Though still constrained by tight raw material supplies, the market for most forms of mechanical tubing should be robust in 2005.

By Myra Pinkham,
Contributing Editor

Sidebars and Tables:

• Total U.S. Seamless Mechanical Tubing Consumption

The North American mechanical tubing market is poised for another good year thanks to strong end-use demand, little import competition and tight supplies—all working together to allow producers to raise prices and increase margins.

“While 2005 will likely be calmer than 2004, it will be an excellent year from both a volume and a profit standpoint. There is every opportunity that it will become one of the good ol’ days,” says Ed Vore, vice president of marketing and sales for the mechanical tubing group of Copperweld Corp., Shelby, Ohio.

In fact, says Robert Keeler, director of North and South American steel sales for The Timken Co., Canton, Ohio, “2005 will likely be the best year we have seen since the 1977-78 timeframe.”

While less glowing in his assessment, Bill Jones, president of O’Neal Steel Inc., Birmingham, Ala., is still very optimistic. “The market for mechanical tubing was pretty strong all through 2004. While it is currently going through a seasonal lull, all indications are that it should remain strong at least through the first half of this year.”

But because the second half of 2004 was not quite as active as the first, some companies are “holding their breath, anxiously waiting for the first part of the new year to see how it sorts itself out,” says Bill Wolfe, executive director of the Steel Tube Institute of North America.

Part of these reason for these slightly different assessments stems from the fact that mechanical tubing is a very broad market—some 2.5 to 3 million tons domestically—encompassing several different sectors, explains Michael Duggan, marketing manager for mechanical tubing at Maverick Tube Corp. in St. Louis.

Maverick is a niche player in mechanical, selling tubing for higher strength welded applications where demand has been decent—up 2 to 5 percent last year— but more subdued than such market sectors as hot-finished and cold-drawn seamless and drawn over mandrel (DOM), which saw increases of 10 to 20 percent compared with 2003.

Different types of mechanical tubing are made of different raw materials. Seamless tubing, for example, starts as special quality bar (SBQ) that is pierced, while most other tubing is formed from flat-rolled steel. While both have been in short supply in the past year, SBQ is tighter than flat-roll today, challenging seamless tubing producers to meet customers’ needs. SBQ is expected to remain on allocation well into 2005, executives say.

Though constrained, the market has enough seamless piercing capacity, maintains Timken’s Keeler. “We just went through a long dry spell. Overall, seamless capacity is sufficient for the business environment. Lead times have extended, but not like bar. Hot-finished tubing lead times are 12 to 14 weeks vs. 10 to 12 weeks historically. Heat-treated [tubing] is another story. That’s at 20 to 24 weeks now vs. a historical 14-week lead time.”

He attributes the spike in demand for heat-treated tubing to the strong energy market, being fueled by high natural gas and crude oil prices. According to Baker Hughes Inc., Houston, 1,242 rotary drill rigs were operating in the United States during the first week of January, up 12.3 percent from a year earlier.

Oil and gas exploration is likely to continue to be strong, Keeler says. “Our forecast is for natural gas prices to remain at a high level, at least for the winter, and then to stabilize at a high level. I don’t see any reason it would slow.”

Likewise, Kathleen Maier, vice president of sales and marketing for Michigan Seamless Tube LLC, South Lyon, Mich., sees a great future for the use of seamless tubing by coal-fired power generation producers.

Demand has been strong, not just for seamless, but also for DOM used in various industrial applications such as agricultural, construction and mining equipment. Construction equipment, according to Copperweld’s Vore, has benefited from all the building activity in the United States, both residential and highway, as well as the weak U.S. dollar, which has helped manufacturers to export equipment. Growth in nonresidential commercial construction also added to tubing demand last year, Jones says, and could have an even bigger effect going forward. “While we haven’t seen much expansion in industrial or commercial construction for the last few years, there will be more nonresidential construction in 2005 and even more in 2006.”

Demand for mining equipment has been bolstered by resurgence in commodity prices. Similarly, strong crop prices have translated into greater demand for new agricultural equipment, Vore notes. Many buyers have invested in new equipment to take advantage of accelerated tax depreciation rules.

Demand from the heavy truck market has been exceptionally strong, largely due to a change in the federal environmental law taking effect in early 2007, tightening the emissions requirements for Class 8 trucks. “As a result, a lot of over-road rigs are being purchased and a lot of older ones are being retired,” Vore says. In contrast, automotive demand is expected to remain flat or even decline slightly in 2005 as automakers scale back first-quarter production to whittle down vehicle inventories.

Citing another promising mechanical market, Warren Mackenzie, vice president of sales and marketing for PTC Alliance in Pittsburgh, notes that the strong economy has boosted the hydraulic industry, which is a big user of large-diameter, heavy-walled tube. With demand strong and supply tight, service centers also have been building up tubing inventories, he adds.

The current business environment is not all good news for service centers, however, says Howard Smith, director of business development and engineering for Earle M. Jorgensen Co., Brea, Calif. He notes that the tight supply and increased prices (due both to higher raw material surcharges and higher base prices) “tend to make people hedge buy, which isn’t a good thing for any business.”

Norman Gottschalk, president of Marmon/Keystone Corp., Butler, Pa., agrees, noting that with prices skyrocketing, the average cost of his inventory is up over 40 percent from Jan. 1, 2004. The price of hollow structurals, for example, grew from about $400-$450 a ton in 2003 to a peak near $1,000 last year, settling recently around $850-$900 a ton.

“We worry about being caught with high priced inventories, but we need those inventories to stay in business. It is inevitable that when the market goes down, distributors will be hurt,” he says.

Several factors have contributed to the tight supply of mechanical tubing, including tight availability of raw materials and lower import levels. Some producers were surprised by demand that accelerated faster than they anticipated. The result is extended lead times and challenges for both producers and distributors to meet their customers’ needs.

“Last year it was very tough to buy mechanical tubing,” Gottschalk says, with some lead times extending out as far as 30 weeks. “All the mills had some capacity problems. All the mills had problems getting raw material.”

Last year it was tough to produce mechanical tubing, says PTC’s Mackenzie. “Timing has been the biggest issue. We eventually get the tons, but steel lead times have exceeded our lead times, and there are times that mills have missed deliveries.” There isn’t much the tube producer can do, he adds, other than try to keep abreast of the situation and educate customers about what is happening.

In light of this situation, Vore says, Copperweld has developed three to four new steel sources, both in North America and abroad. With a wider variety of suppliers to tap into, Copperweld hopes it can better control the flow of raw materials into its plants.

Luckily, he says, flat-roll supply has gotten better in the last few months, and prices have moderated. “They haven’t fallen as fast as they went up, however.”

Availability of SBQ for seamless tubing has not improved. “It is a real balancing act between SBQ and the piercing end of things,” Keeler says, noting that Timken is faring better than many, as it is the only seamless tube maker that also makes its own steel.

“We don’t see any loosening,” concurs Maier. While Michigan Seamless has been able to get the tonnage it needs, uncertain deliveries from SBQ producers have made it difficult to manage inventories. “We have been missing deliveries because the SBQ producers are often late. We need to carry larger inventories to cover that,” she says, noting that the company has about 25 percent more inventory than usual.

The tightness of mechanical tubing has been exacerbated by a general lack of imports, says EMJ’s Smith. Demand outside the United States has also been strong, resulting in consumption of product that might otherwise have been exported here. “Imports have been affected by what the exporters see as an unfavorable relationship between the dollar and the euro, which tends to make imports more expensive,” he adds.

With a few mills already announcing price increases on both DOM and seamless tubing for the first quarter, industry observers say further price increases are possible in 2005.

Jones, at O’Neal Steel, is optimistic 2005 will be a good year for mechanical tubing sales. “It will be a more balanced year than 2004—more level throughout the year,” he predicts. But it will not be a walk in the park, Maier adds. “We will continue to have challenges with raw materials.”