August 2006:

Producers and distributors of pipe and tube products are enjoying a very prosperous 2006, and hoping for more of the same next year.

Mill and service center executives report that the pipe and tube market remains fairly strong—especially for energy-related applications—and should remain so at least through year’s end. Various factors—including imports and a slowing economy—could dampen growth in certain tubular sectors next year, however.

“Demand is not bad, generally speaking,” says Bill Wolfe, executive director of the Steel Tube Institute of North America in Washington, D.C. “There is a lot of foreign penetration of standard pipe and some issues regarding imported parts using tubing from China, but basically it isn’t a bad year.”

Others are more glowing in their assessment of the market. “Demand has been excellent all year,” says Warren Mackenzie, vice president of sales and marketing for PTC Alliance in Pittsburgh, a producer of drawn over mandrel (DOM) and electric resistance welding (ERW) tubing. “There are all indications that demand will remain strong at least through the balance of this year.”

Likewise, Rene J. Robichaud, president and chief executive officer of NS Group Inc., Newport, Ky., an oil country tubular goods (OCTG) and small-diameter line pipe producer, calls it “an outstanding market, better than we’ve seen for years.”

Demand for OCTG has been particularly strong for several years now, says Doug Yadon, publisher of the Preston Pipe Report, Kehmah, Texas, with the number of U.S. rigs drilling for oil and natural gas on the increase. According to Baker Hughes Inc., Houston, 1,762 drill rigs were running in the United States as of Aug. 18, up 23 percent from a year earlier.

“People are drilling at a rate we haven’t seen in 20 years,” Robichaud says. This, of course, is being driven by high energy prices, including oil at over $70 a barrel and, perhaps more importantly, natural gas at just under $7 per MMBtu. While down considerably from post-Katrina highs, the price of natural gas is still very pricey by historical standards. Over 80 percent of the rigs in the United States drill for natural gas, Robichaud points out, adding that there is still a need to increase natural gas drilling. Over the past few decades, the large “pools” of natural gas reserves have largely dried up, leaving exploration companies to search for more “little puddles” of gas.

“With natural gas prices up, more people are willing to find more puddles that might not have been cost effective to drill at lower prices,” he observes.

To do so, they are using not only more OCTG, but higher-grade steel products, adds Robichaud. That’s one reason NS Group purchased Fishing Tools Specialty LP this summer, a premium connection, accessory and field service business in Odessa, Texas, which is now operating under the name Ultra Premium Oilfield Services.

As a result of the strong drill rig count, Kurt Minnich, a partner at Spear & Associates Inc. in Tulsa, Okla., publisher of Pipe Logix, says he predicts U.S. demand for OCTG will reach 4.5 million to 4.8 million tons this year, up about 15 percent from last year. He expects demand to continue rising next year, as well.

Jim Owsley, vice president of material sourcing and supplier relations for Wilson Supply in Houston, agrees that demand for pipe and tube should remain active as long as natural gas stays over $4.50 to $5.00 per MMBtu.

Minnich notes that certain capacity constraints—almost all the available drill rigs are now being used—could slow the rate of growth a bit next year. “It seems that every day we are at capacity,” he adds, “yet still seem to be able to squeeze a little more out.”

“It is my understanding that drilling contractors are refurbishing old rigs and building new ones that will come on in the next 18 to 24 months,” says Terry Mitchell, senior vice president and general manager of tubular products for Northwest Pipe Co., Portland, Ore. However, Minnich says the constraints “have to do as much with people as equipment. There are rigs being built, but there is a need for people to man them and trucks to finish off the wells.”

Yadon says the drill rig count could actually dip slightly between now and the end of the year because completion drilling budgets could begin to decline. “The ballgame isn’t over,” he says, “we will just see an adjustment period. The rig counts will come down to a more normal level, but there will still be a lot of profit for everyone. It will be good for a long time.”

Others don’t see any weakness at all. Robichaud, for example, says he expects 2006 and 2007 to be record years for OCTG sales, even though he admits that import levels are high. OCTG imports, according to Minnich, are up about 25 percent and are on target to hit 2 million tons this year—a level not seen since the 1980s.

“That would be a concern if the market were being flooded, but it isn’t,” maintains Robichaud. “Imports aren’t disrupting the market. Prices aren’t coming down.” He does admit that in the absence of imports, OCTG prices would probably be stronger, however.

Line pipe market
At the same time, the line pipe market is “hitting on all cylinders,” says Yadon, with most large-diameter (over 24-inch) mills essentially booked until the end of the year.

Demand for smaller diameter line pipe, used for gathering systems to support the main pipelines, isn’t quite as good, says Paul Everett, general manager of Omega Steel, Bridgeton, Mo. Lead times are a bit shorter because there are many more suppliers of that product.

Announcements of several new oil and natural gas pipelines to service the United States and Canada have bolstered line pipe demand, as well as a number of projects to refurbish existing pipelines, says Larry R. Lawrence, vice president of tubular product sales at Oregon Steel Mills in Portland.

“There is almost two million miles of pipeline in this country. Most of it is old and needs to be updated,” adds Robichaud.

John Tulloch, executive vice president at Ipsco Inc., Lisle, Ill., emphasized the need for steady and systematic replacement of North America’s aging pipeline infrastructure. He pointed to BP Plc’s recent closure of its huge Prudhoe Bay oilfield in Alaska for a few months to repair 16 miles of corroded pipeline. “That repair job is fairly modest,” Tulloch says, “but it is indicative of what’s going on in the U.S. pipeline system.”

“We need to rethink the way we repair our pipeline infrastructure, and we need to expand it as well,” Robichaud adds.

Though supply is tight, especially for large-diameter product, Tulloch isn’t aware of any projects that aren’t going forward because they can’t get pipe. “The import percentage for line pipe is actually higher than for OCTG,” Robichaud says, “but business is so robust that there has been no damage to the market.”

Energy-related demand should remain strong for at least two to three more years, Lawrence predicts, adding that 2006 and 2007 should be “as good as any I’ve seen in my 36 years in the business. It is a stunning turnaround from five years ago.”

Mechanical tubing market
Energy and distribution are the two strongest end-use segments for mechanical tubing, reports Shawn Seanor, director of marketing and business development for The Timken Co., Canton, Ohio. Distributors see healthy demand for both energy-related and general industrial applications.

Dennis Lasker, group vice president of Plymouth Tube Co., Warrenville, Ill., says many of the dynamics pushing OCTG and line pipe are also pushing mechanical tubing demand. “What we hear from people overseas is that worldwide demand is enormous, and that it will continue to be so for some time.”

The strength in distribution is good news, says David Ehlers, vice president of sales for Michigan Seamless Tube LLC, Ann Arbor, Mich. He recalls that last year distributors virtually stopped ordering from May to September to work down their inventories. This year, service center order rates remain at healthy levels.

“There is strong demand from our manufacturing base,” says Norman Gottschalk, president of Marmon/Keystone Corp., Butler, Pa. “Manufacturing has been growing for a number of years and is still growing.”

“Heavy equipment is doing very well, with no end in sight,” concurs Bill Jones, president of O’Neal Steel Inc., Birmingham, Ala.

Strong corporate profits have fueled capital investment in construction and other industrial equipment, says Ed Vore, vice president of marketing and sales for Dofasco-Copperweld, Shelby, Ohio. Other factors that have boosted pipe and tube demand, he says, include a pickup in nonresidential construction, a weak U.S. dollar that has helped U.S. manufacturers export more equipment, and the Federal Reserve’s decision to take a break from raising interest rates.

Another area of strength, at least for the time being, is the heavy-duty truck market. However, that strength is expected to be short-lived since it is at least partly due to customers buying ahead of new EPA emissions regulations on Class 8 trucks, which go into effect Jan. 1 and stand to raise the cost of each vehicle. “We expect a significant slowdown—as much as 30 to 70 percent—in that market in 2007,” says Vore.

But Jones is optimistic that it will bounce back quickly. “Trucks are really in strong demand,” he says.

One trump card for mechanical tubing is the automotive market, says PTC’s Mackenzie. While the financially challenged Big Three automakers offer little growth potential, there may be future opportunities with the New Domestics, who have been increasing North American production and, in many cases, domestic content.

The recent shift from sport utility vehicles and other light trucks to more fuel-efficient “crossovers” and passenger cars is not good news for mechanical tube producers, Vore notes. “There is more tubing in trucks, and that tubing tends to be bigger and heavier. There are some distinct design factors that make SUVs and other light trucks more tube intensive than passenger cars.”

Supply of mechanical tubing isn’t overly tight, Mackenzie says, though lead times are extended a bit from historical levels to about 10 weeks. Lead times for quench and tempered product used in energy applications are further extended, in some cases out to the end of the year, says Timken’s Seanor. “But we are trying to deal with that through the addition of a $5 million induction heat-treat line at our Canton, Ohio, steel plant, which will add 45,000 tons of bar and tube capacity when it comes on line in the first quarter of 2007.”

The scenario for raw materials is similar, with moderately extended lead times, Mackenzie says. “Pricing of flat-roll has gone up in the second and third quarter. Indications suggest that, with demand being strong worldwide, [the upward price trend] will continue. As a result of the raw material price increases, we have increased our [tubular] prices, and those increases have been accepted in the marketplace.”

Structural tubing market
Structural tubing demand has been quite strong, says distributor Paul Loftin, vice president of Siskin Steel Supply Co. Inc., Chattanooga, Tenn., largely due to the resurgence of nonresidential construction. Highway and bridge construction, which had been depressed for a long time, got a boost from the federal Safe, Accountable, Flexible, Efficient Transportation Equity Act (SAFE-TEA) infrastructure spending bill, which was passed last year. Those funds are only available where states can provide matching funds, he notes.

While the consensus is that commercial construction will remain strong, Donald R. McNeeley, president and chief operating officer of Chicago Tube and Iron Co. in Romeoville, Ill., says he isn’t so sure. The Chicago area still has 20 percent vacancy rates in commercial real estate, he notes, which dampens new construction.

Siskin’s Loftin says that current mill lead times for structural tubing are extended a bit, “but as long as we book our rollings, we aren’t having any problems getting material.”

Supply could loosen even further by the first quarter of next year when Atlas Tube Inc., Plymouth, Mich., and Independence Tube Corp., Chicago, complete announced projects to bring on additional structural tubing capacity.

Currently, Loftin says, some structural tubing imports are coming in at under domestic prices, “but they haven’t been disruptive to the market. Will they become disruptive later? I don’t know. At this point domestic mills are busy.”

Standard pipe market
Standard pipe pricing continues to be impacted by foreign imports, although the outlook for standard pipe is improving, says the Steel Tube Institute’s Wolfe. “Demand is up a little vs. a year ago, but a year ago it was terrible.”

The supply of standard pipe is a bit tight now—even with strong imports from China, India and Mexico—because mills have been dedicating a disproportionate percentage of their capacity to OCTG production. This has resulted in upward pricing pressure on both standard and seamless pipe and tubing, McNeeley says. ERW lead times are anywhere from four to 20 weeks, depending on wall thickness and coil availability, and seamless lead times are out eight to 12 weeks, he estimates.

Gottschalk notes that it has been difficult to acquire hot-rolled seamless pipe 13 inches and above. “Foreign mills are limiting supply of that product,” he says.

But for nearly all pipe and tube sectors, steel supply appears to be in fairly good balance with demand, both on the mill and the service center level, Wolfe says.

Overall, the future is bright for pipe and tube, Gottschalk agrees. “I don’t see any rain clouds. Both service center inventories and our customers’ inventories are pretty much in balance.”

Offshore Drilling Change
Could Cause New Wave
of Pipe and Tube Demand

Should federal legislation pass allowing drilling for oil and natural gas in North America’s outer continental shelf, it could further increase the already red-hot demand for such energy-related steel products as oil country tubular goods, line pipe and mechanical tubing. Congress is expected to act on the controversial legislation this fall.

Shortly before leaving for its summer break, the U.S. Senate passed the Gulf of Mexico Security Act of 2006. Like the Deep Ocean Energy Resources Act passed in June by the House, the Senate measure would allow offshore drilling in former environmentally protected areas, though there are distinct differences between both pieces of legislation.

While the House bill allows drilling 50 miles from the coast anywhere in the outer continental shelf, the Senate bill only opens up an 8 million acre area in the eastern Gulf of Mexico, and would ban drilling within 100 miles of the Florida coastline.

Andrew G. Sharkey III, president and chief executive officer of the Washington, D.C.-based American Iron and Steel Institute, applauded both bills for taking “decisive action to address the nation’s natural gas crisis” and urged members of both houses “to come together when they reconvene in September and continue this critical work. The manufacturing industry must have access to a reliable and affordable energy supply.”

U.S. pipe and tube manufacturers are cautiously optimistic that after several failed attempts, this legislation will pass this year.

“Increased supply of oil and natural gas is critical,” says Rene J. Robichaud, president and chief executive officer of NS Group Inc., Newport, Ky. “It makes no sense for there to be a limit where people can drill. There needs to be a fair balance between modern, clean, efficient drilling and environmental concerns.”

With energy prices so high, Congress might be more agreeable to pass this legislation, says Paul Everett, general manager of Omega Steel, Bridgeton, Mo. Kurt Minnich, partner with Spear & Associates Inc., publisher of Pipe Logix, Tulsa, Okla., agrees. “It just makes good economic sense when you look at how much oil is imported.”

However, Jim Owsley, vice president of material sourcing and supplier relations for Wilson Supply in Houston isn’t holding his breath for a compromise bill. “It should be passed, but there is so much politics involved with energy policy.”

President Bush has publicly voiced his support for legislation allowing drilling in the outer continental shelf.