Decelerated stainless steel market

Oct 23, 2024

The stainless steel sector has been slow over the past two years, with subdued global demand. Manufacturers like Aperam continue to see headwinds in the EU steel sector, offset by more shipments from Brazil.

However, the United States' high-performance alloys market was stable, as per Acerinox, underlining strong performance in North America during the first half of 2024.

Stainless steel prices in the United States have extended the downtrend in the second half of the year from the first half of 2024. Finland's Outokumpu highlighted subdued market conditions during the second quarter in Europe and the Americas owing to limited supply. Moreover, imports into Mexico are disrupting the regional supply and demand balance.

The primary and recycled stainless steel sector's near-term outlook remains bearish due to several factors. Here are the top seven signs impacting this market and arresting its growth.

Correlating the slowdown of the stainless steel sector with that of the global economy is easy. The latter is undoubtedly an essential factor influencing every other sector. As economic data inflows show weak numbers since last year, the stainless steel market has been vulnerable to macroeconomic challenges.

The World Bank places the 2024 global GDP growth forecast at 2.4 percent, down from 2023's 2.6 percent. Last year was marked by geopolitical conflicts leading to problems in ocean freights that continue to hinder any recovery.

Conflicts in the Middle East and Eastern Europe have had ripple effects worldwide, exacerbated by the ongoing Red Sea crisis.

Stabilization is forecasted to be slower; however, the stainless steel market remains under the undesirable effect of a beaten global economy. Lagging industrial production also affects demand for stainless steel to a significant degree.

A major highlight of last year was surging interest rates worldwide set to tackle elevating inflation. There was an impetus to tighten monetary policies, which proved counterproductive for stainless steel businesses, stalling growth and affecting scale and profit margin across the supply chain.

Small-scale manufacturers have felt the full brunt of high interest rates. Several trading companies worldwide have stepped back from purchases, grappling with high interest rates, which is painful for the economies.

Several manufacturers feel that Western economies are expected to recover gradually due to the impact of aggressive interest rate hikes. The underlying growth expectations in steel-using sectors were weak in the first half of 2024.

Downstream stainless steel buyers remain exposed to the stiff headwinds of high interest rates. Purchases are still being postponed as sales weaken further and the supply and demand equations falter. The industry is caught in a vicious cycle, with interest rate cuts seen as a quick fix.

Most large downstream consumers of stainless steel face a harsh business environment. As per S&P Global's August 2024 report, real estate, metals, mining, automobiles, parts, construction material, machinery, equipment, and household and personal use sectors are all outside the growth territory.

However, the pharmaceuticals, telecommunication, food, and healthcare industries fared slightly better by staying in the growth territory. The latter sectors use stainless steel for equipment and storage.

The oil and gas sector is projected to gain strength in 2024 and 2025 as per OPEC's July report, which cites increasing air travel in the holiday season to bolster demand for fuel and its production. Aerospace is also expected to be a strong driver during the year and could strengthen nickel alloy demand.

Hydrogen projection and Ni 201 needs for electrolysis are strengthening, with upward forecasts for 2024 and 2025. The Davis Index for 201 solids climbed by 18 percent annually in September.

Another sector that has boosted the demand for stainless steel is shipbuilding. The industry is anticipated to reach new highs until 2026 as shipyards thrive.

Stainless steel mills have initiated production cuts, which can be traced back to low demand from the automotive and construction sectors. Automobile sales, especially in the United States, have lagged during most of 2024, mainly because of rising costs and inflation concerns. This has contributed to low stainless steel consumption.

Moreover, consumer spending has been hurt, and car sales have taken the back seat this year.

The United States' monthly purchase manager index (manufacturing PMI) slipped 1.7 basis points to 46.8 in July, according to a recent report from the Institute of Supply Management (ISM).

Construction companies are the most significant users of stainless steel; however, the United States Census Bureau's July report indicates that housing starts and completions are lower. Consumers are not confident about their future, citing the credit crunch amid limited lending, which has deterred infrastructure and automobile manufacturing growth.

Shipping line problems multiplied after disruptions on the Red Sea route escalated, adding further tensions in the Middle East. The fallout on the Suez Canal affected nearly 30 percent of global container traffic and raised inflation rates worldwide. The situation is far from eased, as energy supplies have also stalled in regions that import along deep-sea routes.

Containerized freight prices from China's ports have more than doubled in a year. The Containerized Freight Index is 164 percent higher than in September last year, while the Baltic Dry Index is 70 percent higher in the same timeframe.

In June, several exporters and importers of recycled stainless steel noted a shortage of containers and port congestion in the Far East. This hindered trade and softened the United States' recycled stainless demand. Rising shipping costs amid container shortages made shipping to and from Asia highly unfavourable.

The market has only started readjusting, and freight prices have stabilized after shipping container production seems to recover gradually. Exports of recycled stainless steel have improved, giving domestic prices a much-needed reprieve. Toward the end of each year, the metals and recycled material market has been known to lose momentum ahead of the holiday season. Looking at these factors, recycled material prices are likely to be rangebound in Q4 of 2024, if not slightly weaker than the current levels.

Despite the bottlenecks in shipping routes and container shortages, the United States sits on a large warehouse of subsidized imports of specific stainless steel grades from China and Southeast Asia.

Overcapacity in those regions has been the main reason for several Asian countries targeting export destinations. Cold rolled overcapacity could exceed 4 million metric tonnes this year in China and 12 million metric tonnes globally, increasing by 2 million metric tonnes compared to 2023.

The latest petition filed in September by United States manufacturing companies has defined a few products, including flat-rolled stainless steel, for assessment. The companies have urged the Department of Commerce and the U.S. International Trade Commission to impose antidumping duties on the listed products from 10 countries: Australia, Brazil, Canada, Mexico, the Netherlands, South Africa, Taiwan, Turkey (Turkiye), UAE, and Vietnam.

In August, Commerce issued a preliminary antidumping duty on Vietnamese exports of welded stainless steel pressure pipe for the review period from July 1, 2022, to June 30, 2023. While countervailing and antidumping duties are levied to protect domestic producers and encourage near-shoring or friend-shoring, a few economists believe this postpones an expected rebound.

Trade restrictions rose substantially in 2023, contributing to economic downside compared with 2015, according to World Bank data. Global trade growth in 2023 is less than 1 percent compared to an average of 5 percent from 2010 to 2019. However, World Bank data indicates over 2 percent growth in trade in 2024 and a little over 3 percent in 2025.

Stainless steel processors and mills were overstocked in Q2 and Q3, reiterating the tangible effects of the global economic slowdown. While businesses want to insulate their company's performance from sharp market movements, stainless steel markets are vulnerable to volatile nickel, chrome, and molybdenum raw material prices.

Recycled stainless steel processor buying prices for highly traded grades were almost 5 to 8 percent higher in Q1 this year compared with the latest price levels. Furthermore, stainless steel mills have reduced pricing for their raw material intake and have cut purchases in the event of weak downstream sales. For example, Acerinox's global melting shop production totalled 405,000 metric tonnes in Q2 2024, down 12 percent from Q1 2024 and 17 percent lower than Q2 2023.

Processors are at an impasse as margins continue to shrink while finished inventories mount, and most are now buying at price dips while volumes have waned and buying frequency seems erratic. Most have been keen on lowering prices to counter the high cost paid for buying material in the first half of this year.

Recycled Inconel prices are down almost 10 to 20 percent this year in September, which is in line with nickel compared with the same month a year ago, even though demand from the aerospace sector is firm. Notably, this sector is expected to do well this year and next.

The Davis Index for SS 304 solids is trending at its 2024 low in September, while 316 solids bottomed out from its lowest this year in August. Mounting inventories remains a crucial problem in this industry, affecting both upstream and downstream businesses.

Stainless steel alloy surcharges have dropped by 5 to 20 percent annually, depending on the grades. Compared with June (end of Q2), the alloy surcharges of September (end of Q3) are down between 2 and 15 percent. Annual and quarterly surcharge cuts have been more noticeable for the 300 series grades than the 200 and 400 series. Mills are keen to expand downstream sales while nursing losses and downstream consumers are unable to meet the expected demand.

Ferrous scrap prices like HMS1&2 cost and freight to Turkey started firmly in 2024, trading around $405 to $415USD per metric tonne as per the Davis Index. Steelmakers were slow to ramp up operations to support prices amid subdued finished steel demand. Despite relatively lower surcharges in September, sales have struggled, and upstream businesses have also faced the brunt.

The solution to these interlinked problems is directly proportional to a recovery in the global economy. Moreover, geopolitical conflicts have hurt energy and commodities markets. Improvement has been slow, and stainless steel consumption is unlikely to grow considerably in the second half of 2024. There is uncertainty about China's recovery and the direction of high interest rates in Europe and the United States.

The overcapacity situation in China will mostly be met by weaker-than-expected demand globally. Lower inventory levels are improbable this year, thus keeping the global stainless value chain and trade flows under pressure.

The slowdown in the stainless steel market and the lack of visibility remain for the third quarter.

In the United States, softening inflation and lower unemployment are key contributors to the potential rate cuts. The awaited interest rate cut could pave the way toward recovery. However, a 25 basis points cut would be a step toward the 50 basis points cut that economists expect later in the year. The way to return to normalcy is by overcoming these challenges.

Shohini Nath is a U.S. stainless steel analyst and editor at Davis Index, a market intelligence platform for the ferrous and non-ferrous metals and recycling industry. She can be reached at [email protected].

109, Parsi Colony, Block ALullanagarPune, IN, 411040

Website: davisindex.com