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A Moving Target

Supplement - Scrap Metals Supplement

The stainless steel market, though marked by global overcapacity and a changing supply dynamic, remains beholden to an array of economic factors.

Lisa McKenna January 7, 2013

The recent volatility of the stainless steel market and its tendency to move along with fundamental economic tides makes it one that could easily turn on a dime. Better yet, make that a nickel.

The prospects for this versatile alloy can be affected by a host of factors, not the least of which are the price of nickel—a key component—along with the supply of and demand for stainless steel and how that directs the need for scrap.

At the crux of the situation is the fact that global processors and traders of stainless steel scrap have described the world’s capacity as more than sufficient to meet the world’s current level of demand.

“The capacity out there to produce stainless steel today is probably greater than the need for stainless steel,” says Barry Hunter, president of Hunter Alloys based in Boonton, N.J. “As a result you have an oversupply of capacity for finished product.”

Hunter estimates that the operating melting facilities throughout the world can likely supply all of the world’s current annual needs for finished stainless steel within about eight months of production.

Add to that the fact that nickel prices are fluctuating (having increased in recent weeks), supply logistics are shifting and economies are in a holding pattern, and you have a market ripe for any number of outcomes.


Changing Logistics
Speaking in late October at the Bureau of International Recycling (BIR) Autumn Round-Tables in Barcelona, Michael Wright, outgoing chairman of the BIR Stainless Steel & Special Alloys Committee, reported that annual stainless steel production in 2012 may shake out at around 32 million metric tons, lower than what was previously projected for the year. Wright is also chief operating officer of processor ELG Haniel GmbH, based in the U.K.

A major supplier of that capacity is China, which Hunter says has doubled its manufacturing capacity since 2007, to a level of around 14 million metric tons per year.

“China by itself currently produces more austenitic stainless than Europe, the U.S. and Japan put together,” Hunter said, potentially leading to a glut of stainless steel in markets where it’s produced. (Austenitic, or nickel-containing stainless steel, accounts for the majority of stainless steel produced today, as well as the vast majority of stainless steel scrap on the market.)

However, some global capacities are expected to shift logistically in the coming years, particularly those located in the U.S. and Europe.

In November of 2012 the European Commission approved Finland-based Outokumpu’s acquisition of Inoxum, the stainless steel division of ThyssenKrupp AG of Germany. As part of the acquisition, Outokumpu has reported that it will eventually close two melt shops in Germany in the next few years, resulting in capacity reductions totaling 1.4 million tonnes by 2017.

In the meantime, ThyssenKrupp Stainless USA of Calvert, Ala., recently brought its new mill there online, which could add as much as 900,000 metric tons per year to U.S. stainless steel production and world capacity when the mill ramps up to full production, sometime in the next couple of years, industry onlookers have suggested.


Scrap Flows

Addressing BIR delegates, Wright said stainless steel scrap should continue to be the preferred sourcing option over virgin materials by virtue of its price and kinder environmental impact.

Considering the likelihood of increasing scrap demand in the U.S., scrap flows also will likely change in the coming years, Wright said. One major distinction of the Chinese mills is that they don’t use nearly the amount of stainless steel scrap to produce stainless steel, owing to their ready access to a supply of nickel pig iron as a source of nickel and substitute for scrap inputs. As a point of reference, U.S. and European mills operate with a scrap ratio of 60 to 70 percent, Wright said, compared with China’s proportion of approximately 24 percent.

Wright estimated that at 90 percent capacity, the new Calvert mill will need 400,000 metric tons of scrap per year.

“Hence, the USA could well become a net importer of scrap rather than an exporter,” Wright said. “There could be a complete change in dynamics on the movement of stainless steel scrap within the USA.”

Hunter says feeding the new mill would likely begin with U.S. sources of scrap. “If it needs more, it perhaps opens up the opportunity to import scrap from Europe, which is now reducing its capacity,” he says. Still, he adds, the increasing U.S. production will eventually require a significant amount of scrap.

“The capacities are very, very large, and the most interesting part is that the largest producer of stainless steel in the world [China] currently consumes the least amount of scrap,” Hunter observes.

If that pattern continues, he says, mills should find plenty of scrap available, depending on the price they’re willing to offer and the costs involved in the logistics of transporting that scrap.


Going Forward
Scrap processors say 2013 could very well be stronger than the last for stainless steel scrap. Wright, for one, described 2012 as a year that was difficult for processors and traders, with stagnating demand in Europe and America, and most of the production growth occurring in China and India.

Meanwhile Philip Rosenberg, executive vice president of sales for Keywell LLC of Chicago, a U.S. processor of stainless steel, high-temperature alloys and titanium scrap metal, described fourth quarter demand as typical and at its usual low for that time of year.

“We believe that there is nothing different today versus the vast majority of fourth quarters,” Rosenberg says. “The fact that scrap is building up in processors and dealers’ hands in the fourth quarter is normal,” he says, explaining that most processors believe stainless steel scrap will draw a higher price in the first quarter of 2013.

In turn Rosenberg says he expects to see a pickup in orders during the first quarter of 2013 and says there are indications this will occur. Keywell has forecasted increased mill production for the first six months of 2013 compared with the final six months of 2012 and over the first six months of 2012.

“We believe that the first half of 2013 will be better than the first half of 2012,” Rosenberg adds.

An improving U.S. economy also could play a role, Rosenberg says. “The economy appears better now than it was a year ago,” he says, noting however, it will depend on the U.S. averting the fiscal cliff, among other factors. Otherwise, he says, “All bets are off.”

Another factor posited by one industry trader is the increase in speculative buying and selling of nickel contracts in the last several years as investment tools, which he says also has affected the market in unexpected ways. “There are so many different factors that have nothing to do with the business,” he says, noting that nickel transactions not physically related to the commodity’s marketplace now account for a majority of the trades.

With the considerable amount of economic uncertainty that remains, it appears the industry is bracing for the unexpected. Case in point: in early December, one U.S. trader reported a surprising flurry of trading activity and competitive pricing among smaller to medium-size processors.

“Orders came in, and the mills bought more than we thought they would buy,” the trader remarks. “There has been quite a lot of competitive activity as people try to secure tonnage.”

Along with that, he adds, there seemed to be a rush to buy material by some scrap processors. The trader attributed the commotion to some industry players looking to position themselves in advance of the new mill’s startup.

Meanwhile, Hunter says scrap inventories currently appear to be low. “A lot of the dealers who sell to the wholesale market are holding back because they think the market will go up,” he says. “The pattern over the last few years has been that the mills reduce their intake of scrap not to carry a lot of inventory at year’s end.”

A recent rise in nickel prices on the London Metal Exchange and stagnant manufacturing levels also may have played a role in weak fourth quarter orders, Hunter adds.

But, Hunter also expresses hope for a pickup in demand come January and February. “We do feel the mills are going to require more material in the first quarter because they have reduced inventories so much.”

Still, Hunter says, with all of the factors that could affect future orders and prices, it’s almost impossible to predict where stainless steel markets will go in the months ahead.

An even bigger question is how well the U.S. economy will fare in 2013 and how it will affect demand for stainless steel.

“There are more questions than answers today,” says Hunter. “The growth of the world’s ability to produce stainless steel is enormous…Can the world consume 34 million tonnes of stainless steel? It’s a lot of material.”

 

The author is managing editor of Recycling Today Global Edition and can be reached at lmckenna@gie.net.

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