Producers and distributors of pipe and tube products predict a distinctly different outcome for 2006, depending on which markets they serve.

By Myra Pinkham,
Contributing Editor

Though generally optimistic about 2006, North American producers and distributors of steel pipe and tube display varying degrees of confidence. Those selling oil country tubular goods expect hot and heavy demand to continue into 2007, while those selling standard pipe products are bracing for further competition from imports.

The re-emergence of nonresidential construction, as well as strength in off-road equipment and the heavy truck market, are giving tubing suppliers reason to believe that 2006 could be even better than last year.

Norman Gottschalk, president of Marmon/Keystone Corp. in Butler, Pa., says about 95 percent of his company’s customers expect growth in 2006. Larry Soehrman, vice president of materials management for Chicago Tube & Iron Co. in Romeoville, Ill., predicts pipe and tube demand could grow 4 to 5 percent this year.

“This is the strongest real market demand the industry has had for OCTG,” says Doug Yadon, publisher of the Preston Pipe Report, Kehmah, Texas. Last year, OCTG shipments were up about 20 percent over an outstanding 2004, says Rene J. Robichaud, president of NS Group Inc. in Newport, Ky., who expects shipments in 2006 “to also grow smartly.”

It isn’t surprising that demand for energy-related pipe and tube products is so strong given the consistently high prices for oil and natural gas, which have given rise to scores of new drill rigs in the United States. The U.S. drill rig count averaged 1,380 rigs in 2005, up about 16 percent from the 1,200 rigs in 2004.

The count is expected to increase another 12 percent in 2006, says Robichaud. In fact, Houston-based Baker Hughes Corp. reported that as of Jan. 20 there were 1,472 active drill rigs in the United States, up 16.5 percent from the 1,263 in operation a year earlier.

Further growth in oil and gas exploration could be constrained by the availability of rigs and crews to man them, says Kurt Minnich, partner of Spears & Associates Inc., the Tulsa, Okla., publisher of Pipe Logix. “Any rig that can operate is operating,” he says.

Dan O’Leary, president and chief executive officer of Edgen Corp., Baton Rouge, La., points to moves by energy companies to increase rig availability. “There has been more efficient use of rigs and new rigs under construction. I think there is a good match of supply and demand,” he says.

This demand is being pushed by the unusually high energy prices, particularly for natural gas. About 85 percent of the rigs are drilling for gas. “Natural gas prices went over $14 per mcf (thousand cubic feet) after the hurricanes last summer,” Minnich notes. While the price has since moderated, to the $9 to $11 range, it is still very high when compared to the $3 mcf cost for natural gas in 2002.

“Energy will continue to be strong for some time,” says Ed Vore, vice president of marketing and sales at Dofasco-Copperweld, Shelby, Ohio. “Like steel prices, energy prices are at a new plateau. They have opened a new way of thinking, with oil over $40 a barrel (currently near $60 a barrel) and natural gas over $8 per mcf. It allows even marginal reserve to be profitable enough to be considered for production.

“Companies are exploring wells where they wouldn’t have gone before,” Vore adds, “including Colorado, Wyoming and the western provinces of Canada, which are all now much more viable.”

As a result, consumption of OCTG and other energy-related pipe and tube products spiked by 20 percent last year. About 3.7 million tons of OCTG was consumed in the United States in 2005, Minnich says, and an estimated 4.2 million tons will be used this year. Some mills have switched certain line pipe production capacity to OCTG to ensure availability of product to customers.

Meeting this strong demand is stressing the OCTG supply chain, says Rick Preckel, director of investor relations and business development for Maverick Tube Corp. in St. Louis. “We try to plan as close to the rolling cycle as we can to make sure we have met our customers’ needs. If we make the wrong item at the wrong time, it could affect that ability.”

An increasing amount of demand—to the chagrin of domestic producers—is being met by imports, especially for welded carbon “commodity” products. “If the market wasn’t so strong, we would be killed,” asserts Robichaud. He notes that 1.6 million to 1.7 million tons of OCTG products were imported last year, up nearly 60 percent, and as a result domestic shipments increased only about 5 percent despite the 20 percent spike in demand. “It has also kept our pricing down, and we need to keep our pricing strong to be competitive,” he adds.

Some fear a rise in imports of alloy and seamless product, as well. Roger Shagrin, president of Washington, D.C.-based Shagrin Associates and general counsel for the Committee on Pipe and Tube Imports, says that China is currently in the process of starting up new capacity that would give it four of the newest seamless OCTG mills in the world. Its production capability will exceed its internal demand by about double, Shagrin estimates. Some of that new capacity is expected to come online this year and in 2007.

Other energy-related tubular products, such as down-hole and line pipe, have seen new-found demand. One significant change has been the reawakening of orders for large-diameter line pipe, which is used to transport natural gas from the drilling fields to the consumer. “Large-diameter line pipe picked up so much strength, it’s unbelievable,” says Yadon, attributing this resurgence to pent-up demand.

He explains: “Transmission projects were put on hold when Enron collapsed.

The transmission companies had serious liquidity problems. They were prepared to start up projects last year, but then the cost of steel plate for the line pipe doubled.”

Projects that had been on hold before steel prices moderated should prop up demand for some time, Yadon says. “I expect that over the next 10 years, there will be 40,000 miles of new transmission line and 10,000 miles of replacement line put in.”

Ron Williamson, vice president of sales and logistics for Berg Steel Pipe Co. in Panama City, Fla., says it could take close to a million tons of pipe to satisfy the projects on the drawing board this year, including many to move natural gas from Wyoming. “But I’m not sure they will all come to fruition,” he notes, “as some are competing projects.”

The surge of activity has caused line pipe lead times to stretch out through July and beyond. Likewise, raw material availability has been an issue, as steel plate remains at a premium, Williamson says. “Some companies are taking plate earlier than they need it. We are accumulating plate now for projects that we won’t start until April or May. But that means paying for the plate now, which is cutting into our margins.”

Different story for standard pipe
On the other end of the spectrum is the standard pipe market, which has seen skyrocketing import penetration, largely from China. “Predatory import pricing has decimated the domestic industry,” asserts Bill Wolfe, executive director of the Steel Tube Institute of North America in Coral Gables, Fla.

Though demand for standard pipe is finally picking up, fueled by promising nonresidential construction, imports continue to steal a disproportionate share of those sales from domestic mills, says Shagrin. Overall pipe and tube imports reached 1.1 million tons in 2005, which is about 11 percent of the market. The import penetration for the standard pipe sector hit 20 percent, much of it from China. “The price of steel in China has fallen, and since China is subject to duties on flat-roll, producers figure why not turn that flat-roll into pipe,” he adds.

Chinese imports of standard pipe have increased progressively, rising from 10,000 tons in 2002, to 90,000 tons in 2003, to 250,000 tons in 2004, to 400,000 tons in 2005. Such imports could top 550,000 tons this year, according to the Committee on Pipe and Tube Imports. The result so far has been about a 25 percent reduction in domestic production and shipments, along with a 20 percent reduction in the domestic industry’s workforce since 2002, Shagrin says.

“The people of the United States should be disgusted that good Americans should have to see their jobs shift to China. We have seen other industries, including ductile waterworks fittings and steel wire hangers, disappear from the United States,” he adds.

In an effort to stop standard pipe from suffering the same fate, several producers—including Allied Tube & Conduit Corp., Ipsco Tubulars Inc., Maruichi American Corp., Maverick, Sharon Tube Co., Western Tube & Conduit Corp. and Wheatland Tube Co.—filed a Section 421 petition last year to place an import limit on Chinese standard pipe. Though the International Trade Commission issued an affirmative determination that the Chinese imports distorted the domestic market, President Bush denied the petition in late December, stating that it would adversely affect the economy.

Shagrin maintains that the Bush administration’s decision was based on fear that granting one Section 421 petition against China would open the flood gates to other industry groups seeking similar relief.

The president’s decision on standard pipe imports may seal the fate of some U.S. mills, which could be forced to close plants this year. “These producers essentially have no further recourse. The industry had already lost an antidumping case three years ago,” Shagrin says.

Brighter outlook for structurals
The outlook for structural tubing is much brighter, given the improved commercial and office construction activity. “Nonresidential construction is going very well,” says Gottschalk at Marmon/Keystone. “When steel prices were still high, a lot of projects were cancelled. Now that steel has come off of its highs, a lot of projects have been put back into the market.”

Construction in the South will be stronger this year with the rebuilding of the hurricane-damaged Gulf region, which should increase consumption of tubing and electrical conduit, says Jean-Marie Diederichs, general manager of Prolamsa USA in Houston.

Exactly when demand in the Gulf will kick in remains uncertain, says Maverick’s Preckel. “The rebuilding is still in the planning process, so we don’t know what the magnitude or timing will be. There is a question of how quickly they will get rolling on the reconstruction effort. It seems as if they are more interested in deciding how they will do it than doing it quickly.”

Much of the Gulf rebuilding will be to replace homes damaged by the floodwaters. It’s the tight supply of vacant office space nationwide that has led to the turnaround in nonresidential construction projects. “During the economic downturn, there were low office building occupancy rates,” Preckel explains. “It is only recently that occupancy rates have gotten to a point where there is a need to build.”

Michael Dustmann, vice president of business development for Bull Moose Tube Co. in St. Louis, a maker of structural tubing, says the past six months have been relatively strong following some earlier weakness in the structurals sector.

“There had been too much inventory in the system. Steel prices were so high this time last year that people delayed purchases. Now inventories and steel prices have come down. Demand is probably about 15 percent better than it was a year ago.”

While imports are not nearly as much of a problem for structural tubing as for standard pipe, competition from overseas remains a concern. “I think that imports will play a major role in pricing going into 2006,” says Andrew Weston, general sales manager for Welded Tube of Canada in Concord, Ontario. “We have already seen some increases. There is always concern about China, Turkey and a host of other countries due to the differential between the domestic and foreign price.”

Dustmann expects import levels to increase later this year. “Imports could create an issue of volatility. The price could go up or down in any 60 to 90 day period,” he says.

Buyers need to be careful, especially given the government’s apparent stance on dumping, he adds. “We have to develop a new level of creativity on how to deal with dumped imports. We will probably be more aggressive with pricing to make import buys less attractive.”

Clouds ahead for mechanical?
The mechanical tubing market is coming off a good year. In fact, notes Shawn Seanor, director of marketing and business development for The Timken Co. in Canton, Ohio, half of the top 20 shipping months since 2000 occurred during 2005.

Wolfe points to some warning clouds, however, in particular over the automotive market, which is predicting a slowdown and has been adversely affected by the offshoring of finished parts. “[Overseas production and importing of parts] is something the government does not seem to have an appetite to address,” he says.

According to Diederichs, though imports are coming in from South America, Turkey and China, they have thus far only affected the low end of the mechanical tubing market, and to a small degree. Still, Vore adds, “The specter of imports is out there, and sometimes a threat is as effective as the steel arriving.”

Nevertheless, PTC Alliance in Pittsburgh expects 2006 to be a good year for mechanical tubing - maybe even slightly better than last year, says Warren Mackenzie, vice president of sales and marketing.

Most end use markets are quite strong, agrees Dennis Lasker, group vice president of Plymouth Tube Co. in Warrenville, Ill., including energy, mining, industrial, construction and material-handling equipment, aerospace and heavy trucks.

Automotive and agricultural equipment are two notable exceptions to this trend, say tube makers. American carmakers such as GM and Ford have announced major cutbacks and plant closings needed to compete successfully with “New Domestics” such as Toyota, Honda and Nissan. At the same time, persistently high gasoline prices have cooled consumers’ love affair with sport utility and other low-mileage vehicles.

Even if the number of vehicles produced in North America remains near last year’s total, the tonnage of mechanical tubing consumed by automotive is likely to decline by 10 percent this year because the mix of vehicles will shift away from SUVs toward more fuel-efficient passenger cars, says Vore of Dofasco-Copperweld. Tubular products used in light trucks tend to be bigger and heavier than those used in cars.

The industry is trying to mitigate this situation by converting some drive-train applications for automotive, as well as heavy truck and off-road equipment, to steel tubing, Seanor says. This includes conversions from other materials, such as cast iron, to steel, which offers better performance with less weight, as well as conversions of certain bar applications to tubing, which is both lighter and cheaper.

Production of ag equipment is slowing because its rebound came earlier and much of the demand for new tractors and such has already been met. As the dollar has strengthened, it has gotten more expensive for farmers to export such commodities as corn and beans. Thus farm income available for capital investment has declined, say tube suppliers.

The tight supply of flat-rolled steel, used to make tube products, has challenged some producers. “Flat-roll availability has been extremely difficult,” says John Montgomery, president and chief executive officer of Southland Tube in Birmingham, Ala. Steelmakers are fulfilling their promises, he says, but often late, which has forced tube producers to dip into their coil inventories to meet customer needs.

“The tightness of flat-roll has made scheduling a challenge,” concurs Weston of Welded Tube. “We need to do everything we can to meet customer requirement dates.”

Much of this tightness will be relieved, say tube makers, when U.S. Steel brings its big Gary (Ind.) Works No. 14 blast furnace back into production. The furnace has been down for maintenance since August.

Overall, strength in the energy markets should offset weakness in other sectors, industry executives agree, making 2006 another solid year for pipe and tube.
“2006 may not be a remarkable year, but it will still be above normal,” says Gottschalk. “Profitability will likely be slightly less than last year, but I’m comfortable with that. 2005 was a fantastic year.”