Stainless Steel Where Will Stainless Shine in 2013? Jason Kaplan Senior Principal Analyst 27 September 2012

Stainless SteelWhere Will Stainless Shine in 2013?

Jason KaplanSenior Principal Analyst27 September 2012

Copyright © 2012 IHS Inc. All Rights Reserved.2

Stainless Provides No Challenges for 2013

• Will supply tighten?• Demand: Slow return over 2013 in the United States, not until 2014 in

Europe, China losing some momentum• Capacity utilization globally at 60-70% – Mills tended to run at 80-90%• Specialist grades less available, but prioritised by mills

• Will prices leap?• Base price will remain relatively static at and close to present floor• Alloy surcharges: Nickel likely to rise further, chrome supply is a concern

• Risks• Alloying elements have highest risk and largest impact

• Implications for Buyers


Crude Stainless Production Has Fallen, Reflecting Poor Global Demand

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012f0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

0%

10%

20%

30%

40%

50%

Global Crude Stainless Steel Production and Chinese Share (m tonnes, %)

Asia Americas EMEA China's share [RHS]

Source: ISSF Note: Chinese output not broken out before 2005


Stainless Has Both Consumer and Industrial Applications – Consumer Has Suffered Especially

Catering and Appliances;

37%

Process and Resources; 19%

Construction; 18%

Transport; 12%

Chemical and Energy; 11%

Others; 3%

Breakdown of Stainless Sectorial Demand (%)


Returning Construction Will Lift Demand, but Only From 2014 in the United States and Later in Europe

2008 2009 2010 2011 2012 2013 2014 2015 20160

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

30%

32%

34%

36%

38%

40%

42%

44%

46%

48%

Global Construction and Share of Residential(2005 $ bn, %)

RotW Asia Western Europe North America Resid. W.Europe [RHS]Resid. N.America [RHS]

Source: IHS


Output Approaches Long Run Trend by 2015, But Lost Production Amounts to 33 m Metric Tons

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150

10,000

20,000

30,000

40,000

50,000Stainless Steel Production and Forecast

(m metric tons)

Source: IHS Global Insight


Overcapacity Will Remain an Issue as Situation is Not Being Adequately Tackled

• Chinese capacity to grow to 26 m metric tonnes by 2015

• Additional capacity coming on-line:• POSCO Orissa• ThyssenKrupp Mobile• Acerinox Johor Baru

• A few players are working to cut capacity…

• Outokumpu and Inoxom merger• Aparem available

• …but will stop if market share is hit, without lifting profitability

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

50%

60%

70%

80%

90%

100%

Melted Stainless Capacity Uti-lization (%)

Source: ArcelorMittal, IHS Global Insight

Historic capacity utilization


Mills’ Margins Have Suffered – Leading to Cost Cutting and, More Recently, to Consolidation

2002 2003 2004 2005 2006 2007 2008 2009 2010 201120%

10%

0%

10%

20%

Gross Operating Margin at Stainless Mills (%)Outokumpu AK Steel Acerinox

Source: Thompson Financials Note: Some results include other specialist, but non-stainless materials


However, Prices Have Stayed Up – Driven by Non-Base Price Elements…

0

2,000

4,000

6,000

0%

20%

40%

60%

80%CR304 Price Make-up and Alloy Share ($/metric ton, %)

US - Alloy US - Base Alloy share [RHS]

0

2,000

4,000

6,000

0%

20%

40%

60%

80%CR430 Price Make-up and Alloy Share ($/metric ton, %)

Europe - Alloy Europe - Base Alloy share [RHS]


…As Alloy Costs See Both Higher Levels and Greater Volatility – Traits Likely to Stay

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

20,000

40,000

60,000

80,000

100,000

0

1,000

2,000

3,000

4,000

5,000

6,000

Stainless Steel Input Alloy Costs($/metric ton)

Nickel Molybdenum Chrome [RHS]


Given Weak Fundamentals Prices Rise Principally on Alloy Increases Through 2014

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Cold Rolled 304 Transaction Price($/metric ton)

China United States Europe

Impact of Greek exit

Source: IHS


Risks Are on the Downside From a Buyer’s Perspective, But are Mainly on Cost, Not Supply

Risk LikelihoodImpact on

Supply Price

Raw material supply issues could push up prices or even stop supply

Ferro-chrome from South AfricanNickel from more problematic laterite ores

30%20%

MediumLow

MediumHigh

Low freight costs lift trade, but protectionism isolates markets and produce local price spikes

United States, Europe wary of Chinese importsDuties are applied when the material lands

20% Low Medium

Reduced inventories through the supply chain could bring short-term supply shortages, if:

Demand lifts unexpectedlyShipments drop from a supply disruption

10% Medium Medium


Stainless Will See Little Shine in 2013, With Just a Few Bright Rays From 2014

• Over next 18 months• Supply has few issues even with significant consolidation...• ..while demand remains weak• Base prices, dictated by fundamentals, will stay close to cost of production

• Alloy surcharges expected to stay muted, but rise slowly• Given production costs, nickel prices are un-sustainably low

• Risks stem mainly from raw materials• Little way to self-protect from ferrochrome supply issues• Nickel price hikes are possible / likely if capacity is disrupted


Implications for Buyers

• Consider locking in prices, perhaps later in 2013• Offers protection against price rises or supply difficulties• Range bound prices over 2013, makes locking in more attractive for 2014• Beware that severe shortages could be met by force majeure clauses

• Explore opportunities to move away from austenitic stainless• e.g. duplex grades could substitute for 304 and 316 in some applications• Discuss material alternatives with suppliers• Automotive specific grades are being pushed by mills

• Implement effective hedging for nickel exposure• Prices still close to multi-year lows and can only rise• New technology is riskier to implement, so shortages are possible• Ferro-chrome and molybdenum hedging on LME is too new


Thank you!

Jason Kaplan Senior Principal Economist [email protected]

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Stainless Steel Where Will Stainless Shine in 2013? Jason Kaplan Senior Principal Analyst 27 September 2012