Viewpoint: Stainless weakness to persist in early 2019

Excess stainless steel scrap inventory, increased nickel discounts and falling LME nickel prices are all contributing to a weak market outlook for US stainless scrap prices in early 2019.

Prices for bellwether stainless 304 scrap, which contains 8pc nickel and 18pc chrome, decreased by 23pc in 2019 from 58-59¢/lb to around 44-45¢/lb as of mid-December, the lowest since April 2016. The stainless scrap price fall follows lower raw material costs, mostly nickel, which decreased by 15.4pc during the same period. Additionally, the European chromium benchmark will fall to $1.12/lb in the first of quarter of 2019, a decline of 9.7pc from $1.24/lb the fourth quarter of 2018.

Compounding the raw material impact, stainless scrap supply in the US has grown in line with an expanding economy.

The economy has expanded at a strong pace in 2018, with GDP growth between 2.2-4.2pc during the first three quarters of the year and late-2017 tax reform both aiding strong manufacturing, which resulted in increased scrap generation.

Nickel discounts have logged historic lows during the year, down as low as 68.5pc for December US mill procurements. Nickel discounts are expecting to climb as excess inventories and competition from ATI's joint venture with an affiliate of China-based Tsingshan Group will continue to weigh on consumer prices.

The joint venture, which began commercial operations in early 2018, imports semi-finished stainless steel slabs products from Indonesia, which may be subject to the 25pc tariffs imposed on all stainless steel products imported into the US. The US government's review of the exclusion request is ongoing, while stainless steel slab production in the US is currently at approximately 95pc utilization rate. The US imported 62,672t of stainless slabs from Indonesia through October 2018, up from 18,903t in all of 2017, according to US Department of Commerce data.

International Nickel Study Group (INSG) confirmed the world primary nickel consumption in 2017 was 2.184mn t, while INSG forecast an increase to 2.350mn t in 2018 and 2.422mn t in 2019.

The strength of the nickel market is greatly reliant on stainless steel production as about 70pc of all nickel produced in the world will make its way into stainless steel production.

In the Americas, stainless steel production for the first quarter of 2018 was 718,000t, down slightly from 721,000t in the same period a year earlier, according to the most recent statistics from the International Stainless Steel Forum. Overall stainless production in the Americas in 2019 is expected to be relatively unchanged from 2018.

Indonesia plans to increase nickel mining capacity and Vale intends to invest $500mn in its New Caledonia nickel mine, adding to nickel supply. A waning China economy could further weigh on nickel prices and stainless steel 304 scrap prices in 2019.