Perhaps one positive that can be said about the stainless steel market as we begin 2016 is that prices are not falling as fast as they were a few months ago. Indeed, for much of 2015, prices fell drastically as the price of nickel, a key component in the most common grades of stainless steel, hit new multi-year lows with each passing month.
With nickel prices, at writing, hovering around $8,000/tonne - the lowest nominal level since 2003 - there is a belief that nickel prices are now oversold and thus due a rebound. Certainly for those that believe in long-term regression to the mean, nickel prices are low.
In real terms (i.e. accounting for inflation), they have historically averaged around $14-15,000/tonne at today’s prices. At some point, we would expect them to rise back toward this level. But will that happen in 2016? If so, stainless steel prices would receive an automatic boost given that such raw material costs are automatically passed on to stainless steel consumers in the form of the alloy surcharge mechanism used in stainless steel pricing.
At present, however, there are few indications to suggest that nickel prices will rise sharply in the next few months. Much of the nickel industry continues to produce even though, at these price levels, losses must be being made by many.
We understand that some miners have increased output in an attempt to lower unit costs and to generate revenues in order to pay down debts but it is clearly not a sustainable option at these price levels. The big question is how long will they hold out if nickel prices remain low? Who will blink first?
With the cost of dollar-denominated debt rising (in the form of rising interest rates and a stronger US dollar), some miners, particularly those in emerging markets with high dollar-denominated debts, may be pushed to extinction this year, although interest rates are still very low in historical terms. At the same time, a stronger dollar also acts to reduce other costs (e.g. labour) in dollar terms for miners in emerging markets.
Were there to be a raft of bankruptcies and mine closures, nickel prices could in turn pick up sharply but forecasting the timing of any decisions on mine closures is almost impossible. Those betting on a quick upturn in nickel prices would be wise to remember the words of John Maynard Keynes - “the market can stay irrational longer than you can stay solvent”.
In the short term at least i.e. the next 3 months, stainless steel prices are thus very unlikely to receive a boost from nickel prices rising. There are some other indicators that do provide a measure of hope for the world’s stainless steel producers, however.
Firstly there is the fact that stainless steel imports in most regions of the world have begun to ease, and so too have localized stock levels, suggesting that problems of oversupply have softened. There is also some hope that stock levels have fallen to the extent that a short-term increase in purchasing is due.
That said, we note that stock levels have, by our understanding, merely fallen back toward long-term average levels, having been built up through late 2014. There is also understandably little desire on behalf of large-volume buyers to restock on any significant scale while stainless steel prices are still falling slightly, and unlikely to rise significantly in the short term. Large-volume buyers are thus happy to wait for now, particularly with lead times on stainless steel generally quite short.
Perhaps base prices (the component of stainless steel pricing not dictated by movements in alloy prices) may rise somewhat over the coming months as the market tightens and some large-volume buyers replenish their stocks. But supply could almost certainly respond to any sharp increase in demand - the short lead times at present are a symptom of surplus production capacity waiting to be used. With prices of alloys, notably chrome and nickel, likely to remain subdued over the short-term, however, the global stainless steel market may have to continue to wait for any significant upturn.
Source: MetalBulletin Research