Article Published: June 12, 2014
Article Published: June 12, 2014
The domestic specialty metals industry is a capital intensive, highly competitive industry that is modern and efficient and a recognized global leader in the development and implementation of new and innovative product and process technology. As such, it competes successfully on a global basis, exporting significant quantities of product, particularly product in the more highly valued end of its overall product distribution. Despite its preeminent position in this global market, it must contend with unfair trading practices from its global competitors, industry consolidation, high energy and regulatory costs, periodic swings in raw materials costs, high capital costs and high legacy costs.
Regardless of these challenges, growth in demand for specialty steel products exceeds five percent per year due to product improvements and increased global lifestyle expectations.
There are about three dozen specialty metal or specialty steel companies operating within the Pittsburgh metropolitan statistical area (MSA.) Beyond the MSA and within 100 miles of Pittsburgh are hundreds of other specialty steel manufacturers, processors, fabricators and related companies that comprise a supply chain and industry cluster.
Major industry players, such as Allegheny Technologies, Universal Stainless, AK Steel, Carpenter Technology Corporation (formerly Latrobe Specialty Steel), Perryman Company and Electralloy, make the region a world center of excellence in the specialty steel industry. In general, local industry leaders are positive about the near-term future of the industry, while expressing concern about the long-term future, in the face of foreign competition.
Specialty steels stimulate other sectors of the economy. Many of these metals are so versatile that they add higher quality characteristics to manufactured goods, for example, corrosion resistance or high strength with lower weight.
Defining Specialty Steel
Due to the broad range of manufacturing activities encompassed by the industry, definitions of the term “specialty steel” tend to be elusive. Specialty steel enterprises run the gamut, including fully integrated mini or “boutique” mills that produce both commodity stainless steel products for resale; the stock they use to forge and finish high performance parts; fabrication plants that make parts, tools and utensils and treatment and finishing mills that add value to commodity stainless steel products by enhancing surface durability and aesthetics. In terms of application and use, specialty steels range from the stainless steel sink for the typical kitchen to the high-performance, nickel-based super alloys that keep jet engines flying while under extreme thermal and mechanical stress.
Specialty steels differ in several ways from the conventional steel that is used in construction girders, car bodies and “tin” cans. First, and perhaps most important, specialty steels are chemically and metallurgically designed and manufactured to meet highly specific performance standards.
Second, unlike conventional carbon steel, which uses iron as its main feed material, specialty steels are manufactured mainly from re-melted scrap steel.
Finally, specialty steels are manufactured in significantly smaller quantities and command significantly higher prices than carbon steel.
Scales and Costs
For comparison of production scales and pricing, Carpenter Technology illustrates differences between three types of steel producers. Whereas a large producer of both conventional carbon steel and stainless steel might produce 20 million tons of product per year, Timken’s Canton, Ohio alloy steel facility might make 1.5 million tons of automotive bearing and special bar quality steel each year, using a 150-ton furnace at a price of $640 to $1,120 per ton. Carpenter’s plant, on the other hand, would typically produce 50,000 tons, in a 35-ton furnace at prices ranging from $700 to $59,800 per ton.
Latrobe Specialty Steel’s sales typically have benefited from the strong aerospace and specialty steel markets, which comprise a considerable portion of the company's overall sales.
In 2006, AK Steel’s board of directors approved a $55 million expansion, upgrading and modification project at its Butler, Pennsylvania and Zanesville, Ohio facilities which was expected to increase production capacity for high quality, grain-oriented electrical sheet steels by about 12 percent. A $180 million capital investment to increase electrical steel production capacity at its Butler works was completed in 2011. The two investments combined have served to boost AK Steel’s production capacity for electrical steel products to about 5.2 million tons per year.
The most widely produced type of specialty steel is stainless steel, which is defined by the Specialty Steel Industry of North America, (SSINA) as steel containing more than 10.5 percent chromium. The SSINA lists more than 100 stainless steel alloys, categorized within five crystalline microstructure systems. Each crystalline system, or phase, carries a different set of materials characteristics. Principal among those characteristics are hardness, strength, formability, ductility, weldability, conductivity, magnetism and corrosion resistance. Depending on the balance of crystalline phases of the subject steel, these characteristics are tunable by a variety of methods, including rolling or working the metal in either a hot or cold state, heating after manufacture (annealing), surface treatment (pickling), machining and aging.
The International Stainless Steel Forum (ISSF) reported global stainless steel production in 2013 to reach a record 38 million tons, an increase of nearly eight percent over the previous year.
How Alloys Become Specialty Metals
In addition to chromium, a wide range of alloying metals may be added to improve performance. Those metals include nickel, silicon, carbon, manganese, molybdenum, sulfur, selenium, tantalum, titanium, copper, vanadium, tungsten, niobium cobalt, hafnium and zirconium. These elements are added for purposes of variously increasing corrosion, scaling or heat resistance, welding performance, tensile strength, or to enhance machining, cold working or surface finishing. As an industry convention, once an alloy component exceeds 30 percent of the total composition of the product, it is no longer considered an alloy, but is referred to as the alloy’s metallic base. Hence, the metal in high performance components is called a nickel-based alloy, rather than nickel-steel. The technology of specialty steels has advanced so far and so rapidly, that many metals previously called specialty steels are now considered specialty metals. Many manufacturers of specialty steels are also in the specialty metals business.
After iron and aluminium, titanium is the third most common metal to be found in the earth's crust. Titanium is chemically stable, lightweight, strong, corrosion-resistant and heatproof, but in the past, the high cost of extracting it from other minerals has made it too expensive for industrial use. However, titanium is finding its niche in a variety of industries, including aerospace, military, automotive, sporting goods and medical.
Several years ago, the U.S. titanium industry consisted of ten companies capable of producing high-quality titanium suitable for building airplanes. Today, there are only six, and two have locations in Pittsburgh: RTI International Metals (one of Fortune magazine’s top 100 fastest growing companies for 2008) and Allegheny Technologies. Dallas-based Timet, with operations in Morgantown, WV, is third and a Russian company, the world’s largest producer of titanium, is the fourth.
Titanium producers are stepping up and expanding their capabilities to take advantage of the fact that the growing demand for the specialty metal in the aerospace and defense industries has catapulted prices approximately 80 percent in recent years. Industry experts believe that prices will continue their ascent. Consequently, Allegheny Technologies completed a $1.2 billion investment at its Brackenridge, PA plant, while operating profit is forecasted to increase by as much as $150 million to $250 million, as a result of the new modernized plant.
The Washington County-based Perryman Company recently completed a $30 million expansion, and has plans for a decade-long growth at a rate of 10 to 20 percent.
In 2006, the world's largest aircraft maker, Airbus SAS of France, entered into a 10-year agreement with RTI International Metals. The company will supply titanium to support the new Airbus 380 program. Over the contract's term, RTI expects to generate revenue in excess of $800 million.
Specialty steel commodities are classified by two basic shapes: flat and long products. Flat products include stainless steel plate, coils and sheets, while long products are ingot, bar, wire, rod and seamless pipe.
Higher value forged and finished products are made of high purity steel that is frequently re-melted and solidified two or more times. Increasingly, the term “specialty steels” is being replaced by “specialty metals” to more accurately reflect the range of products made by various manufacturers in the industry. Specialty metals include nickel-based alloys, titanium and precision-engineered metals, such as silicon electrical steel.
The specialty steel industry serves virtually every major industrial sector, including aerospace, construction and mining, chemical processing, oil and gas drilling, food equipment, appliances, automotive, machine and cutting tools, electrical energy, medical, defense, electronics and transportation services.
To make specialty steel, electricity is used to melt scrap steel, either in an electric arc furnace or a vacuum induction-melting furnace. In addition, other raw materials, such as ferrochrome or nickel may be added to adjust the metal’s chemistry. Depending on the specific process, heat is generated, either by an electrical arc struck between an electrode and the scrap inside the furnace, or by induction, which uses the metal itself as an electrode to generate thermal energy by means of electrical resistance. The vacuum facilitates the removal of reactive gases, such as nitrogen and oxygen and contaminants, such as phosphorus, which negatively affect the steel’s performance characteristics.
Depending on performance and purity requirements, secondary and tertiary melting and refining are done by means of argon/oxygen carbon reduction (decarburization) or a vacuum oxygen decarburization process, (respectively called AOD and VOD in the industry). Both processes alter the operating atmosphere and its pressure to permit the removal of impurities, while protecting the molten steel from recombining with either contaminant gases or residual solids.
At its facility in Monessen, Koppers annually produced approximately 327,000 metric tons of furnace coke, a key ingredient in producing steel, and sells it all to the world's largest steel company, Mittal Steel USA.
Defining the Niche
In many specialty steel operations, the same array of equipment is used to manufacture many different specialty steel products, which makes effective capacity utilization one of the keys to success. As a practical matter, specialty steel manufacturers typically rely on niche markets in order to optimize capacity utilization and to compete effectively in the area of higher value-added products. For some producers, no single specialty market is large enough to completely fill surplus capacity. Furthermore, offshore production, as a result of downstream customers’ demands for lower prices, results in a trend toward domestic concentration on high value production. Consequently, support services and research become less economically viable, as a consequence of lower overall output.
Through SSINA, the specialty steel industry expends considerable effort in Washington, D.C., taking advantage of U.S. trade laws, which are compliant with World Trade Organization regulations and designed to mitigate unfair trading practices by foreign competitors. In addition, SSINA has led an initiative in Washington focusing on the overall improvement of U.S. manufacturing competitiveness, especially in the specialty steel industry.
Testimony from the SSINA in 2005 alerted the U.S. China Commission to the importance of the health of the specialty metals industry to national defense. The testimony explained that technology development travels with the manufacturing process. Facilities and plants in the specialty metals industry are laboratories. It is therefore naïve to think that manufacturing of these materials could be transferred to China, while technology development is kept here in the U.S.
Continued off-shoring may result in a cascade of events detrimental to national defense, to the specialty steel industry and to the American industry at large. Without domestic commodity production, the SSINA testimony claimed that the U.S. will not have jobs for engineers and scientists, which naturally will result in a dearth of science and engineering university graduates, which in turn over time, will result in fewer new technologies and products, thereby undercutting our ability to compete in the future.
Predicting the Future
The Specialty Steel Committee of the Pittsburgh-based Association for Iron and Steel Technology (AIST) reported that for the near term, the United States specialty steel industry is well positioned to compete in a global marketplace, but cautions that production capacity may be purchased and installed by anyone with the financial resources to do so. Although the capital cost of entering the specialty steel industry is high, the profits associated with the production of high-performance products may serve as an incentive for emerging countries to buy their way into the industry. Although world production capacity is currently more or less in line with demand, low capital cost investments by emerging nations could conceivably lead to excess world capacity. Such eventualities would result, not only in inventory gluts, but de facto unfair trading practices, as a result of the low cost of capital in emerging nations.
Titanium manufacturers’ interest in military contracts is protected by the specialty metals clause, a provision to the 1941 Berry Amendment, which mandates that certain materials used for U.S. defense be manufactured in the U.S. However, the Aerospace Industries Association (AIA) has lobbied the Department of Defense to relax its interpretation of the law and allow the Russian-made titanium to enter the U.S. market.
A study conducted by Latrobe Specialty Steel analyzed the effects of emerging markets on the specialty steel industry, with a focus on the competitive realities of low labor cost countries (LLCC) versus high labor cost countries. The analysis compared the relative cost fractions of labor, capital and freight from Asia to the United States across carbon steel, special bar quality steel and specialty steel products. The limited study revealed an increasingly favorable bias toward foreign manufacture and export of small, light, high value products, traits that define specialty steel products. The study concluded from this that domestic migrations to high value products alone cannot protect against foreign substitutions of those same products.
In addition, the Latrobe Specialty Steel study considered the possibility of non-economic behaviors by foreign governments, including market-distorting government subsidies, excess capacity and global raw materials shortages. Other potential illegitimate competitive advantages posed by LLCCs include zero-cost capital, disregard for environmental problems, currency manipulation and trade protection. In light of this set of potential threats, service, flexibility and customer responsiveness are a key to the successful cultivation and preservation of the U.S. specialty steel industry’s customer base.
In response to these conditions, Latrobe has modernized and expanded production capacity for re-melted and double re-melted products for the aerospace and cutting tools industries. In addition, they have entered the tool steel distribution business for commodity products manufactured offshore. Today, Latrobe Specialty Steel’s distribution business contributes about one-third to the company’s revenues.
Late in 2011, Latrobe Specialty Steel was acquired by Carpenter Technology Corp., a Reading-area specialty metals producer, in a $558 million deal that both sides said will benefit the Latrobe operations. Previously, Latrobe’s ownership group invested $60 million into building the world's largest vacuum induction melting furnace, which came online in 2009 when other manufacturers were cutting production.
Going Where the Business Is
Bridgeville, PA-based Universal Stainless and Alloy Products serves the aerospace, power generation, petrochemical and manufacturing industries.
Founded in 1994, Universal has little to offer in commodity products. The company focuses its resources on the development of close relationships with customers who buy significant amounts of the products that Universal has positioned itself to produce and market efficiently. Universal’s strategy targets markets that will be less affected by exports, due to its close relationships with high-value customers.
Universal’s acquisition of an unfinished $104 million Ohio factory, just 80 miles from its Bridgeville headquarters, has jump-started its growth in aerospace, power generation and oil and natural gas markets.
The new plant gives Universal more production capability with the largest hydraulic radial forge of its kind in this part of the world. In addition, the new factory has two vacuum arc remelting furnaces and an 18-ton vacuum induction melting furnace, which has an annual capacity of between 9,000 and 12,000 tons.
Meanwhile, Universal's Bridgeville continues to ramp up production, as an indirect result of the acquisition, and the company expects to increase sales by about 70 to 75 percent with the new plant and to double its profits in coming years.
Between 2001 and 2003, in the aftermath of 9/11, the market for stainless steel plate and sheet products collapsed, largely as a consequence of downturns in the airline industry. The year 2004 and the first part of 2005 saw a recovery largely due to developments in the aerospace industry, such as Boeing’s new, high efficiency 787 airliner.
Although recent upturns in the aerospace sector appear to be buoying the domestic market, steady increases in foreign imports of specialty steel commodity products combined with decreases in domestic consumption continue to give some industry leaders cause for concern for the future. Production data from the ISSF indicates that the stainless steel market was oversupplied for an extended period. Import consumption and market penetration data from SSINA shows recent increases in total specialty steel imports and total foreign penetration of specialty steel into the U.S. market has risen significantly.
In 2006, United States Steel Corporation opened its world-class 120,000 square-foot research and technology center in Munhall near Pittsburgh. The center employs 110 research and technical personnel who provide a broad range of support to the company through advances in product and process technology. The high-level research efforts conducted at the center will help ensure that U.S. Steel remains at the forefront of technological advances, and our region will continue to play a role in this increasingly competitive global industry.
In 2006, U.S. Congressman Mike Doyle (D-Swissvale) announced that the National Park Service designated the old Carrie Furnaces, which formerly produced iron for the U.S. Steel Homestead Works, a national historical landmark. The designation provides historical protection for the mill and could help fund preservation and restoration, which may cost up to $100 million.
Leveling the Playing Field
Far and away, the gravest concern among industry leaders is that of competing against foreign governments. They unanimously proclaim the urgency of maintaining a level playing field through the vigorous enforcement of existing trade laws. In 1998, in response to foreign “dumping” of steel products into the United States, the U.S. International Trade Commission (ITC) imposed anti-dumping and countervailing duty orders variously on stainless steel plate, coil and strip products made in Belgium, Canada, Italy, Korea, South Africa, France, Germany, Mexico, Taiwan and the United Kingdom. In March of 2005, the ITC conducted a five-year sunset review on the tariffs. After deciding to revoke duties on the United Kingdom and France, regulators reinstated duties on all other originally named countries. U.S. steel industry tariff revenues are distributed to steel companies who prove that they have been injured by unfair competition or dumping.
Winning the Game
All in all, the state of the specialty steel industry in the Pittsburgh region is bright, if not perfect. Despite concerns about near term challenges, such as rising energy costs and longer-term issues, such as foreign imports and leveling the playing field, most specialty steel leaders express optimism for the future. The SSINA states that the industry is well positioned to take advantage of near-term opportunities, particularly in aerospace.
In addition, the AIST is positive about the United States’ ability to compete in the global marketplace.
Latrobe Specialty Steel expresses cautious optimism, noting that as a result of current excellent market conditions, which are partially created by the growth of emerging markets, like China, competition from those nations is less of a factor than just two years ago. However, capacity growth in those countries already has begun to swing the pendulum the other way again.
Universal continues to expect favorable conditions n the long term, due to the reemergence of the aerospace industry and developments responsive to the world energy crisis, which is predicted to result in a global expansion of heavy industry.
Also among the bright spots is Allegheny Technologies. Since mid-decade, the company has been setting sales and profit records. Fueled by firming prices and strong growth in shipments of titanium products, the company’s net earnings exceeded $164 million in 2013 on revenues of $4 billion. The company employs about 9,500 worldwide.
A turning point came when Allegheny Technologies acquired J&L Specialty Steel for $67 million in 2004. J&L Specialty, formerly based in Moon, operated a melting, casting and finishing plant in Midland in Beaver County. The company also operated a finishing plant in Louisville, Ohio. The resulting efficiencies, flat overhead costs and a backlog of orders (including an eight-year contract with Boeing, valued at about $2.5 billion, to supply titanium for various commercial and aerospace applications, including Boeing's new Dreamliner 787 airplane) bodes well for the company’s future profitability.
Allegheny Technologies is launching an advanced Hot Rolling and Processing Facility (HRPF) in Brackenridge, PA. The HRPF, which will be the most powerful hot rolling facility in the world. At a cost of $1.1 billion, the HRPF is among the largest industrial projects currently underway in the U.S.
When operational the facility will manufacture nickel-based alloys, titanium and specialty alloys, zirconium and stainless steel sheet and plate.
Former Chief Executive Officer Pat Hassey previously explained that what once was a stainless steel company with some specialty metals, has turned into a specialty metals company with some stainless steel. Allegheny Technologies has become a major factor in alloy mill products.
Sentiment among industry leaders is widespread that as long as the playing field is level, U.S. specialty steel producers, especially those in the Pittsburgh region, are well positioned to exploit anticipated opportunities in the global marketplace and to reap its rewards.