MANY FACTORS POINT TO RATIONALISATION IN STAINLESS STEEL

Numerous indicators regarding the prospects of the world economy in general and the stainless steel market in particular, suggest that a significant restructuring of the stainless production sector will be necessary, sooner rather than later.

There is already excess production capability. Western European capacity has, for some time, been estimated to be around one million tonnes above requirements. Growth in Chinese output has outstripped demand of late and new facilities have been built in various parts of the world.

Global economic growth forecasts have been downgraded. Even China's rate of expansion has slowed as the authorities there attempt to tailor their output to the new reality of the worldwide financial situation. The latest predictions for Western Europe are for nil or minimal growth in the next couple of years. However, with very few people convinced that recent measures designed to save the euro will be successful, even these projections may be optimistic.

The uncertainty created can be seen in the hesitation among would-be commodity investors. The risk of a big fall in values makes the decision to enter the market more difficult. To demonstrate the gamble, for the year to November, the Dow Jones-UBS commodity index lost almost 10 percent on a total return basis. To further emphasise the gloomy outlook, the US-based commodities trader, Cargill, recently announced that it would reduce the size of its workforce by 2,000 people. Being privately owned, the company does not need to take an optimistic view for the sake of its shareholders. A spokesman said the company thought that global economic growth was "weak and weakening".

Of more specific relevance to the stainless steel market is nickel. Its value is usually strongly linked to those of other traded commodities, particularly metals. However, its price has fallen 28.3 percent this year, compared with copper’s 17.8 percent decline. This is due to market fundamentals. Furthermore, nickel supply is expected to be in surplus next year.

The profitability of stainless steel producers is, of course, in question. All have striven to maximise productivity and minimise costs over recent years. Nevertheless, the Finnish-based company, Outokumpu, published an operating loss of €53 million for the third quarter of 2011. The giant European producer, Aperam, made a net loss of $US41 million for the same period.

Consolidation seems inevitable. Japan's Nippon Metal Industry recently announced that its stainless steel division would merge with that of Nisshin Steel. Rumours have been circulating lately, regarding proposed alliances between European producers, or combinations of European and Asian companies. It will, surely, be only a matter of time before conjecture becomes news.

Source: MEPS - Stainless Steel Review