger erosion of base prices in recent months. But, the industry has no room for lower prices as most mills already struggle to stay profitable.

As indicated above, 2012 will become a transition year on the demand side. On the supply side, consolidation will certainly take place next year after 2 years of mostly ‘cosmetic’ measurements. All four European flat product mills announced to be prepared for consolidation – ThyssenKrupp renamed its Global Stainless division in ‘Inoxum’ to emphasize that this part of TK should become an independent entity soon. The big question is whether 2012 is a good year for IPO’s? The current market capitalization of the 3 listed companies Outokumpu, Aperam and Acerinox is ridiculously low and TK will not sell ‘Inoxum’ for such a low value. Also a merger with a European competitor, based on a exchange of shares is on such low levels unlikely.

This makes other options more likely, including selling to non European competitors who offer a significant premium for strategic reasons or selling to private equity funds just to ‘offload’ the stainless business unit. Also the option of selling individual parts rather than the entire units become increasingly likely for all E.U. mills. Outokumpu has already started this by selling OSTP (Tube & Pipe). Thus, SMR expects that there will more – rather than less – stainless steel producers in Europe in a few years.