Navigating the shutdown-created recession is proving to be a much different task for the specialty metals sector.
The specialty metals industry, like others in the metals supply chain, has endured countless down cycles through its history. Most veteran executives have been through a half-dozen or more downturns that have put the squeeze on even the most well-run operations.
Yet nobody in business today has experienced the kind of conditions the industry has found itself during the first half of 2020.
“We are a cyclical industry, so we’re used to these declines,” says Peggy Sikora, general manager of U.S. sales for Valbruna Stainless, Carol Stream, Ill. “But not like this.”
Bill Gouveia, vice president of Atlantic Stainless, Attleborough, Mass., agrees. “Unfortunately, I’ve never subscribed to the playbook, ‘This is how you manage in a global pandemic.’ I guess everybody is writing their own as they go along.”
For most companies, that starts at a place they’re familiar with, safety. “The No. 1 responsibility you have is the safety of your employees and their families. You try to do everything you can, follow all the recommendations and safety measures,” says Jason Matuscin, vice president of sales for Washington, Pa.-based Camalloy, a distributor that specializes in stainless products.
Gouveia agrees that the overriding safety concerns make these conditions different from previous downturns. “We’ve been through worse, but it’s the worrying about the health of your employees and keeping them safe. That’s the big difference in this from everything else. Our industry has always been concerned about safety. But this is a whole new level of safety to worry about.”
Of course, once those safety measures are in place, the second major concern kicks in. “Your No. 2 responsibility is to make sure they have a job to come back to once the lockdown is lifted,” Matuscin says.
Companies are just now managing through that second part. Though the economy remains a long way from “opening up” to full speed ahead, most stainless supply chain executives were starting to see a little bit of pick up as May turned to June.
“Hopefully May was the bottom,” says Michael Graham, Western region sales manager for Roda Specialty Steel, Buffalo Grove, Ill., a producer of stainless bar products. “The first week of June we had some good activity. There is light at the end of the tunnel.”
That sentiment was shared by specialty metals master distributor Ta Chen. “We’ve had some tonnage improvements, albeit small ones. But it’s moving in the right direction,” says John Hellinghausen, vice president of stainless flat-rolled products for the company, which has its U.S. headquarters in Los Angeles.
The story is similar north of the border, says Etienne Chouinard, general manager of Ulbrich Stainless Steels and Specialty Metals’ Canadian division, though the market was at its worst in April. “It started to go back up in May, and so far June is going to be better than May, since the government started to deconfine various sectors of the economy.”
Alas, even if the trajectory is improving, it will take a long time to fully recover what’s been lost, says global stainless analyst Markus Moll, managing director of Austria’s SMR GmbH. According to Moll’s analysis, the Americas, a market dominated by the U.S., will see an 18 percent decline in stainless shipments in 2020. That will be followed by a 19 percent increase in 2021. “And everybody who works with statistics knows that minus-18 and plus-19 does not bring you back to pre-crisis levels.”
The Western Hemisphere is not alone in feeling the bite. Moll projects a 16 percent decline in Europe (followed by a 17 percent increase in 2021), an 8 percent dip followed by a 16 percent increase in China, and a 13 percent decline and a 12 percent increase in the rest of Asia. Only the rest of the world, driven by India, will be ahead of the 2019 figures by the close of 2021.
All of Moll’s predictions are predicated on the idea that a second wave resulting in a second round of shutdowns is not forthcoming.
Looking at the individual markets, there are obviously some better poised to weather the recession than others. Certain subsets of the medical market are particularly strong, with no expectation it will slow down in the near future.
“The defense and medical markets have helped carry us through,” says Sikora. Graham agrees, describing the medical market as “consistent.”
The flip side to that is oil and gas, which was already in the midst of a pricing spiral before the coronavirus hit, which took a huge bite out of demand. That resulted in a literal glut of excess product.
“What we’re seeing in the energy market is just terrible,” Hellinghausen says.
Premium Alloys’ President James Coursey, whose company is based in Houston, agrees with that assessment. “Anything that’s going downhole, land-based, there is no demand for that.” While Coursey has seen a little more activity offshore, “overall, oil and gas is not a market you want to be fully invested in right now.”
Situated somewhere between those two is automotive. Demand obviously nosedived in March when most of the automakers halted production out of COVID-19 fears, but the recent restarts provide for a little bit of optimism. It will take a while for full ramp up to begin, but most executives believe that at least the worst is in the rear view mirror.
Moll says the automotive industry will be one of the long-term beneficiaries of the virus spread, as people around the globe will move away from public transportation. Moreover, “in a pandemic, a city is not a popular place.”
Other markets have shown spotty demand, with some subsectors outperforming the whole but otherwise lagging typical activity levels.
Before the coronavirus hit the western world in earnest in early March, Moll was anticipating an uninspired year in the stainless world. His forecast called for mild declines in shipments in the U.S., and stagnation elsewhere. Boeing’s issues with the 737, coupled with the dip in the oil and gas market that predated the pandemic, contributed to his muted outlook.
U.S. executives weren’t seeing that pessimism play out. Ta Chen’s Hellinghausen says his company’s service center customers were “excited” about their prospects. “Our year was pretty set for us. The activity level across all fronts seemed very positive.”
Somewhat remarkably, Roda Specialty Steel’s Western region remained somewhat up through the first five months, a testament to the strong performance in the first quarter, Graham says. April and May were both off substantially from the prior year.
Though most service centers and their customers were deemed essential, that didn’t mean business was functioning as usual throughout the worst of the shutdowns. Matuscin says his customers were typically operating at approximately 50 percent of their normal levels, driven largely by the fear of the unknown. “Nobody knew if they would be allowed to stay open the next day, so you’d find out late in the day whether you could make deliveries. There was a great amount of hesitation in the marketplace and an unwillingness to pull the trigger on a number of jobs.”
Both Valbruna and Roda had a bit of a head start understanding the depth of the pandemic. The companies have Italian parent companies, and thus were the first “hot spot” outside Wuhan, China. “Because we’re Italian-owned, we had the baseline experience of that country. We felt we were a little more prepared than others,” Sikora says.
Roda’s Graham says his parent company is located in the Lombardy region, the epicenter of Italy’s coronavirus outbreak. The mill was shut down for about a month during the height of the pandemic, leading to some delays in receiving material here.
Other than that delay, service centers are not reporting issues obtaining product, even with situations like those faced in Italy. “We haven’t noticed any lack of availability right now. That may change as we get a few more months into this. We have seen the mills slow down a little bit,” says Gouveia.
“Everything we’re hearing from the mill level, they have plenty of availability,” says Matuscin. “When your volumes fall off on a monthly basis for almost three months, there’s not going to be a lot of demand from service centers.”
If not now, Moll believes there will ultimately be fallout on the production side as a result of the pandemic. “I’m not speculating who will survive and who will not, but not everybody will make it. And not everyone on the nickel alloy side will make it.”
Matuscin has similar worries downstream. “The biggest concern is going to be with some of the customers and how long it takes for them to recoup their cash flow situation from basically being shut down for two months. That’s one ripple that might be felt throughout.”
In the middle of those two groups, however, there’s far less worry.
“Since this thing started, the service centers have been practicing very responsible inventory models,” says Hellinghausen. “Every year they manage inventories better. What we saw across the board was service centers being very well managed, and I don’t think that will change.”
Gouveia says the distribution industry tends to be good at the front part of a crisis, but struggles when there’s little visibility into what comes next. “I think our industry handles tough times and unstable prices and difficulty in getting inventory much better than it handles uncertainty. Uncertainty is the enemy of most businesses.”
But uncertainty will remain the governing principle for the foreseeable future, particularly given the possibility of the dreaded resurgence of the virus. “It depends on how bad the second wave will be, but for us our projection shows increased activity,” says Chouinard.
And that kind of guarded optimism is characteristic of all of the supply chain executives. “We’re going to be able to weather the storm, from what we see right now,” says Coursey. “Hopefully there are no more black swans coming our way.”
“The expectation is we’ve hit bottom and we’re going to start clawing our way out,” says Graham. “We’re not banking on our budget that we set early this year, but we think things will pick back up and we’ll finish the year strong.” ?