Relevant Trends
How has the production capacity utilization improved in 2011?
The ‘unused’ capacity in Europe improved from 3 mill t in 2010 to around 2.7 mill t, utilization ratio increased accordingly from ~68% to 71%. This still unacceptable low utilization rate will only slightly improve in 2012 - measurements have taken by the producers in recent years to curb capacities mostly by reducing the number of shifts in some departments. E.g. ThyssenKrupp has reduced their capacity eliminating expensive night and weekend shifts in some departments. Companies such as Acerinox and Outokumpu have reduced number of employees in 2010/11. Outokumpu recently announced to reduce its workforce in the General Stainless Division and at its Terneuzen branch by another 150-200 people in 2012.
In China quite the opposite is the case. Although their unused capacity exceeded again 6 mill t in 2011, they continue to over-invest (more than the market growth justifies). This will lead to the surprising situation that capacity utilization in China will most likely even fall to below Europe’s utilization in the forthcoming years.
The picture below shows the unused capacity by region:
How is the Industry Profitability?
Although the profitability has improved somewhat throughout 2011, it is still unsatisfactory for the European industry as the diagram of quarterly EBIT/tonne results shows. Most mills reported small profits for the 1stquarter 2012, but will most likely fell back again in Q2 (due to falling prices). 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 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 don't?
We are living in a 2-speed world. The dynamic markets in China, India, some Asian Countries and Latin America and the stagnating markets of Europe (U. Kingdom, Spain, France) and Japan, which might even shrink in the years to come. In contrast to Europe, the U.S. market showed strong signs of life in 2010 and 2011. It is also expected that the U.S. will grow faster this year than most European markets.
The reasons are saturation and Off-shoring of several important stainless consuming industry segments including simple products such as table ware (pots, pans, and cutlery), household appliances, sinks and lifestyle products (just have a look at IKEA or other department stores). But increasingly also high value products such as heat exchangers, industrial boilers (incl. for power plants) or exhaust components are imported into Europe or North America from Asia. We estimate that the indirect stainless imports (through ready to use products) exceed 750.000 t into Europe and even 1 mill 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 2011 and 2016:
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As shown, India surpassed Japan to become the 3rd biggest stainless consuming country worldwide. Japan will continue to lose against the USA and CIS (mainly Russia) will take over the 9th position from Thailand.
What are the Future Growth Drivers?
About 55% of the stainless steel market can be considered as ‘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 strengths 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 2011.
- Consumer Goods (appliances, tableware, catering equipment, lifestyle products)
As forecasted in last year’s report, this segment has slowed amid consumers concerns about government austerity programs, especially in Southern Europe. In the U.S., the market improved as the housing market showed first signs of life after crisis. Overall this is one of the most stable segments of the stainless steel market in terms of growth, especially in the BRIC countries China, India, Brazil and Russia.
- Industrial Use (chemical, petrochemical, pharmaceutical, food processing, pulp and paper, water treatment, manufacturing, primary industries and industrial components like fittings and flanges). After a substantial improvement in 2011 with a strong demand increase in the pulp and paper industry ongoing investments in seawater desalination, strong overall investment in the Chemical Process Equipment Industry, growing market risks will however result in more project delays and cancellation this year. Thus, there is a high risk of a limited growth in Europe, China and some Asian countries. In the Energy sector there is a high degree of uncertainty about future energy politics after Fukushima. Nevertheless, the fundamental growth drivers for industrial use 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 and 2011. 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. It is expected that market will slightly grow in 2012 – on a very high level.
- 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. In Spite of low interest rates commercial building activity is below expectations (stagnating) whilst public building activity remained flat in 2011 (even negative growth in Germany). All growth in this sector comes from residential building which is growing between 1 – 5% in Europe. In total this segment showed a little growth in 2011 thanks to growing use of stainless steel components in roofing, facades, water-pipes and even high-end components such as swimming pools.
- Transportation (passenger cars, trucks, off-road vehicles, trains, ships, motorbikes)
The global market for passenger cars is somewhat slowing from its enormous re-bound of 2010/11 but will most likely to grow again by satisfactory 6% this year. Passenger car growth is expected to be strong in U.S. with 10% whilst Europe is the only region with a negative growth (minus 5% in car production). China will slow due to various inflation control measurements to a ‘mere’ 7% and Asia (outside China) will grow by more than 10% after the Japanese production drop after earthquake and tsunami last year. New emission regulations require Urea tanks (in the future Ammonia) which will increase the future 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 prices seem to have stabilized on low levels. Ex-stock prices (2mm CR sheet, 304, 2B) in Europe decreased by more than 100€ in since they peaked in March. Market prices are however around 400-450 € lower than a year ago (May 2012 vs. 2011). The price gap to Asia is pretty stable at 300 – 400 €/t (to China, which has lower prices than Asia on average, the gap is above 450€/t.
The tables below provide the results of the SMR price census of May 2012:
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. In 2011, the year started (outside China) with an up-stocking quarter which came to a sudden end when Ni prices dropped in March and April. This year, the same phenomenon occurred again – Ni prices started to drop already in February. 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 has put further pressure on raw material markets as supply exceeded demand in recent months. Falling Ni prices have dampening effect on Chinese NPI (Nickel Pig Iron) production as many producers with old equipment there cannot produce profitable at prices way below 20,000 $/t. Thus, Ni supply will continue fall in line with price drops – a price where reduced Ni supply meets demand again will be achieved this way.
The Chrome industry the price – making procedure has changed in recent years. Whilst the price was set in the past between South African FeCr suppliers to European and Japanese consumers in face to face negotiations, it is today set by what the leading Chinese consumers are willing to accept. The ‘artificial’ benchmark price increase to 1.35 US$/lb has been initiated by South African FeCr smelters. For them it was more attractive to temporarily suspend smelters in Q2/12 and get compensation for this from South Africa’s energy supplier ESKOM in order to avoid electricity supply shortage.
Stainless steel scrap (18-8) was relatively tight in the beginning of this year – but this situation has changed after a weaker demand in Q2. Falling Ni prices had a negative impact on availability but this has changed already as small peddlers do not have the deep pockets to bear such a situation over a longer period of time.
Almost 3 years after the severest crisis in the stainless steel industry things look better from a distance, the biggest problem of structural overcapacity in Europe has been addressed by the announced Outokumpu/Inoxum merger. The merger is currently under review by anti-trust regulators. It is expected that a decision will be announced in September/October this year. This merger will not solve all problems of the European industry but is a first step in the right direction. If the Chinese government still backs up ruthless capacity expansions through various subsidies, also future 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 2012 and beyond.
