Relevant Trends
How Did the Capacity Utilisation Improve in 2010?
The ‘unused’ capacity in Europe improved substantially, but still reached 3 million tonnes in 2010, comparing to an utilisation ratio of only 67%. This still unacceptable low utilization rate will improve in 2011 due to a slightly increased demand (see above) but also measures taken by the producers to curb capacities mostly by reducing the number of shifts in some departments. E.g. ThyssenKrupp has reduced its capacity eliminating expensive night and weekend shifts in some departments. Acerinox decided to put 1.660 (out of 2.240) people of the Campo de Gibraltar plant on short work (up to 50%) until December 2011.
In China happens quite the opposite. Although their unused capacity already exceeds 6 million tonnes in 2010, they continue to over-invest (more than the market growth justifies).
The picture below shows the free capacity by region:
How is the Industry Profitability?
Although the profitability has improved somewhat throughout 2010, it is still unsatisfactory as the diagram of quarterly EBIT/tonne results shows. Most mills are reporting small profits for the Q1 2011, but fell back in Q2 (due to falling prices) and it has to be feared that Q3 will be worse (due to falling volumes). The financial results reflect a mix of product portfolios, customer portfolios and not to forget working capital. E.g. Aperam is successful in minimizing its working capital and hedging its open nickel position on the LME. Allegheny’s relative success is based on from a consequent focus on value add market segments (e.g. precision strip). Acerinox’s (relative) success is based on low production costs.
If the entire supply chain is analysed, you can see who really made money in recent years in the graph below. On average, raw material suppliers (excluding scrap suppliers) have 7 times higher EBIT margins than stainless steel producers or distributors! Thus, the vast majority of ‘value add’ is skimmed off by the raw material suppliers of the stainless steel industry. A situation that needs to be changed through increasing the profitability in the stainless industry, even if it is at the cost of the profitability in the raw materials industry. The key is ‘leverage’, which at the moment is very limited seen from the stainless end, except in China, where the industry developed alternative Ni, Cr and Mo supply chains. Maybe it is time to learn from the Chinese?
Which Markets Will Grow and Which Won't?
We are living in a 2-speed world: on the one hand, the dynamic markets in Asia and Latin America including Brazil and on the other hand, the stagnating markets of Europe and North America amongst whom some like Japan, U.K., Spain, France might even shrink in the years to come. The reasons are saturation and off-shoring of several important stainless consuming industry segments, including simple products such as tableware (pots, pans, and cutlery), household appliances, sinks and lifestyle products (just have a look at IKEA or other department stores). But also high value products such as heat exchangers, industrial boilers (incl. for power plants) or exhaust components are increasingly imported into Europe or North America from Asia. We estimate that the indirect stainless imports (through ready-to-use products) exceed 750.000 tonnes into Europe and even 1 million tonnes into North America. The main source countries are China, India, Vietnam and even Turkey. Additionally to the increasing imports of stainless steel containing articles, also the export dominance of E.U. producers is for some components at risk. Chinese fabricators have improved their technology and quality and increasingly compete with European engineering firms also outside China. Examples are boilers for coal fired power plants or urban transport systems.
As a result, we see the Top 10 stainless steel markets (representing 90% of the world market) growing as follows between 2010 and 2015:
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As shown, India surpassed Japan to become the 3rd biggest stainless consuming country worldwide. By 2015, Japan will be surpassed by the USA and Thailand will take over the 9th position from the Middle East.
What Are the Future Growth Drivers?
About 55% of the stainless steel market can be considered consumer durables, whilst the balance (45%) are investment goods. Both market segments have fundamental differences in purchasing behavior and demands to the products. Whilst consumer durables tend to be more price sensitive as consumers often have alternatives at hand (coated carbon steels, aluminum, plastics, etc.) investment goods are more stable in their specifications, but a lot more volatile to the economic situation as we have seen in 2009.
But the approx. 50/50 mix of the stainless enduse structure is one of the strength of this material as they complement each other and reduce the risk through their compensating business cycles.
The following pie chart shows the share of industries of the total stainless steel market in 2010.
- Consumer Goods (appliances, tableware, catering equipment, lifestyle products)
As forecasted in last year’s report, this segment has slowed somewhat amid consumers concerns about government austerity programs, especially in Southern Europe. Also in the U.S. the market stagnates as the housing market showed new signs of weakness in the summer 2011. The inventory of unsold houses and still rising foreclosures has a negative impact on the appliance market. However, overall this is one of the most stable segments of the stainless steel market in terms of growth, especially in emerging markets.
- Industrial Use (chemical, petrochemical, pharmaceutical, food processing, pulp and paper, water treatment, manufacturing, primary industries and industrial components like fittings and flanges).
Unfortunately, this very important segment is still lagging behind forecasts. There are some signs of life in the pulp and paper industry, and ongoing investments in seawater desalination, but overall investment in the Chemical Process Equipment Industry disappointed so far in 2011. In spite of record profits in the Chemical and Petrochemical industry, these companies have not increased their capital spending anywhere near pre-crisis levels. What is continuously running on a high level is mechanical engineering whilst also power generation is still slow at the moment as uncertainty about future energy politics prevails in many countries after Fukushima. Nevertheless the fundamental growth drivers are still intact. These are the urbanization in Asia, India and South America and the re-building of the Russian industry and infrastructure, which has been neglected for many years.
Oil and Gas (downhole hardware, sub-sea equipment, topside equipment, including oil and gas refining and distribution)
has been quite strong in 2010. All major key accounts (Halliburton, Schlumberger, Baker Hughes, etc.) have refilled their supply chains and the oil majors have released new on- and offshore projects. Also renewable energy sources increasingly offer an opportunity for stainless steel (geothermal, solar and photovoltaic), although these volumes are so far limited.
Architecture, Building and Construction (structural and ornamental tube, re-bars, cladding, roofing, swimming pools, chimney linings, elevators, heating systems, etc)
This segment is surprisingly underperforming throughout Europe and North America. In spite of low interest rates commercial building activity is below expectations (stagnating) whilst public building activity is below 2010 (e.g. -15% in Germany). All growth comes from residential building which is growing between 1 – 5% in Europe. In total this segment is rather stagnant in 2010. But the growing use of stainless steel components in roofing, facades, water-pipes and even high-end components such as swimming pools allows for a small growth to be expected in 2011.
Transportation (passenger cars, trucks, off-road vehicles, trains, ships, motorbikes)
The global market for passenger cars is slowing from its enormous re-bound of 2010. But this industry segment is still a major growth driver for stainless steel this year. Passenger car growth is expected to be strong in Germany and the U.S. with 5–6% whilst other European countries will grow around 3%. China will slow due to various inflation control measurements to a ‘mere’ 7% and Asia (outside China) will not grow at all as the production in Japan could fall as much as 15-20% this year. On the other hand trucks still grow at double digit rates compared with 2010 and the fact that new emission regulations require Urea tanks (in the future Ammonia) is increasing the stainless steel use in truck and off-road vehicle (yellow goods) exhaust systems.
Which Way Will Prices Go?
Short term: CRC Prices are falling into the summer amid dropping raw material prices and alloy surcharges. The good news is (for the mills) that the base price erosion seems to be limited. Ex-stock prices (2mm CR sheet, 304, 2B) in Europe decreased by more than 200€ in since they peaked in March. The price gap to Asia is pretty stable at 400 – 450 €/t.
Whilst Ni prices could go lower as the market is oversupplied at the moment, the Cr and molybdenum markets are rather in balance. Overall stainless pricing will be stable until the end of Q3 and rise again in Q4 amid a recovery in Ni pricing.
The tables below provide the results of the SMR price census of May 2011:
What Can We Expect from Raw Materials?
Raw materials price volatility thrives the order cycles in stainless steels. The past year has shown that the up- and de-stocking cycles become shorter and shorter. Also in 2011, the year started (outside China) with an up-stocking quarter which came to a sudden end when nickel prices dropped in March and April. The speculative part of the market (stockists, tube makers and other large volume buyers) reacted with its ‘normal reflex’ and reduced buying for a couple of months to an absolute minimum. As a result the stainless mills around the globe are planning for a reduced production between May and August. This will put further pressure on raw material markets as supply will exceed demand over the summer, especially as the Chinese NPI (Nickel Pig Iron) production is rising at the moment. Thus, based on market fundamentals, the nickel price should fall below 20.000 $/t.
However, the growth drivers for Q4 are still intact which could lead to rising nickel prices in Q4.
In the chrome industry, the price making procedure has changed in recent years. Whilst the price was set in the past between South African FeCr suppliers to European and Japanese consumers in face to face negotiations, it is today set by what the leading Chinese consumers are willing to accept. The recent price drop in the benchmark price (by 15 ct/lb to 1.20 $/lb) brings some South African producers close (or below) their production costs. Therefore they decided to stop a number of furnaces over the summer (their winter) also as electricity is scarce. This will prevent the Cr market from building up significant stocks, which could support a price hike later this year.
Stainless steel scrap (18-8) is in oversupply at the moment, but this will change over the summer as discounts (on intrinsic metal values) are too high at the moment which has a negative impact on availability in Q4 when demand from the steel mills will jump.
One and a half year after the severest crisis in the stainless steel industry, things look alright from the distance, but the biggest problem of structural overcapacity has not been addressed so far. There had been discussions between European producers, but the outcome was that just the consolidation of some of them does not solve the problem. The general understanding is that all mills have to do their homework and contribute to synchronizing supply with demand by giving up un-competitive plants or un-profitable products. But if the Chinese government still backs up ruthless capacity expansions through various subsidies, also trade action seems increasingly justified to protect many markets outside China (including Asian countries).
The fundamental long-term growth dynamics (5 % p.a.) of the stainless steel market are still intact also in 2011 and beyond.
