OCTG's New Melting Pot
The face of the oil country tubular goods market is poised for a makeover in the next five years as foreign suppliers seek a haven in North America.
By Myra Pinkham, Contributing Editor
The promise of North America's energy boom and the threat of trade actions against foreign imports have prompted pipe and tube suppliers from all over the world to make plans for setting up shop in the United States. This shift in the U.S. oil country tubular goods supply has raised concerns about the potential for future overcapacity, and has prompted mills and distributors alike to rethink their business relationships.
Demand for OCTG continues to be fairly positive. While the U.S. rig count as of mid-August was running 6.4 percent behind year-ago levels, OCTG consumption has actually remained fairly stable, says Gregg Eisenberg, president and chief executive officer of Boomerang Tube LLC, Chesterfield, Mo.
That is because more tubular goods are used on each rig, explains Jef Fry, senior vice president of Energy Tubular sales for Welded Tube of Canada, Concord, Ontario. OCTG consumption has risen from about 225 tons per rig per month to 250-275 tons due largely to the increased horizontal drilling in the nation’s shale oil and natural gas formations. About 66 percent of the rigs operating in the United States are drilling horizontally compared with 51 percent a year ago.
Kurt Minnich, partner with Spear & Associates Inc., publisher of Pipe Logix, says the number of wells drilled in the U.S. this year is expected to increase to 50,000, up from 48,000 last year. Because horizontal wells are deeper than vertical wells, a horizontal well typically requires double the footage of OCTG, he notes.
The type of OCTG used is also different, Eisenberg says. Drilling in the shale plays requires tubing with heavier wall thicknesses to withstand the high pressure environment of hydraulic fracturing, more commonly known as “fracking.”
“The demand side of OCTG is okay and should get better, especially if natural gas prices pick up,” Eisenberg says. [Natural gas was trading at $3.44 per MMBtu, as of this writing, which is lower than many energy companies consider a profitable level to drill.] “The big question is what will happen as far as supply.”
Major changes are afoot on the supply side of the market as foreign producers have announced plans for a flurry of welded and seamless capacity additions in the United States. Some of that production has already begun, but most is slated to come online in the next two to four years.
How much, and how quickly, the new tube mills will ramp up depends on the outcome of a major OCTG trade case filed in July by a group of domestic producers, including Boomerang, Energex Tube, Maverick Tube, Northwest Pipe, Tejas Tubular Products, TMK Ipsco, U.S. Steel, Vallourec Steel and Welded Tube USA. Last month, the case received a positive preliminary injury determination from the U.S. International Trade Commission, allowing antidumping investigations to move forward on OCTG imports from India, the Philippines, Saudi Arabia, South Korea, Taiwan, Thailand, Turkey, Ukraine and Vietnam, as well as countervailing duty investigations on shipments from India and Turkey.
Both of these issues—the trade case and migration of mills from overseas—could significantly alter pipe distributors’ business relationships, experts agree, as they will have more sources of supply much closer to home from which to choose. OCTG is unusual in that specialized distributors are involved either directly or indirectly in the sale of virtually every piece of pipe. Pipe mills depend on distributors to provide a range of value-added services, from threading and heat-treating to breaking bundles and repackaging them for shipment.
Distributors will need to re-evaluate their strategies for picking and choosing supply chain partners to find the ones that provide the best fit, says Eisenberg at Boomerang. “There will be a lot of juggling and fine-tuning of relationships, but no wholesale changes,” he predicts.
“Distributors need to be on point,” says Paul Vivian, a partner with the Preston Pipe Report, Ballwin, Mo. “Any time a new player enters the market, it has the potential to upset the supply chain. The same is true with the trade case, especially for distributors that have relationships with companies in the named countries.”
One concern stemming from the trade case is whether distributors will be able to get all the products they need from domestic sources if the flow of imports is interrupted, says Kim Leppold, senior steel analyst for London-based Metal Bulletin Research. Also, distributors may find that the new mills have less need for their processing services. Several of the proposed mills have heat-treating lines in their plans, for example.
Jelani Rucker, a spokesman for JMC Steel Group in Chicago, admits that if the trade case is successful it could result in a temporary void in the marketplace. “But I think the domestic manufacturers will soon be able to fill it,” he says. “Right now there is a little too much inventory in the system, partly because of the amount of OCTG that has been unfairly imported into the United States.”
David Phelps, president of the American Institute for International Steel, which represents foreign mills, acknowledges there is an inventory overhang that has been created by “some overly aggressive suppliers.” Nonetheless, he believes the ITC decision to let the trade case move forward is as an abusive use of U.S. trade laws and one that is likely to disrupt longstanding supply relationships.
The fact that the trade action was in the works for some time begs the question of whether that was a primary motivator for foreign mills to build new plants in the United States. Fear of trade sanctions could be one of the factors behind the decision by Turkish-owned Borusan Mannesmann Pipe Inc. to build a 300,000 ton per year ERW mill in Baytown, Texas, Leppold says. The mill is expected to begin operations in mid-2014.
“With 40 percent of our exports currently destined for the United States, we now aim to become a local manufacturer in order to be closer to the market and our customer base,” Buddy Brewer, Borusan Mannesmann’s chief executive officer told Metal Center News earlier this year. “Also, favorable changes to the energy policies in the United States, as well as advancements in the shale gas technology, were factors that hastened our investment decision,” he said.
His mill is expected to make OCTG in N80-Q125 alloy steels, as well in certain custom-engineered grades. Recent documents filed with the ITC indicate that once the mill is ramped up, it will remove about 85 percent of Turkey’s OCTG exports to the United States.
Boomerang was one of the first to announced plans to add OCTG production in 2008, but its 360,000-ton ERW OCTG and line pipe facility did not become operational until fourth-quarter 2010 due to the recession. Seventy-five percent of its output is in the 4.5-inch to 9 5/8-inch OD range in high-end alloys. “We could possibly invest in some debottlenecking at our facility if there is a positive outcome from the trade case, but we would need to see the import rate drop and prices rise first,” Eisenberg says.
The 225,000-300,000 ton ERW OCTG and line pipe mill of Russian-owned United Metallurgical Co. (OMK) began operations in December 2012 and continues to ramp up. The Houston pipe mill currently produces 2 3/8-inch to 7-inch OD J55 OCTG, although it has the capability to upgrade to Q125 material and plans to eventually produce line pipe up to 6 5/8-inch OD, as well. Even so, 80-85 percent of its output will remain in OCTG, says Terry Cantrell, OMK Tube’s chief operating officer.
While OMK has been importing pipe into the U.S. market since 2003, the company did not have a physical presence until late 2011 when it acquired Tubular Solutions’ OCTG end-finishing and heat-treating operation, also in Houston. “Being close to our customers is a big plus,” Cantrell says, as is the fit of the mill with the finishing facility.
OMK plans to continue growing its presence, either in Houston or elsewhere in North America. “I think our new pipe mill will be a springboard for OMK,” Cantrell says. “Now that we have begun to stick our foot in the door of the domestic market, we will show what we have here and what we can do.”
Lakeside Steel Inc. was already in the process of building a new mill in Thomasville, Ala., when JMC acquired the company in April 2012, making it part of JMC’s Energex Tube business unit. Already qualified to produce 4.5-inch to 9 5/8-inch OD pipe in alloy casing grade J55, the mill began ramping up production in the first quarter. Thomasville’s ultimate production capacity, once fully operational, is reportedly about 192,000 tons per year.
Energex also recently commissioned a new testing and finishing line in Warren, Ohio, enabling it to provide 4.5-inch to 7-inch OD OCTG casing in J55 and other proprietary alloy grades, as well as 2.5-inch to 6-inch OD line pipe in X42 through X60 alloys.
In June, France’s Vallourec SA officially opened its Vallourec Star LP OCTG mill in Youngstown, Ohio. The facility has the capacity to produce 350,000 metric tons of seamless pipe per year and will specialize in 2 3/8-inch to 7-inch OD OCTG. Vallourec’s goal is to participate even more actively in the development of the North American shale plays. “The large number of wells and the use of horizontal drilling techniques required in shale hydrocarbon production have increased demand for small-diameter tubes and premium connections,” say company officials.
Welded Tube of Canada’s 350,000 ton per year ERW OCTG mill in Lackawanna, N.Y., is on target to begin operations in mid-September. Initially, the mill will produce 120,000-125,000 tons of 4.5-inch to 9 5/8-inch green pipe, much of which will feed the company’s new heat-treat facility in Welland, Ontario. Eventually, Welded Tube plans to add finishing capacity at Lackawanna, as well.
Chinese-owned Tianjin Pipe (Group) Corp. America Co. (TPCO) plans to start producing 4-inch to 10 ¾-inch seamless casing early next year at its new mill in Gregory, Texas. While it will have the capacity to produce about 500,000 tons of OCTG per year, production will be limited for the first few years. After the pipe mill ramps up, the company reportedly plans to add an electric arc furnace.
Expected to start operations in mid-2014 is a 300,000 ton ERW mill in Bryan, Texas, being built by Prolamsa Group. It is to operate under the name of Axis Pipe & Tube Inc. and produce OCTG, line pipe and structural tubing up to 16 inches in diameter with wall thicknesses of up to 0.625 inch. The plant will be fully integrated with a slitting line, mill, finishing floor and heat treatment facilities. It will have the capability to produce a wide range of API grades.
In addition to upping its annual seamless pipe capacity in Veracruz, Mexico, by 400,000 tons, Tenaris SA is planning to build a 640,000 ton per year seamless OCTG mill in Bay City, Texas. The new Texas mill will position the company to service the Eagle Ford and Haynesville shale plays once it comes on line in 2016.
In what is seen as a diversification move by a company that largely provides seamless tubing for transportation applications, Germany’s Benteler Steel/Tube GmbH is building a 250,000 ton per year small-diameter seamless OCTG mill in Caddo, La., that is expected to begin producing pipe in 2015. The company reportedly plans to add an electric furnace there five years down the road.
The most recent announcement of a new OCTG plant came from the Alita USA subsidiary of Dubai-based trading company Alita Trading DMCC. According to Ali Hosseini, its president and chief executive officer, the company is close to finalizing plans to build a “fully integrated” 150,000 ton per year ERW OCTG line in the United States. While Hosseini would only say the company is in the final stages of negotiations with two states, a New York State Power Authority document indicates that Alita has narrowed its list of potential locations to Houston and Buffalo. The mill could begin producing L80, N80 and P110 grade pipe as early as 2015.
As promising as the energy boom in North America may be, does the market really need this many tubular mills? “It is questionable if there is enough demand to absorb all of this new capacity,” Leppold says.
Christopher Plummer, managing director of Metal Strategies Inc. in West Chester, Pa., notes that capacity and operating rates are two very different things. “Usually OCTG mills never operate at more than 50 to 70 percent of their rated capacity,” he says. In many cases, OCTG will only account for about two-thirds of the mills’ output, with line pipe, mechanical pipe and standard pipe making up the balance.
It remains to be seen just how much of the announced capacity will indeed be built, Vivian says. Those with later startups have the opportunity to amend or even cancel their plans, depending on the market conditions. Even if all the capacity does eventually come online, Vivian says, “time is on our side.” The staggered production dates, coupled with increased drilling activity and a decline in imports, should help the market absorb the change. “As we get the full impact, the market should be better than it is today,” he adds.
[“It is questionable if there is enough demand to absorb all of this new capacity.” Kim Leppold, Metal Bulletin Research]