Stainless-Steel Sales Jump as Nickel Gain Spurs Stockpiling

May 27, 2014 1:44 am ET

(Updates with nickel price in sixth paragraph.)

May 27 (Bloomberg) -- Mining companies aren’t the only ones benefiting from this year’s nickel rally. Stainless-steel makers in Europe, who use the metal, are seeing a surge in sales as customers stock up to avoid higher raw-material surcharges.

Finland’s Outokumpu OYJ reported a 9.1 percent jump in stainless-steel deliveries from the fourth quarter, orders at Madrid-based Acerinox SA are “the highest in at least three years,” and Germany’s ThyssenKrupp AG, says customers are adding to inventories. The sales jolt is reviving prospects for in an industry mired in losses since the financial crisis.

While nickel accounts for half the cost of stainless steel, mills impose surcharges to cover any increase in the expense. Nickel surged 41 percent this year after Indonesia, the largest supplier to China, banned ore exports to spur investment in domestic smelters. The supply halt is boosting profit for mining companies including Glencore Plc and may help create what Credit Suisse Group AG called a “supercycle” in prices.

“The biggest winners are nickel producers, and the second- biggest are the producers of stainless steel,” said Markus Moll, the founder of Reutte, Austria-based Steel & Metals Market Research GmbH who has studied the industry for three decades. “Usually such a surge in nickel prices triggers a strong speculative buying wave. The biggest loser is the end user, who has to pay higher price for stainless.”

Nickel makes up 8 percent to 9 percent of series 300 stainless steel that accounts about two thirds of global output. Steelmakers impose a so-called alloy surcharge usually linked to the London Metal Exchange price with a one-month lag.

Price Gain

The cost of nickel reached a two-year high of $21,625 a metric ton on May 13. Macquarie Group Ltd. said May 22 that prices will rise even further as the Indonesia ban creates a global production deficit until 2019. The metal was at $19,600 a ton on the LME at 1:41 p.m. in Singapore today.

Buyers of stainless steel will step up purchases to avoid higher surcharges, which will be reflected in rising orders for the world’s mills over the next few months, Moll said. Speculative purchases including those for stockpiles may drive up European demand by 10 percent this year, compared with growth in actual use of as much as 4 percent, he said.

“Nickel prices went up quite significantly, and it seems the whole industry overall is recovering there a bit, which was definitely needed,” ThyssenKrupp Chief Financial Officer Guido Kerkhoff said on a conference call May 13. The price gain helped the company’s AST stainless-steel unit, he said.

Profit Gain

Espoo, Finland-based Outokumpu expects nickel rally will keep helping to boost deliveries in the second quarter after sales jumped to 676,000 tons in the first quarter from the fourth, the company said April 29. The company expects nickel to rise and “similar or somewhat higher” deliveries in the second quarter. Analysts expect Outokumpu to earn 45 million euros ($62 million) in 2015, according to 14 estimates compiled by Bloomberg, the first profit since 2007.

Aperam SA, a Luxembourg-based steelmaker with capacity of 2.5 million tons in Europe and Brazil, said May 7 that higher prices and restocking by customers helped boost first-quarter earnings before interest, taxes, depreciation and amortization. The company will be profitable this year for the first time since 2010, a survey of eight analysts by Bloomberg showed.

China, the biggest metals user, may become a net importer of stainless steel this year because of disruptions to nickel- ore supply from Indonesia, Credit Suisse said in a May 8 report. China, which accounts for 53 percent of global stainless-steel output, had a cost advantage by developing technology to use lower-cost nickel pig iron, which contributed to a three-year slump in LME price of refined nickel.

More Smelters

Steelmakers in China have lost their advantage because the cost of NPI is now close to refined nickel on the LME and scrap nickel for recycling in Europe and the U.S., Macquarie said. Chinese stainless-steel output will grow 9.1 percent this year, after a 21 percent increase in 2013, with more low-nickel content alloys produced, the bank estimates.

The nickel-fueled gains may not last as China may build smelters in Indonesia to get around the ban. Construction takes about 12 months, so a “de-bottlenecking” of supply will occur in mid-2015, sending prices to $16,000, Goldman Sachs Group Inc. said in a May 14 report. Nine nickel-processing plants may be completed this year in Indonesia, with as many as 40 more by 2017, according to the Energy and Mineral Resources Ministry.

Rising scrap-nickel prices also erode profitability for European mills. Scrap’s discount to LME prices may narrow to about 15 percent from 22 percent by July, SMR’s Moll said. In Asia, scrap is about 10 percent below LME nickel as mills in China use more, Citigroup Inc. said in a May 7 report.

Biggest Losers

The demand surge also may fall short of expectations. So far, the industry is “surprisingly reluctant” to restock, Skanderborg, Denmark-based stainless-steel wholesaler Damstahl A/S said in a report this month.

Macquarie said it expects the nickel rally to last for the next few years, with the prices reaching $26,001 in 2015 and $38,000 in 2019. The metal settled on May 23 at $19,600 a ton.

Deutsche Bank AG, which raised its price forecasts this month, said the gains would help bolster profit for Baar, Switzerland-based Glencore, which gets more than half its income from coal and copper.

The biggest losers in the nickel rally will be end-users, including building contractors, equipment makers and metal distributors, Jason Martineau, national sales manager at Penn Stainless Steel Products Inc. in Quakertown, Pennsylvania, said in a telephone interview May 15.

“Profit margins in construction are quite small, so the industry is particular vulnerable to material price increases,” said Anirban Basu, chief economist Associated Builders & Contractors Inc., a Washington-based industry group. “Often, the risk of material prices falls upon the contractor, as opposed to the developer.”

--With assistance from Luzi Ann Javier in New York.