Stainless Surges

July/August 2014

U.S. stainless scrap processors should be celebrating record high prices, but their fight for supply has them facing shrinking margins and taking unusual measures to bring the market into balance.

By Helen Burnett-Nichols

The essential role that nickel plays in the production of stainless steel has meant, historically, that as the nickel price goes, so goes the stainless scrap price. Unfortunately, this close relationship has meant that those in the stainless scrap industry are used to being at the mercy of a volatile primary metal price. When the London Metal Exchange’s three-month-average nickel price plunged in mid-2013 to a four-year low, stainless consumers reported inventory-related losses that affected their profitability, while stainless scrap processors said margins were tightening. The extent of the challenges facing the industry became clear in September, when stainless steel scrap processor Keywell (Chicago) filed for Chapter 11 bankruptcy, citing the drop in nickel prices and sales volume. Private equity firm Prophet Equity (Southlake, Texas) acquired the company’s assets late last year.

The nickel price has since had a reversal of fortune, rising from $6.25 a pound for the LME three-month average in July 2013 to an $8.22 average in May 2014. The demand picture for stainless steel applications in the United States seems to be improving as well, but some players in the scrap market say challenges persist. A convergence of factors at home and abroad this year mean competition for material is fierce, they say, and in the last few months, the United States has moved into the unusual position of having the highest stainless steel scrap prices in the world.

“The U.S. stainless market today is probably the firmest international market for material,” says Barry Hunter, principal of Hunter Alloys (Boonton, N.J.). It “has demonstrated the best signs of coming out of what were terrible times and conditions. As our economy moves forward, mill order books continue to look good for stainless steel finished product, and a continued need for scrap remains strong because of it. In view of current U.S. production levels, scrap availability is currently perceived as tight.” As a result, he says, many major players in the industry are facing the most interesting, complex, and intriguing market conditions they have ever seen. Questions about not only how to create buying margins to secure and meet current domestic mill needs, but also how to meet the potential international demand for nickel-containing scrap, loom larger and larger.

The Consumers’ Picture

Stainless steel scrap consumers have faced difficult market conditions and uncertain demand in the last few years, which have led many of them to cut costs and restructure.

Although the European stainless steel market had been a substantially larger producing market than the U.S. market for many years, Hunter says, European consumers have been focusing on consolidation and capacity-cutting. In 2012, Outokumpu (Espoo, Finland) acquired the Inoxum stainless steel division of ThyssenKrupp (Essen, Germany) in a move that combined the first- and second-largest suppliers of cold-rolled stainless steel products on the continent, according to the European Commission (Brussels). Market watchers expected the acquisition to generate more efficient capacity utilization in Europe through melt shop closures in Germany as well as cost synergies.

Some of that capacity has now shifted to the United States, however, in a move that some say is a game-changer for the domestic market. Outokumpu is ramping up production at its integrated stainless steel mill in Calvert, Ala., which opened for production in late 2010 under the ThyssenKrupp banner. The melt shop opened in late 2012, and the company plans to increase the frequency and number of melts until it reaches full production capacity—900,000 mt—in 2015, it reports. The mill’s ramp-up has increased the demand for scrap in the United States, according to industry participants, as it becomes the fourth major U.S. facility producing stainless steel flat product, joining North American Stainless (Ghent, Ky.), Allegheny Technologies (Pittsburgh), and AK Steel (West Chester, Ohio).

“The American market has always been able to support U.S. stainless production with available domestic scrap and have a substantial amount left over for offshore markets,” Hunter says, “but we never had to supply the potential increased tonnages represented by the total capacity of [what are] now four mills, with the addition of the new Outokumpu melt facility.”

The ramp-up of the Calvert mill comes at a time of some optimism for consumers after years of challenging market conditions. In its first quarter 2014 results, Outokumpu said it expects continued recovery in underlying demand this year, as well as “a positive impact on market dynamics” from the recent rally in the nickel price. Acerinox (Madrid), the Spanish parent company of North American Stainless, said stainless consumption increased about 8 percent in the North American market in the first quarter. Allegheny Technologies, or ATI, also pointed to improving business conditions in the first quarter, including early signs that demand from the jet engine, oil and gas, and flat-rolled stainless sheet markets is improving for the first time in several years.

Steel consulting firm MEPS (International) (Sheffield, England) reports that, globally, last year’s total crude stainless steel output topped 38 million mt—an all-time high—and it expects global production to grow another 3.6 percent in 2014. European Union production in 2013 fell compared with 2012, but U.S. output began to trend upward, the company says.

Amid the improving demand picture, the Calvert mill “could change the dynamics of everything that we have seen in the industry,” Hunter says. Notably, it could create the need to import stainless scrap from Europe and South America, and within the United States, the flow of stainless scrap could begin to move from the West Coast eastward to U.S. mills rather than to the Asian market. “The mills that are the foremost in Europe are the same mills that are foremost in the United States,” Hunter says. “If the European scrap is not required [in Europe], does it flow to the United States through the same channels?”

Markus Moll, managing director and senior market analyst with Steel & Metals Market Research (Reutte, Austria), says that while Calvert’s ramp-up has some in the industry wondering whether the United States will turn into a net importer of stainless steel scrap, this has yet to happen. “We are not there yet, and I think probably [we] will never be. I think the U.S. has sufficient scrap to feed its steel mills,” he says.

The most recent trade figures seem to support that assertion. According to the U.S. Geological Survey (Reston, Va.), U.S. exports of stainless steel scrap totaled 644,000 mt in 2013, compared with 624,000 mt exported in 2012. At the same time, the United States imported 227,000 mt of stainless steel scrap in 2013, up from 155,000 mt the year before, but still far below the export volumes.

Domestically, USGS reports that in 2013, stainless producers consumed 1.32 million mt of purchased and home stainless steel scrap, up from 1.3 million mt in 2012.

Outokumpu says it will finalize its technical ramp-up at Calvert this year, and it expects its full commercial ramp-up in 2016. Projecting delivery volumes of about 530,000 mt this year from its Stainless Americas division, the company predicts it will garner 25 to 30 percent of the NAFTA market in the next few years.

Pressure on Processors

The current market is a “good news, bad news” scenario for stainless scrap processors, says Alasdair Gledhill, product manager at ELG Metals (McKeesport, Pa.). “The two big mills are North American Stainless and Outokumpu,” he explains, “and their demand for scrap has led to a situation where there’s not enough stainless steel scrap being generated in North America to supply their needs. So very rapidly, the demand has put pressure on the supply of scrap to the point where the price has risen relative to other global markets, and now North America is the highest-priced market for stainless steel scrap in the world.” This is a situation that hasn’t existed previously in his tenure at ELG, he notes.

In early May, the price for stainless steel scrap in the United States was about $100 a ton higher than it was in Europe, Moll says, pointing to the start of the Calvert mill as a contributing factor. During the first 11 months of 2013, the average price for nickel-bearing stainless steel scrap delivered to purchasers in Pittsburgh was about $1,511 a ton, according to data from Scrap Price Bulletin (New York). That was down 14 percent from the 2012 average price. In spring 2014, buyers were paying between 82 and 85 cents a pound for 300-series stainless scrap—in the range of $1,640 to $1,700 a ton, says Jim Lawrence, a stainless steel and alloy consultant based in Wexford, Pa.

As Gledhill puts it, “we’re being squeezed because we’re having to pay higher prices to buy scrap, [and] we’re having to sell it at the most competitive prices possible in the market. And so here we are making razor-thin margins, but in an environment where the volume has rapidly increased.” Indeed, Hunter says the biggest challenge on the processor side right now is creating margins. How can processors make money, he asks, when they are under such pressure to supply product?

Driving up the prices processors have to pay, Gledhill says, is a scrap supply base that has been shrinking since 2007 due to consolidation among scrap companies. “Now these larger companies are bringing more tons to market at a given time, and they’re commanding a higher price when they sell it to us,” he says. As prices rise, Hunter says, “suppliers of scrap to the major stainless processors have the option of holding onto their material until they decide to sell, the result being that, in times of good demand, the wholesale market has to entice them with pricing—and overpricing—in order to secure material so they can meet their supply commitments.”

Tom Buechel, owner of Rockaway Recycling (Rockaway, N.J.), says that although his company saw more stainless steel scrap in the first quarter of this year than in 2013, sourcing material remains a challenge. “The supply is out there, as is the demand for the stainless,” he says. “The problem is that so many scrapyards and traders are clawing at the same work that it makes it difficult to close the deals like we used to.”

Lawrence calls the current market “a little scary” also because of the lack of supply of nickel units in scrap. “I think that’s probably one of the biggest changes that we’re seeing today,” he says—“the supply side of stainless steel is getting tougher and tougher. Why? Because our manufacturing base has decreased probably a good 50 percent [from] where we were 30 or 40 years ago. We don’t have that same generation of scrap stainless, of scrap alloys that are coming into the marketplace like we used to.”

Frank Santoro, president and CEO of Cronimet Corp. (Aliquippa, Pa.), says there is no comparison between the current market and what processors were experiencing in 2013 and previous years. “We were able to buy scrap, the discounts at the mill were larger, they were able to buy scrap cheaper, and there was excess being exported to other countries,” he says.

The domestic stainless steel scrap market is in need of balance, Santoro says, and some of the larger processors are taking action in an effort to create it. They’re importing scrap—not because domestic material is unavailable but because it’s expensive. “The price in the United States for buying material—the processor price—has gotten so out of whack with what the processors in Europe are paying that we’re looking to move scrap this way to try to ease the pressure here in the United States,” he says. “We’ve got to get the market back into line.”

ELG also is starting to move stainless scrap from Europe to the United States, Gledhill says. “For the first time since I’ve been doing this, we are beginning to bring vessels in from Europe, 5,500 [gross tons] at a time. The scrap is always going to flow where the price is the highest, and that’s what we’re seeing right now.”

The competition in the market also can be seen in the discount the mills offer to the LME nickel price. Consumers base the scrap nickel price on the previous month’s LME cash average, which is then multiplied by a discount, Lawrence explains. “In my career, I’ve seen that discount anywhere from 75 percent to 105 percent.” In mid-May, the specialty producers were basing their prices on a discount of 80 percent—they’re paying 80 percent of the previous month’s LME nickel cash average for the nickel value in the scrap, he says. In mid-June, however, “there seems to be a disparity among the producers” in their discounts “in relation to how much scrap they need to buy. As demand increases, that discount becomes more and more critical as a primary mechanism in their pricing.”

That said, demand for stainless scrap still remains sluggish at best, Lawrence says. “While there is a slow increase in demand, it still is not enough to overcome the current supply. However, going forward, as that demand does increase, the supply side of scrap nickel and chrome units is becoming more and more scarce, and that is going to drive the price in a very serious way. Scrap is still the raw material of choice for the melt shops, so competition will continue to drive the prices both on the buy side and the sales side.”

Moll warns that “there could be trouble ahead.” North America is a “very competitive stainless steel market, with the newcomer ramping up, and on the other side … [you have] potentially increasing scrap prices, so that means that [processors’] margins, again, [are] becoming smaller,” he says.

What about China?

Another key question for the U.S. market is the extent of China’s need for stainless scrap later this year, as it faces a changing supply situation. China’s growing dominance in the production of stainless steel has been unquestionable over the last few years. Global stainless steel production hit record levels in 2012 entirely due to growth in China’s production, according to the International Stainless Steel Forum (Brussels), while the rest of the world’s production fell as a result of destocking. In 2013, China’s stainless steel production grew another 18 percent over 2012, to 19 million mt.

To produce more than half of the world’s stainless steel, China imports little scrap, however, instead sourcing its nickel units from lower-cost nickel pig iron, according to a report Hunter presented at the fall 2013 conference of the Bureau of International Recycling (Brussels). This feedstock was put in jeopardy earlier this year, however, when Indonesia—a main exporter of nickel ore to China for the production of NPI—announced a ban on ore exports that took effect mid-January. The LME nickel market, recognizing the reality and potential consequence of the ban on Chinese stainless production, felt the impact of the ban, Hunter said. At the time the ban took effect, the LME three-month nickel buying contract was hovering around $14,000 a mt, Hunter says. Five months later, the May three-month average closing price was $19,450. Gledhill notes that the nickel price also has been buoyed by geopolitical uncertainty in Russia, the source of 20 percent of the world’s primary nickel.

“The market is a bit in turmoil because nobody knows the impact of the ore export ban from Indonesia,” Moll says. “So in anticipation of a problem in the Chinese nickel market in the second half of this year, nickel prices have already significantly gone up.” The key question going forward, he adds, is what alternatives China has to nickel pig iron because he expects supply of NPI to fall short of demand this year. “Speculations are that we have probably between 150,000 [and] 250,000 tons less than last year [of] NPI production,” he says, and those nickel units “have to come from somewhere.” China’s first strategy might be to import more class-two nickel, which is mainly ferronickel, Moll says. After that, “the next step could be to start importing scrap, after five years being absent [from] the scrap market.”

What will this mean for the United States? “Scrap consumption in the U.S. this year will be higher than it has been in the last 15 years,” Moll predicts. “The U.S. will use all its scrap, and all its scrap at the end of the day is always sold out.” The remaining question, he says, is: “How much is then available for export to Asia?”

The answer to that might depend on what Asia is willing to pay. Given the limited supply of scrap, Lawrence says, when a country like China suddenly needs material and is perhaps offering a higher price than domestic mills, it’s going to make the market even more competitive. “There’s not enough scrap to go around, so … I wouldn’t be a bit surprised to see the market take a real uptick, just on the basis of supply and demand,” he says.

As of late April, the ban had yet to result in an increase in U.S. stainless steel scrap exports to China, with the country rumored to have inventories of Indonesian ore that would last them into the summer, Santoro says. Still, Moll expects the Chinese to try to import stainless scrap sometime this year. “If this is the case, then we have a completely changed situation in the scrap market, especially in the United States, where we already have a very tight market,” he adds.

Ultimately, Moll says, when the mills’ discounts in scrap normalize again at about 10 percent below the LME, various sources will begin to release material, resulting in higher scrap recycling ratios and an easing off of the current situation. Gledhill also expects the market to achieve greater balance once the arbitrage opportunity evaporates, as his firm and its competitors bring in more scrap from Europe, but he says issues around sourcing material will likely persist. “Then the question becomes, how do you continue to find enough scrap to supply the demand? And that’s the big challenge.” 

U.S. stainless scrap processors should be celebrating record high prices, but their fight for supply has them facing shrinking margins and taking unusual measures to bring the market into balance.