November/December 2001
It’s an uncertain world after the terrorist attacks in the United States. Even so, four metals experts offered predictions for nickel, stainless, ferroalloys, and scrap at a recent ReMA roundtable.
By Kent Kiser
Kent Kiser is editor and associate publisher of Scrap.
Predicting metal market trends is an iffy business in the best of times, but it becomes infinitely more iffy in uncertain times—and the times don’t get much more uncertain given the terrorist attacks on the United States in September and the
already-tenuous state of the U.S. economy.
Not surprisingly, uncertainty was a common theme among speakers at ISRI’s nickel/stainless steel/special metals roundtable, held in Pittsburgh in September. Whether they were talking about primary nickel, stainless products, scrap, or ferro-alloys, speakers noted that the U.S. response to the terrorist attacks and the subsequent direction of the U.S. economy will profoundly affect the markets. As one speaker asserted, “Turbulent times are always bad for business.”
Still, these uncertainties didn’t stop the speakers from reviewing market fundamentals and offering their best-guesses for the future. Here’s what these brave souls had to say.
The Market at a ‘Turning Point’
Speaking from his “gut feeling,” Friedrich Teroerde, chairman & CEO of ELG Haniel Metals Corp. (McKeesport, Pa.), stated that current nickel prices don’t reflect market fundamentals, and “the whole nickel and stainless steel industry might have reached again another turning point.”
To explain his bullish feeling, Teroerde reviewed developments in the U.S. secondary nickel, U.S. stainless, and primary nickel markets.
Looking first at scrap, Teroerde noted that the U.S. secondary nickel supply totaled 145,000 mt in 2000, up about 45,000 mt—or 4 percent—from 1999. Stainless steel scrap accounted for about 95,000 mt of that total, with the remainder taken up by nickel alloy scrap. The supply of stainless steel scrap grew about 3.6 percent a year from 1990 to 2000, while nickel alloy scrap availability expanded faster at 4.5 percent annually, he reported.
Of the 145,000 mt of U.S. secondary nickel supplies, about 81,000 mt—or 56 percent—is consumed in the United States, while the balance is exported, Teroerde said. The U.S. stainless steel industry consumed 62,000 mt—or 77 percent—of that domestic scrap, with the nonferrous industry being the second-largest domestic consumer.
On the export side, almost 60 percent of U.S. secondary nickel exports went to the Far East, with shipments to Canada also growing steadily, said Teroerde. In contrast, Europe has become a minor export destination due primarily to the availability of scrap from Eastern Europe.
With nickel prices “under pressure,” U.S. scrap supplies have diminished. That’s not surprising, Teroerde remarked, because “any nickel price fluctuation on the London Metal Exchange induces more or less significant parallel movements in the availability of scrap.” The scrap-supply situation is worse in Europe, he noted, due to lower scrap exports from Russia and Ukraine.
Still, despite a slowdown in stainless melting activities, demand for stainless steel scrap remains high. “In this environment,” Teroerde said, “desired scrap quantities can only be made available if higher prices are being paid—and this results in temporary premiums for nickel in stainless steel scrap as we have seen here in the United States.” This trend, however, has not been a financial boon for U.S. stainless scrap processors. Instead, the trend has only served to narrow their margins.
Turning to the U.S. stainless industry, Teroerde noted how demand has been growing steadily but apparent supply (which includes domestic mill shipments plus imports minus exports for flat and long products) has fluctuated widely around demand, mainly due to seasonal factors. From an oversupply of 127,000 mt in the first quarter of 2000, the U.S. market shifted to a deficit of some 343,000 mt in 2001.
In this shift, U.S. production of austenitic stainless declined more than production of ferritic stainless. “This trend toward ferritic grades is not just a ‘one-off’ event but in line with the long-term trend in the United States and other major stainless-producing countries such as Japan, Germany, and France,” Teroerde said.
Assuming U.S. economic growth of 2 to 3 percent in 2002, though, “we are confident that apparent supply will return sharply until the middle of next year before it follows again its seasonal decline,” he stated.
In terms of scrap consumption, U.S. stainless mills “traditionally operate with exceptionally high external stainless scrap ratios,” which Teroerde estimated would be about 52 percent this year. Adding internal stainless steel scrap, the total stainless scrap input of U.S. mills is 70 to 80 percent, which means that “the scrap ratio here is already close to technical limits,” he said.
Such is not the case in other countries. For instance, the scrap ratio in Western Europe and Japan averages about 36 percent, while South Korea is around 50 to 52 percent and Taiwan is 32 to 35 percent, Teroerde reported.
As for primary nickel, demand in the West has increased since the second quarter due to stable stainless production and lower scrap availability. “This trend will continue into the fourth quarter as scrap quotas in Europe will be sharply reduced,” Teroerde said. In his view, the nickel market was more or less balanced in the third quarter but could slip into deficit in the fourth quarter.
Considering all of these factors, “I personally believe that another change in the nickel and stainless steel market is imminent,” Teroerde asserted. “The price trend for nickel on the London Metal Exchange does not reflect market fundamentals, and it is only a question of time when investment funds also become aware of it.”
He conceded, though, that two factors could have a major effect on the market—the economic impact of the terrorist attacks in the United States and the secondary nickel demand from the new melt shop at North American Stainless in Ghent, Ky. “This plant is likely to become a major factor in forthcoming years,” he said.
Nickel’s Uncertain Future
Even by the volatile nickel market’s standards, “the uncertainty at this point is particularly high” due to the terrorist events in the United States and the tenuous state of the global economy, said Peter Cranfield, market research manager, stainless steel materials, for BHP Billiton (London).
Still, Cranfield offered a forecast on where nickel is heading for the rest of 2001 and 2002.
To provide some market perspective, Cranfield first noted that Western World stainless slab production grew an average of 5 percent a year in the 1980s and 6 percent a year throughout the 1990s. In those same decades, global stainless slab production increased an average of 4 percent a year. In the coming decade—from 2000 to 2010—Western World stainless slab production could continue to grow 5 percent a year, while global production growth could jump to 5 to 6 percent a year, he stated. Since two-thirds of primary nickel goes into stainless production, these growth projections mean that “the outlook for long-term primary nickel use is very good,” Cranfield said.
But what about the short term?
Cranfield emphasized that industrial production is a “reasonably good indicator of underlying real demand for stainless and nickel.” Forecasts for 2001 expect U.S. industrial production to decline about 2 percent, Japanese production to slip about 5 percent, and European production to show low growth, though Cranfield warned that final 2001 results could be worse.
In 2002, he added, industrial production is expected to have “a gentle rather than sharp recovery—less than 2 percent in the United States and 2 to 3 percent in Europe.”
Overall, BHP Billiton’s base-case forecast calls for moderate improvement in economic activity beginning in the first quarter of 2002. This economic recovery would trigger increased stainless purchases, with real stainless use rising more than the projected 2-percent increase in industrial production and apparent consumption increasing 6 percent, Cranfield said. The big question is whether U.S. consumer confidence and spending will decline. If so, “then the slowdown could continue throughout most of 2002, which would be grim for our industry,” he stated.
Looking at scrap, one big development in the first half of this year was a 40-percent reduction in stainless scrap exports from Russia, Ukraine, and Kazakhstan. “It appears that scrap is becoming tight in Europe, especially Germany,” with the recent low nickel prices tending to reduce the supply of scrap, Cranfield noted.
Globally, the scrap supply totaled about 5 million mt in 2000 and was forecast to decline up to 700,000 mt in 2001. That decrease appears too great, Cranfield said, suggesting that any decrease will likely be less than 500,000 mt. Also, the scrap ratio in stainless melts is expected to remain close to recent levels in 2002.
Summing up, Western World nickel consumption could slip 2 percent this year to 1.01 million mt, while production could increase 40,000 mt to 810,000 mt, Cranfield said. Factoring in about 210,000 mt of East/West trade, nickel could end 2001 with a surplus of about 10,000 mt. A similar surplus could be in store for 2002. He noted, however, that at current nickel prices, high-cost producers are hurting and market-related cutbacks can’t be ruled out.
For Western World stainless production in 2002, “the best we can plan on is growth of 6 percent from the current rather low level,” Cranfield said, adding the following caveat: If the terrorist events in the United States result in a protracted economic slowdown, any recovery in stainless production could be delayed until 2003.
Closing with a price prediction, Cranfield said that nickel values are expected to rise throughout 2002, noting that “the base-case market volumes are consistent with a nickel price around $3 a pound.”
A Promising Future for Stainless
Looking beyond the current dreary economy, flood of imports, drooping prices, and higher energy costs, Richard Wardrop Jr., chairman and CEO of AK Steel Corp. (Middletown, Ohio), expressed optimism about stainless steel’s future.
One promising area for stainless is in the use of the AgION compound—an antimicrobial compound based on silver—on coil-coated steels. AK Steel, which is the exclusive worldwide licensee (with a few small exceptions) of the AgION compound, has perfected a process that incorporates the compound into both an epoxy and polyester coating. According to Wardrop, these coatings can withstand the rigors of fabrication and welding without a significant loss of effectiveness. Along with their antimicrobial benefits, the coatings resist fingerprints. These traits make AgION-coated stainless ideal for use in appliances, hospital/clean room applications (including door push panels), food preparation surfaces, and HVAC/ductwork equipment, he stated.
In the automotive sector, stainless is chosen for corrosion-resistance, temperature, and appearance reasons, with 80 percent of it being used under the floor pan, Wardrop noted.
Yet stainless could be used to make stronger and lighter truck bumpers, control arms and other suspension parts, fuel tanks, outer body panels, and even modular space frames. A roll-formed stainless modular space frame is about half the weight, twice the stiffness, and about the same cost as a conventional unibody structure, he said.
To promote this space frame, AK Steel became a founding investor in Build-To-Order Inc., reportedly the world’s first automotive company to deliver build-to-order vehicles directly to consumers. Build-To-Order has developed an off-road vehicle that incorporates the stainless space frame. This prototype “will answer many of the questions major automakers have about the modular space frame,” Wardrop said.
Aside from cars, stainless is also a great material choice for buses, transport vessels, and passenger railcars, he added.
Beyond these uses for austenitic stainless, ferritic grades of stainless have grown considerably in the past decade thanks to mandates for long-lasting and higher-temperature vehicle exhaust components, Wardrop said. Though the changeover to stainless exhaust components is largely complete, there’s still room for growth through production increases and conversion of manifolds, brackets, and hangars, he noted.
‘Dim’ Outlook for Ferroalloys
In the first half of 2001, the ferroalloy market suffered “staggering” decreases in prices and import levels, noted Patrick Ryan of Ryan’s Notes (Pelham, N.Y.).
To illustrate this dramatic downtrend, Ryan provided figures comparing U.S. imports in the first half of 2000 with imports in the first half of 2001 for the following ferroalloys:
• vhigh-carbon ferrochrome—252,000 mt vs. 150,000 mt;
• low-carbon ferrochrome—25,000 mt vs. 11,000 mt;
• ferrosilicon—144,000 mt vs. 80,000 mt;
• high-carbon ferromanganese—119,000 mt vs. 79,000 mt;
• medium-carbon ferromanganese—36,000 mt vs. 25,000 mt;
• low-carbon ferromanganese—11,000 mt vs. 7,000 mt; and
• silicomanganese—253,000 mt to 150,000 mt.
This massive slide was surprising, in part, because economic predictions were calling for recovery in the second quarter. That recovery never occurred, emphasizing the unpredictable nature of the metal markets and the economy in general.
“There’s no way anyone could have predicted the sudden dropoff in U.S. consumption of these ferroalloys,” Ryan stated, noting that the United States is a net importer of all the ferroalloys noted above. “Likewise, there’s no way anyone could have accurately predicted the decline in relative U.S. dollar terms of those
commodities.”
So where will the ferroalloy market go from here? Ryan examined both macro- and microeconomic factors.
On the macro side, the U.S. government’s economic responses to September’s terrorist events will likely boost demand—at least initially. Any sustained recovery, however, depends on consumer confidence, Ryan said. As he explained, the previous prolonged economic boom was borne on the backs of consumers. If consumers don’t feel confident, the government’s efforts to stimulate the economy will only create a “boomlet”—that is, a short-lived recovery. “This whole thing revolves around consumer confidence,” Ryan stressed.
The currency exchange rate is another big consideration for foreign ferroalloy producers. In recent years, such producers have been able to finance themselves because they sell their products in U.S. dollar terms, and the dollar’s strength compared with their own currencies has enabled them to make money, Ryan noted. That could change if the dollar weakens.
On the microanalysis level, there’s “tremendous flux” and a couple of wild cards. One factor is the impending entry of SA Chrome into the market. This South African producer is expected to add 230,000 mt of new capacity to the market by mid-2002, and this material will have to find a home in the already-saturated market, Ryan said.
As for wild cards, one is the U.S. Defense Logistics Agency (DLA), which is sitting on huge stockpiles of ferrochrome. For instance, DLA could sell 150,000 short tons of ferrochrome every year for the next six years, and it has enough low-carbon ferrochrome in the U.S. stockpile to supply total world demand for more than 21/2 years, Ryan reported.
Another wild card is Eti Krom, a Turkish producer who reportedly wants to sell off its 100,000 mt of ferrochrome inventory as well as restart its 80,000-mt-a-year production plant, said Ryan.
Though ferrochrome producers have curtailed some production, they haven’t cut back enough given current demand. Producers assert that there’s a ferroalloy scrap shortage that will translate into increased demand at some point, but they’re overlooking the potential supply overhang of 200,000 to 300,000 mt of ferrochrome from the combined DLA and Eti Krom supplies, Ryan noted.
Given these macro- and microeconomic conditions, “the outlook for low-carbon and high-carbon ferrochrome looks dim,” Ryan said.
Does that mean there’s no hope for recovery? Of course not, he stated, but “there has to be some major economic trigger to reverse this trend.” Technology drove the last economic boom. Currently, there’s no similar force to drive the next boom, he noted.
In light of current demand and assuming that the dollar will weaken against other currencies, high-carbon ferrochrome prices could range from 25 to 32 cents a pound for the remainder of this year through 2002, while low-carbon ferro-chrome could see 50 to 55 cents a pound, Ryan concluded. •
It’s an uncertain world after the terrorist attacks in the United States. Even so, four metals experts offered predictions for nickel, stainless, ferroalloys, and scrap at a recent ReMA roundtable.