How Rising Input costs and Poor Demand making Global Stainless-Steel Industry bleed?

The year 2019 is proving to be particularly bad for global stainless steel (SS) industry due to poor demand from end-user segment and rising nickel prices (a key raw material) that are resulting in falling margins for the SS manufacturers.

Nickel which a key raw material for stainless steel sector is playing a spoilsport for the industry due to its rising costs. The nickel prices have lifted the input costs for most of the stainless steel producers in recent months. Majority of global SS manufacturers have been unable to pass the total amount of this increase on to their customers and the steelmakers, therefore, are forced to absorb the rising price of raw materials, thus cutting or eliminating their profit margins.

Why is Nickel prices soaring?

The key reason behind nickel's robust bull run is severe supply curbs arising from Indonesia amid a surge in demand from electric vehicles. The rally began in June this year when severe supply constraints rose from Indonesia, a nickel hub.

Indonesia accounted for about 22% of the global nickel exports in 2018 and it is a major supplier to the Chinese stainless steel industry. Hence, the recent widespread flooding in Sulawesi Island, Indonesia resulted in a loss of production from the country. Soon after the supply curbs eased down, the country announced its plans to introduce a ban on the export of nickel ore. The aim behind this move was to make Indonesia a major supplier of nickel.

The ban on exports of nickel ore, which was earlier scheduled in 2022 will now be effective from January 1, 2020. The ban is aimed to make Indonesia the major supplier for Stainless steel as well as the Asia's major EV market.

Plunging stainless steel demand

On the demand side, the stainless steel industry accounts for about 70% of the global nickel output, majority of the demand comes from China. A noticeable downfall in the Chinese economy hampered the demand prospects for stainless steel.Trade actions, by the United States, have slashed the volume of shipments of steel, and manufactured goods from China, and other Asian countries. In turn, this has negatively affected the ability of consumers, in these emerging economies, to buy goods from suppliers in many developed countries.

Producers, particularly in the traditional stainless steelmaking regions, continue to struggle with growing global excess capacity. European mills find it increasingly difficult to compete with price offers from Asia, for commodity grades. However, they may receive some temporary respite, in the near future, as the EC Safeguarding quota tonnages for several stainless steel product forms are projected to be exhausted, before the end of the quota period.

What does future holds?

The upcoming ban by Indonesia is likely to have a severe impact on China's stainless steel industry as they were their major suppliers. Nickel prices have rallied continuously in 2019 as the stainless steel producers have started to build up inventories of raw materials considering the global shortage which might be witnessed after the ban comes into effect. Other major producers like Philippines will try to bridge the supply gap which will occur after the ban comes into effect. However, southern Philippines Nickel mining hub faced suspension of extraction operations (the suspension might include 5 mines by the end of 2019) after the regional government conducted an industry audit which might further raise supply worries and in turn support prices.

Moreover, Indonesia aims to become Asia's Electric Vehicle (EV) hub in the coming future. Japan's Toyota Motor Corp has a plan to invest $2 billion in EV production in Indonesia. With such strong fundamentals and a possible deficit in the fourth consecutive year, it is likely that nickel prices may increase further pressuring the stainless steel producers' margins. On the demand side also, the outlook for SS remains negative which means that there is a tough road ahead for the global stainless steel manufacturers.