Profits in the Pipeline
Suppliers are working hard to keep up with demand for energy tubulars, especially line pipe.
By Myra Pinkham, Contributing Editor
High crude oil and natural gas prices continue to propel demand for pipe and tube as energy providers work to pull the precious fuels from the ground and deliver them to refineries. While demand is high for all energy-related tubular products, large-diameter line pipe is especially hot. If rising steel costs don’t force buyers to put pipeline projects on hold, line pipe suppliers could see strong orders through 2010 and beyond.
Escalating steel prices could have a dampening effect on other tubular products as well, including oil country tubular goods and mechanical tubing. Vicki Avril, senior vice president of IPSCO Tubulars Inc., Comanche, Iowa, admits that 2008 began “a little choppy” despite strong demand for both the drilling and transmission of oil and natural gas.
“We are hopeful that 2008 will transform from its rocky start to a decent year,” adds John Mocker, vice president of Lally Pipe & Tube, Covington, Ky.
With thousands of miles of new exploration projects in development for both oil and natural gas, mills are seeing an explosion of interest in large-diameter line pipe, says Larry R. Lawrence, vice president of tubular products for Evraz Oregon Steel, Portland, Ore.
Total line pipe consumption (including small diameter and large diameter) reached nearly 5.0 million tons last year, up about 40 percent from 3.5 million tons in 2006, according to Paul Vivian, co-publisher of the Preston Pipe Report, St. Louis. While certain capacity issues may prevent that kind of growth from continuing, double-digit gains are possible again this year, he adds.
Ron Williamson, vice president of sales and logistics for Berg Steel Pipe Co., Panama City, Fla., says that energy companies are investing heavily in new infrastructure in light of record or near-record oil and gas prices. Natural gas, at a price currently near $8 per thousand cubic feet, accounts for 75 to 85 percent of all drilling activity in the United States. Combined with crude oil prices of $85 to $100 per barrel, potential revenues from exploration can justify a lot more projects.
“Demand is coming from all over,” he says, pointing to several new transmission lines going from Canada into the United States due to the exploration activity in the Alberta oil sands. “We are also seeing lines in Texas, Mexico, Florida, all over. In some locations, companies are placing new lines adjacent to existing lines.”
John Shoaff, president of Sooner Pipe LP, Houston, observes that one “resource play,” which wasn’t previously economical, is the Barnett shale in southwest Texas. Other now-active areas include south Alabama, south Pennsylvania and central and northern Arkansas.
Lawrence says there is also a push to move energy from Wyoming and the Rocky Mountains to the Midwest and eastern U.S. One such large pipeline project, the Rocky Mountain Express, is being undertaken by Kinder Morgan Energy Partners LP, Sempra Energy and ConocoPhillips.
While much of the demand for large-diameter line pipe is coming from new projects, a significant amount is going toward maintenance and repairs. “Much of the domestic pipeline infrastructure was built right after World War II and hasn’t been updated since then,” says Vivian. Should the economy worsen, however, maintenance budgets may be cut.
With new project backlogs extending two to three years, “I expect demand to be good through 2010 and maybe beyond,” says Vivian. Major steel price increases could stall some projects, however. Some predict flat-roll prices will increase by $150 per ton in the first quarter. Steel plate, the traditional raw material for large-diameter pipe (though new spiral-weld pipe mills can also use coil plate or flat-roll), is also on the rise with a $60 a ton increase for March deliveries piggybacking on a $30 a ton increase in February. “That is very significant and will likely cause some projects to be reviewed,” Vivian notes.
Compounding the cost escalation is pressure on the energy companies to use high-quality APA X70 and X80 grades of steel coil and plate for their line pipe, Lawrence says. “These are very sophisticated steels with a large amount of alloys, so they are very expensive, and only a limited number of producers make them. This has resulted in a significant advancing of the pricing structure.”
With demand significantly outstripping line pipe producers’ production capacity, typical mill lead times have stretched out to a year, and in some cases as much as three years. But plans in the works to add 1.2 million to 1.5 million tons of new capacity—largely for spiral-weld pipe—should loosen supplies over the next few years, experts agree.
Leading the pack is IPSCO, which is currently commissioning an upgrade at its Regina spiral-weld mill. Once fully operational later this year, the mill will have an annual capacity of 500,000 tons, a two-thirds increase. Shortly thereafter, probably in the third quarter, Berg’s new 180,000-ton spiral-weld mill will come on stream.
In second-quarter 2009, the Stupp Corp. division of St. Louis-based Stupp Brothers is planning to start producing pipe up to 60 inches in diameter at its new 150,000- to 180,000-ton spiral-weld pipe mill in Baton Rouge, La.
PSL-NA, a joint venture of India’s PSL Ltd. and two U.S. minority partners, is planning to build a 300,000-ton-per-year spiral-weld pipe mill near Bay St. Louis, Miss. The company plans to install its equipment in June and ramp up by the end of 2008.
United Spiral Pipe LLC, a joint venture of U.S. Steel Corp. and South Korea’s Posco and SeAH Steel Corp., plans to start construction this month on a 300,000-ton spiral-weld pipe mill in Pittsburg, Calif. The new mill is scheduled to start producing pipe in April 2009.
Also in the planning stages, Lone Star Technologies, now owned by U.S. Steel, has formed a joint venture with India’s Welspun group to construct a mill that will produce 300,000 tons of spiral-weld pipe per year.
While there may be enough demand for all of this additional capacity at the height of the market—expected to peak in 2010 or 2011—industry observers generally are skeptical that it can be supported long term. “It borders on too much,” Vivian says. When any new capacity will start relieving the short supply situation is unclear, since recent steel price hikes could prompt delays in mill construction projects, as well as pipeline projects, he adds.
While relatively stable, line pipe pricing has moved up as mills have passed along rising raw materials costs. Avril expects the marketplace to accept the latest price hike announced for March.
“People are now more accepting of price increases and are building them into their plans,” agrees Williamson at Berg Steel.
Other markets show strength
Besides line pipe, other energy markets are also faring well, including oil country tubular goods and applications for mechanical tubing. Shawn Seanor, director of marketing and business development for The Timken Co., Canton, Ohio, says that 2007 was a record year for external use of its mechanical tubing (not including internal use of its bearings), with the greatest increase coming from the energy sector. 2007 shipments were double those in 2005 and will likely remain at that high level this year, he says. Lead times have stretched out considerably, he adds, especially for quench and tempered tubing, usually used in oil field applications.
Business is also positive for OCTG. “It has had several strong years and will continue to be strong in 2008,” says Larry Soehrman, vice president of materials management for Chicago Tube and Iron Company, Romeoville, Ill.
Last year’s OCTG consumption declined about 6 percent to 4.6 million tons vs. 4.9 million tons in 2006, but much of the difference was due to an inventory correction, says Vivian. While the demand outlook going forward may not be quite as strong as in 2004-05 when the OCTG market “went absolutely nuts,” he adds, it is still very solid.
Through most of 2007, service centers and others in the supply chain worked down inventory levels that had ballooned due to overzealous buying and the lag time in import deliveries. “Currently OCTG inventories are in pretty good shape,” says Vivian, at about five months of supply on hand vs. 5.5 to 5.6 months at the start of 2007. “And that is with fewer rigs running.”
According to Kurt Minnich, partner with Spear & Associates Inc., Tulsa, Okla., the publisher of Pipe Logix, 500 rigs were added last year, though the total rig count hasn’t increased much. “Now there is an ample supply of rigs, and counts dropped a little as old rigs were pushed out and replaced with new ones,” he says.
Oil field services company Baker Hughes Inc., Houston, reports there were 2,329 rotary drill rigs operating in North America at the end of January, down 1.4 percent from a year earlier. Much of that decline was in Canada and the Gulf of Mexico. In the United States, 1,747 rigs were operating, up 2.8 percent from a year earlier.
The rig count is expected to remain fairly flat this year. “I think we will see demand consistent with 2007, though if we see the Gulf of Mexico come back in the second half of the year, we could see a slight increase,” says Shoaff at Sooner Pipe.
Despite the fact there will be major growth in energy consumption in the next three to five years, most won’t come from the United Sates, but rather from China, India and other developing nations. “The U.S. market has begun to mature resulting in a slower rate of growth—4.5 to 6 percent vs. the 8 percent to double-digit growth of the last several years—not just for natural gas and oil rigs, but also for OCTG,” Shoaff says.
Nevertheless, says Soehrman at CTI, current energy prices offer enough return on investment for energy companies to dig deeper wells, which require more higher-end OCTG products than traditional wells.
Minnich points to horizontal drilling in the Baaken shale in North Dakota as an example. “It is very expensive. Ten years ago it couldn’t have been developed. We didn’t have the technology or the oil price to support it. But that has changed.”
Imports have had a negative effect on tubular products other than large-diameter line pipe. Import competition has put a ceiling on domestic prices, which is problematic given the surge of raw material increases, says Avril. “Imports have taken a significant amount of market share—about half—given that there are lower prices in some countries.”
While there are some line pipe imports coming in, the demand is healthy enough to support them. “They are coming in like crazy, but right now we aren’t feeling it much,” says Williamson. “Our mill is full.” Should imports continue at this rate, however, they could contribute to an oversupply in a year or two when the new spiral-weld capacity starts coming online, he adds.
OCTG imports declined to 1.95 million tons in 2007, a 7.1 percent decline from the 2.1 million tons that came in (about half from China) in 2006, partly due to trade case filings. “What is significant is that imports had been growing every year since 2004, so this is a trend reversal,” Vivian notes.
“Just the talk of possible trade sanctions is having a dampening effect on imports from China,” adds Shoaff. The weak U.S. dollar and reports of poor quality with some OCTG imports have also contributed to the decline.
Supply of OCTG products is currently tight with mill lead times further extended by about a month. Now that inventories are in balance, domestic mills are trying to catch up with demand. But they don’t want to turn on too much capacity until they get their prices back up, says Vivian.
U.S. Steel recently announced an OCTG price hike—5 percent for carbon and 8 percent for alloy—and other mills are expected to follow suit. “This price increase is raw-material driven. Flat-roll is up. Energy is up. But soon demand might drive it as well,” Vivian says.
Overall, say the experts, 2008 should be a “rock solid” year for sales of energy tubulars, particularly large-diameter line pipe, which should continue to grow for the next three to four years. The markets for OCTG and energy-related mechanical tubing are expected to be flat this year, both on a volume and price basis.
Consolidation Creates Big Three in Pipe and Tube
Recent mergers among pipe and tube producers have created a market dominated by three players—a concentration that many consider a positive development.
“I think the consolidation was needed,” says Vicki Avril, senior vice present of IPSCO Tubulars Inc., Comanche, Iowa. “With the consolidation, producers can offer a broader product line.”
“It has given producers a chance to understand the market better, and to make money,” says Paul Vivian, co-publisher of the Preston Pipe Report, St. Louis. “It has made the market more transparent and, therefore, easier for companies to judge and forecast.”
The end result is that three mills—IPSCO, U.S. Steel and Tenaris—now lead the market, says Kurt Minnich, partner with Spear & Associates Inc., the Tulsa, Okla., publishers of Pipe Logix. Unlike the consolidation in the flat-rolled steel industry, however, the pipe market concentration hasn’t changed pricing or supply, as there has been essentially no rationalization of capacity.
Recent megadeals in the pipe and tube sector include the following:
n Buenos Aires-based Tenaris SA acquired Maverick Tube Corp., St. Louis, in October 2006 for $2.7 billion. Maverick is a leading North American producer of welded oil country tubular goods, line pipe and coiled tubing. Tenaris is a leading global producer of seamless pipe.
n IPSCO, now headquartered in the Chicago area, acquired the NS Group Inc., Newport, Ky., for $1.46 billion in December 2006, marking IPSCO’s entrance into the seamless tubular business while enhancing its position in welded products. Soon after, in July 2007, IPSCO was purchased by Sweden’s SSAB for $7.7 billion. Prior to its purchase of IPSCO, SSAB was exclusively a producer of steel plate and sheet.
n In November 2006, Russia’s Evraz Group acquired Oregon Steel Mills Inc., Portland, Ore., for $2.3 billion, giving Evraz a presence in both the North American tubular and plate markets.g
n U.S. Steel Corp., Pittsburgh, acquired Lone Star Technologies Inc., Dallas, a leading producer of welded tubular goods, for $2.1 billion in June 2007. The merger significantly expanded U.S. Steel’s tubular product offerings, its production capacity and its geographic footprint.
Further consolidation is certainly possible among pipe and tube suppliers, though Vivian at the Preston Pipe Report expects a lull in M&A activity for a while. “Prices are high for acquisitions. I believe that people have paid just what they will pay at the point.”
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