Regaining altitude: demand for specialty metals has been muted for some time, but hope for an improved 2002 is widespread. (Commodity Focus).

Going into 2002, the specialty metals market is pancake flat. The market was battered for months. It is little exaggeration to say one can cut the gloom in the nickel, titanium and ferro-titanium scrap markets with a knife. Most dealers hope that knife would be made of stainless steel -- anything to boost material consumption.

The third quarter of 2001 was poor and the fourth quarter saw industrial production off by 30 percent. Just when it seemed things could not get much worse for the specialty metals market, the bottom appeared to fall out of the airline industry. Bleak reports of individual airlines losing between $5 million and $15 million a day were rampant. That hardly bodes well for new purchases.

Still, the darkest hour is just before dawn. At least one dealer hasn't seen a dive in airline-related materials. And many in the scrap business think the market for specialty materials will improve as we move out of the first quarter of 2002 and into mid-year.

GRIM ASSESSMENTS

"Things right now are crummy," says Andrew Salitsky, president of Salitsky Alloy, Holden, Mass.

"It's a bloody, bloody show," agrees Stuart Freilich president of Universal Metal Corp., Worcester, Mass. "People are handling material for nothing or at a loss just to keep their plants busy. The next year will be very tough in high-temperature and titanium revert."

Noting that he had received just one call in two weeks, Freilich says the titanium market is virtually non-existent. "Overseas, it has held up a bit better than domestically. But who do you sell it to? Who's not in Chapter 11?" In addition to being president of Universal Metal, Freilich also is on the BIR (Bureau of International Recycling) roundtable for stainless steel.

In the nickel-chrome area, things are flat, too. "December's a disaster," says Gerry Stewart, executive vice president at ELG Metals, McKeesport, Pa. He says that the mill business is so slow that demand is extremely light. "The LME is not going to support a mill price," he says.

As a result, Stewart says, "December's demand is absolutely terrible." He notes that industrial production, depending on which report one reads, is down 28 percent to 32 percent. "Overall, the flow has dropped dramatically," he says.

"Things are continuing to be very weak," agrees Jim Wilkoff, president of stainless processor S. Wilkoff and Sons, Cleveland. "Stainless demand is weaker than the high-temp. High-temp has a bit more life."

Wilkoff notes that new material has to be sold before anyone generates scrap. "The drop in stainless is related to that," he says. "Once things pick up, there will be a couple of months lag in generation of scrap."

"Scrap flow is down, has been all year and continues that way," says Steve Alberico, vice president at OmniSource, Fort Wayne, Ind. "December will be down 20 percent or better," he says. Make that 20 percent or worse.

"Sales of stainless and alloy are down significantly," Alberico continues. The normal holiday market slow-down was deeper than usual as many people took a few extra days off since nothing much was happening.

Freilich says that high-temp alloy, vacuum quality, moves on a sporadic basis. He notes that some forgers and mills are stretching out and delaying orders that were placed previously. "Buying is on an as-needed basis while people wait for the other shoe to drop," Freilich says.

AIRCRAFT UP OR DOWN?

Titanium demand is heavily tied to aircraft, and right now that link to aircraft sales is not helping things. "Your titanium is looking pretty lousy," says Nick Oliver, senior trader at ELG's Los Angeles office. "Titanium is based on demand in aerospace and there is a lot of uncertainty over whether aircraft orders will be cancelled or pushed back."

Oliver says he can move "bits and pieces," however, he adds, "I don't see good things for titanium over the next year."

At Atlantic Stainless, North Attleboro, Mass., material continues to move. And company President Gerald Cohen sees that as a relief. "We haven't seen too much change in the aircraft market," he says. "Many people expected a severe drop-off, but the economy has not fallen out of bed completely," Cohen says.

Some people feared the market for aircraft materials would evaporate after the September 11 tragedy. But in Cohen's market things are holding their own, and he says he expects the flat but steady trend to continue into the second quarter of 2002.

Freilich, however, is quite concerned about the aircraft market. Commercial airlines are not buying new jets and many planes that could be flying are mothballed in the desert in Arizona. So, when the time comes to refurbish the remaining flying fleet, the airlines will strip parts from the planes in storage, not buy newly manufactured parts. As a result, no scrap will be generated.

"I think we have a good two years to get through that inventory," he adds. "So I personally don't see any rebound in aerospace for close to two years," Freilich continues.

Defense spending could be a wild card, yet it is likely a long time out for hungry scrap dealers. Freilich notes that meeting delivery dates for fighter jets in 2004 means that manufacturers will not start to order metal until early-to-mid 2003. "In the long, long term -- say 2004 to 2008 -- it will help and we'll feel it in that cycle," he adds.

Still, he says the ferro-ti market seems to be surviving. "Car sales and sales of appliances are holding up nicely," Freilich notes. In fact, the zero-percent and other special financing deals offered by auto makers have lit a fire under the auto market. How long that can endure is another question.

Oliver says that the mills appear to anticipate things getting better towards the end of 2002. Yet, he isn't completely sold on a rebound. "There is so much uncertainty in the near term -- the recession, people not flying." Still, he says, "Maybe the second half of 2002 will be better. But I don't look for a big year next year," Oliver says.

In the stainless market, scrap is a tight commodity. "There is not a lot of scrap out there," Alberico feels.

BRIGHT SPOTS

Some scrap dealers are actually quite positive. One of those not in the dumps is Jerry Turchin, president of California Metals Inc., El Cajon, Calif. He finds things "good and better" in the Inconel titanium alloy market.

"It's moving," Turchin says. "Some of our customers are quite busy. For us, it's always good whenever we're moving trailer loads." California Metals acquired Miller Metals a year ago and the two recycling operations are seeing material come into the yards and go out.

"Between the two, we're doing significantly more than we were doing," Turchin continues. While he agrees that the aircraft business, in general, is slowing things down, he adds. "The shops we deal with are aggressive and that means we're picking up more scrap."

Some recyclers see the up-tick in nickel prices as a reason for cautious optimism. However, they all note that nickel prices were at unheard-of lows under $2. "Sure, nickel is moving up a bit. But the price was so depressed to begin with," Salitsky says. The nickel unit contained in collected stainless steel scrap is usually valued at between 90 percent and 92 percent of the current primary nickel value, according to the Nickel Development Institute, Toronto. Even at the low point of the metals price cycles, it is usual for secondary metal to continue to be collected and processed intensively.

Wilkoff, speaking from a December viewpoint, said that nickel prices at $2.50 were unnatural. He said he saw a 70 percent chance that nickel would drop back to $2.20 and a 30 percent chance it would go up to $3.

But he said there was a 100 percent chance it would be one or the other, and not $2.50. "Either demand will improve or it will stay slack and the market will drop back," he predicts.

He explains the uptick in price on year-end maneuvering by some major suppliers that has nothing to do with the supply of or demand for scrap, but rather with the vagaries of the financial markets reacting to gossip about shortfalls.

Oliver terms the stainless market "okay, not great." The staples of the high-temp market are moving. He sees 718 and 706 -- the alloys popular with the industrial and turbine market -- moving reasonably. "Some other grades are difficult to move," Oliver says.

"People are working with tighter margins," Salitsky observes. "Lots of people are holding back what they can, including me. But there is just so much money in it and there is a limit to the space we have available (to stockpile)."

Freilich says he expects the general economy to recover faster than the airline segment.

DOWN THE ROAD

Some industry experts are keeping their personal Visa cards in their pockets until market directions become a bit clearer.

"I don't think there is any real shining light as yet," Salitsky says. "I hope and pray I'm wrong. In markets like this you've got to be an optimist. But the economy is so lousy. What will it take to get manufacturing to jump?"

Turchin, however, thinks 2002 will only get better in his neck of the woods. "Buy it, pack it, ship it and you'll make a profit," Turchin says. "Holding doesn't work. Even if you sell it for a couple of extra bucks, someone will screw up the classification or shipment."

He says they are now doing significantly more business than they were as recently as the third quarter of 2001. Any time a yard can move volumes of material, there is the opportunity to expand margins.

While not as ebullient as Turchin, OmniSource's Alberico sees an increase in utilization at the very end of the first quarter and the early part of the second.

"There is the potential for a dramatic uptick in pricing. There is no scrap out there," Alberico says. "There will be pressure on price when scrap is tight."

He says he expects discounts will tighten toward the intrinsic value of the materials. During that time there will be a real boost in the prices paid. That will last until scrap flows get back to normal levels and mills again widen their discounts, he predicts.

Cohen says their market has been flat but steady and he does not anticipate much of a change at all. "Material is moving in a limited fashion. We have not run out of options," he continues.

"We can sell anything we want to sell. We get orders and we can move material," he adds. That's always good news in the scrap area.

"Assuming that you don't see a dramatic increase in oil prices or another terrorist attack, I expect the economy will show signs of increased demand for ferro-ti quality grades," Freilich says. He excludes bar product from this scenario.

For high-temp and titanium revert, however, his outlook is not so hot. "2002, at best, will be an extremely difficult year," Freilich says. "It will be a tough year regardless of the price of nickel."

Frelich says he thinks the year-end upturn in the nickel price was due to short covering. "It will be hard to follow into 2002."

"I always see hope. I'm not a pessimist," says Wilkoff. He says he is definitely bullish about markets four months out. "People at all levels -- the mills, the dealers, the users -- are operating with reasonable-to-low inventories. When there is a pickup in demand, we'll all see the effects pretty quick."

NEW FRONTIERS 

Remember how titanium golf club heads perked up the market for that metal? There are some other potential fillers that may eat up a bit of the slack should the normal titanium market continue to be weak.

Rhino-Skin of Jackson Hole, Wyo., makes specialized protective cases for all sorts of computer equipment, including personal digital assistants (PDAs) and other hand-held devices. The company produces a classy, form fitted product in aluminum and titanium, as well as leather.

Yet, recycled materials currently meet little of its metal requirements. Fancy PCs or Palm Pilots are often seen as toys. Many executives see getting a fancy titanium case as "getting a toy for my toy." Titanium cases were favored as being an otherworldly material. As Palms become ubiquitous, the demand for protection is greater.

So why doesn't Rhino-Skin use more recycled material? Its Meridian, Miss., manufacturing site simply cannot get what it needs.

"It is not a question of cost. It is a question of availability," says Spencer Thompson, director of business development for the company. "It is hard to get the material we need."

Titanium cases for computers will not turn the industry around. But the story is likely one of many little applications where a hungry buyer and a ready supplier simply are not linking up for their mutual benefit.

Another area where titanium will make inroads is in the handgun market -- especially European weapons produced for the law enforcement community. Ti-based pistols are light, tough and look good. Ironically, at least some of the boost in titanium usage for pistols will come at the expense of the stainless steel market. Stainless is the current standard material in handguns.

Don't dismiss the popularity of more "look good" applications for titanium. Even the Visa credit card now offers a so-called titanium card. While the card contains no actual titanium, it is proof that titanium is surpassing gold and platinum as a prestige item in the public's perception. That bodes well for further applications of titanium in high-ticket hard goods.

The author is a contributing editor to Recycling Today and can be contacted via e-mail at [e-mail].