Forecasts and market analysis based on price assessments from Fastmarkets MB and Fastmarkets AMM

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March 2015 | Stainless Steels

Why Acerinox leads the way

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“With average nickel prices during Q4 set to be lower than those seen during Q3, stainless steel producers’ financial results will continue to weaken in the short term.”

While MBR continues to await its expected nickel price rally, we did not have to wait long to see our prediction above, made in our breaking view published back in December, bear true.

Recently-released results from Europe’s stainless steelmakers showed a decline in margins for all three of the continent’s major producers – Acerinox, Aperam, and Outokumpu – during the final quarter of 2014. 

With nickel prices continuing to weaken through Q1 of this year, we can perhaps expect financial results to disappoint again.

But that is not the topic of our article today. Instead, we look this month at the European stainless steel producer that has outperformed its peers in recent years – Acerinox.

Indeed, although not the case during Q4 of last year, Acerinox actually improved its margins during a time of falling nickel prices back in Q3. The company has also operated at relatively higher margins over recent years.

So what is so special about Acerinox?

It is certainly not that it dominates the European market - indeed, Acerinox only accounts for around 15% of capacity in finished cold-rolled flat stainless steel in the region.

Perhaps instead the focus should be on the woes suffered by Europe’s other key producers. Outokumpu for instance, which is Europe’s dominant producer, has seen its results impacted by widespread internal restructuring. Aperam meanwhile suffers in part through less efficient operations – it operates over 4 sites in Belgium and France compared to the 1 fully-integrated site operated by Acerinox in Spain.

But to only focus on the negatives of its competitors would be doing Acerinox a disservice.

For example, rather than a hindrance, the fact that it is not Europe’s dominant producer is one reason why Acerinox has performed relatively well in recent years. Despite its Spanish heritage, Acerinox these days may not even be considered European. Its earnings, production levels, and the geographical location of its sales are all higher outside of Europe than within it these days. This is due primarily to its ownership of North American Stainless (NAS), the leading producer of stainless steel within the USA.

Thus the company has benefited from a relatively strong US market in recent times, and from a strengthening dollar. The 8% appreciation of the dollar against the euro during the third quarter of last year for example clearly helped to boost the group’s net earnings in euro terms.

This focus away from Europe has of course been a deliberate strategy pursued by Acerinox, which will continue to reduce its dependence on the European market with the ongoing backward-integration of its Bahru Stainless facility in Malaysia.

Europe's other major stainless steel producers are also attempting to pivot away from Europe to some extent but such is their existing presence in Europe that it will prove to be very difficult.

Aperam for their part have their Timoteo mill in Brazil. The hope for Aperam is that South American consumption of stainless steel still has a lot of upward potential. Indeed, stainless steel consumption in South America averages around just 1kg per person per year, compared to levels of around 4-6kg in China, Europe and the USA.

South America, and Brazil in particular, are often said to be the locations of the future. Many also add that they always will be. But regardless of whether the region will ever live up to its potential, Aperam’s ownership of the mill has actually hurt their balance sheet in euro terms in the short term given the fall of the Brazilian real against the euro over the past few years.

Outokumpu meanwhile have their Calvert mill in the USA, which will continue to be ramped up toward full capacity by late 2016, and a cold-rolling mill in Shanghai. But, as can be seen in the chart, these two companies remain much more dependent on the European market than Acerinox for now, which has diversified well over recent decades and is now reaping the rewards.

Robert Cartman
Senior Analyst