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Commodity uptick pans out well for stainless steel

Stainless steel is regaining its shine. After falling victim like many other basic industries to the global commodities downturn, companies that specialise in the rustproof metal are enjoying a change in their fortunes.

An upwards spiral in share prices, bigger profits and increased payouts to investors is helping to restore the lustre in this niche of the steel market.

“It’s very clear we are now in a recovery process,” says Bernardo Velázquez Herreros, chief executive of Spanish group Acerinox. “We are optimistic for the future.”

Although stainless steel accounts for a tiny fraction of all steel produced worldwide, it is an important market as the metal goes into household appliances, medical goods, cars and water treatment equipment.

Its use is also widening as developing countries transform into consumer economies with aspirations of higher living standards. A record 45.6m tonnes were churned out worldwide last year, according to estimates from steel consultancy Meps.

There are three listed pure-play stainless steelmakers, including Acerinox. They are all based in Europe but with international operations — and all of them are riding a wave of rising prices and buoyant demand for the metal as consolidation, a reduction in capacity and trade policy have helped spur recovery.

The revival was highlighted this month by Luxembourg-based Aperam, which raised its dividend by a fifth and unveiled a $100m share buyback as it reported a near one-quarter jump in annual net income to $214m. That was despite a 10 per cent decrease in revenues to $4.3bn, mainly due to a price slump in 2016.

A week before, its rival Outokumpu of Finland revealed its first core annual operating profit since 2007 and proposed reinstating dividend payments after a six-year gap. Seth Rosenfeld, analyst at Jefferies, described the decision as “a symbolically important step for this previously beleaguered company”.

Over the past year, shares in Acerinox and Aperam have gained more than one-third and 56 per cent, respectively, while Outokumpu’s stock price has more than tripled. Each company has a market value of about €4bn.

The almost year-long rally in the metal follows a collapse in general steel prices that wrought havoc on producers around the world.

“What we see today is that from the trough of last year, prices have recovered,” says Timoteo Di Maulo, chief executive of Aperam.

Benchmark grades of cold rolled stainless coil became cheaper during the first quarter of last year than at any point since 2009 in the US, and 2003 in Germany, according to data provider CRU.

A key factor in the reversal is climbing prices for nickel and chromium, elements that endow stainless steel with corrosion resistance and toughness. Although the cost of these alloying agents is passed on directly, when they are falling buyers of stainless steel tend to put off purchases in anticipation of the metal becoming cheaper still.

“Last year, in terms of prices, we’ve experienced the lowest level that we could have imagined [for some] commodities,” says Mr Di Maulo. The situation became unsustainable, he argues, as some nickel suppliers were selling below their own production costs.

Yet anchoring the stainless steel recovery is the apparent resolution of fundamental problems that have dogged the wider steel sector.

“Stainless [steel] was considered a worse industry than [standard] carbon steel a few years ago, but that led to three key things: consolidation, capacity reduction and trade policy,” says Mr Rosenfeld of Jefferies.

Closures of underused factories have partially dealt with excess production capacity, a chronic issue for the steel industry. When plants are not filled with orders, their high fixed costs weigh heavily on profits and companies lose the power to set prices.

Outokumpu led the charge following its €2.7bn acquisition of Inoxum, the stainless steel unit of German industrial group ThyssenKrupp in 2012, shutting about two-fifths of its combined European melting capacity.

“But even after that consolidation we still saw bad industry profitability due to lots of imports coming into Europe,” adds Mr Rosenfeld.

After Chinese steel mills flooded international markets with surplus material, the EU slapped anti-dumping tariffs on stainless steel sold at lowball prices in early 2015. The US followed suit last year.

The move by Brussels stemmed an “incredible surge” of stainless steel shipments from China, says Mr Di Maulo. “It has helped prices a little bit, but also helps European companies to recover the production volumes that they need,” he adds.

Stainless steel companies say the measures are complementing internal efforts to cut costs, reduce debt and offer higher-value product.

Chris de la Camp, chief financial officer at Outokumpu, says the sector is also being aided by an uptick in Asian demand — particularly in China, which produces half the world’s steel. “When China grows, it keeps the pressure off Chinese material moving elsewhere,” he adds.

But for others, the world’s monolithic producer remains an uncertain variable in the equation. “The main risk is China. It’s a black box,” says Mr Velázquez of Acerinox. “If they maintain their promise to reorganise the steel sector, try to consolidate and not increase the excess capacity, then the market will come back to reasonable and healthy levels. If not, then who knows what will happen.”

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