Tubers Feel the Pinch

Demand for both DOM and ERW tubing is expected to decline substantially in 2009 as major end-use markets such as automotive and heavy equipment dial down production.

By Myra Pinkham, Contributing Editor

As in virtually every other steel market, producers and distributors of mechanical tubing products are hoping for the best, but expecting the worst, as the economy struggles to right itself.

Tubular demand remained fairly strong for the first three quarters of 2008 before experiencing double-digit declines. “While demand for mechanical tubing isn’t dead in the water, it is down significantly,” reports distributor Norman Gottschalk, president of Marmon/Keystone Corp., Butler, Pa. This is a big concern for service centers, as about half of all mechanical tubing in the United States is sold through distribution.

“I think 2009 will be a very difficult year,” says Larry Soehrman, vice president of materials management for Chicago Tube and Iron Co., Romeoville, Ill. “I don’t see any light at the end of the tunnel at this time. We are keeping our fingers crossed that the government’s economic stimulus package does something, but it isn’t likely to have a significant impact this year.”

Bill Wolfe, executive director of the Steel Tube Institute of North America, Coral Gables, Fla., holds out hope that the market will begin to turn around by the end of the year, but concedes, “who knows?” As of mid-January, demand for mechanical tubing was down 35 to 40 percent from its late summer peak. “The only end use that had been showing any sign of normalcy was the energy business, but in recent weeks even energy has been off considerably,” he says.

Agricultural and mining equipment markets have also held up fairly well, relatively speaking, adds Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa., (see related charts).

For full-year 2008, mechanical tubing shipments declined only slightly vs. the previous year, according to Rick Preckel, a principal of the Preston Pipe Report, Ballwin, Mo. He places 2008 shipments (both domestic and foreign) at just under 4.0 million tons, down from 4.1 million tons in 2007, with the lion’s share of that decline occurring in the fourth quarter.

“Demand in 2009 will be substantially lower,” he says, probably around 2.5 million tons, “driven by the current and expected economic situation. There just aren’t a lot of orders.”

While some predict a more modest drop, most expect a double-digit decline this year. Higher-value-added seamless and drawn over mandrel (DOM) products, which account for only about 10 percent of the total mechanical tubing market, have been faring a little better than electric resistance welded (ERW) tubing, according to Plummer.

Most welded tube producers started feeling the downturn in September or October. Shawn Seanor, director of value added solutions for the Timken Co., Canton, Ohio, which makes seamless tubing, reports that shipments were strong throughout 2008, but orders began to slip in January, “and February’s are nowhere near we would like them to be, with lead times coming off by 25 percent.”

Suppliers to the automotive sector have been especially hard hit, Preckel says. Automotive production was down 40 percent in November 2008 vs. a year earlier. Automakers consume an estimated 25 to 40 percent of all mechanical tubing, much of it used in hydroformed frames, steering columns, exhaust systems and suspension parts.

“It isn’t that no one wants to buy cars. Some people just can’t get credit,” adds Preckel.

“Despite the bailout of the financial sector, financing isn’t any more available than it had been,” says Gottschalk at Marmon/Keystone. “No one wants to lend money. In fact, many credit lines aren’t being renewed.”

Bill Jones, president of O’Neal Steel Inc., Birmingham, Ala., says he expects credit to start flowing more freely later this year. “It has to or else the whole economy will shut down. Right now the economy is like an engine that someone drained of oil. But credit won’t be anywhere near what it was this time last year, and it probably shouldn’t be. Credit was too free then.”

Making matters worse, the biggest percentage of the auto production decline was for light trucks. According to Plummer, light trucks use 50 to 100 percent more mechanical tubing than passenger cars.

“It isn’t that consumer preference really changed,” says Preckel, but rather it was a temporary response to $4 per gallon gas prices. “Now, with gasoline prices down, there is no doubt that some people will go back to larger vehicles. It might not be the big SUVs, but maybe crossover vehicles, which are currently very popular.”

The auto market actually has been on the decline for a while. Even before the financial crisis hit, the automakers and mechanical tube mills were adjusting to shrinking sales, notes Wolfe. “Obviously they are eager for any assistance the government could lend them. Companies are anxiously awaiting what effect the bailout of the Detroit Three will have,” he adds.

“The auto bailout was a must, not just for the automakers but the whole auto supply chain, including mechanical tubing,” says Jean-Marie Diederichs, general manager of Prolamsa USA, Houston. Seanor agrees: “It will enable the Detroit Three to do what they need to do. It is very important to the steel industry that the automakers rightsize themselves.”

Beyond automotive, mechanical tubing is used in a wide array of other applications, including farm, construction and mining equipment; recreational items such as exercise equipment; heavy and medium duty trucks; marine and shipbuilding; oil, natural gas and petrochemical industries; and utilities. Most of these markets are similarly slow “as a reflection of the general economic malaise in both the U.S. and throughout the world,” says Wolfe.

“All are impacted in one shape or form by the weakness of the economy and poor consumer confidence,” says CTI’s Soehrman, who observes that consumers account for more than 70 percent of U.S. GDP.

Much of the decline in mechanical tubing demand—from construction equipment to appliances—is tied to the housing market, which is “literally dead in the water,” says Gottschalk. Not only does housing—directly or indirectly—account for a large percent of GDP, but its slowdown also drags down nonresidential construction. After all, there’s no need for strip malls or schools when the subdivision is not built.

Overall, sales for earthmoving machinery, including construction and mining equipment, were off 20 to 25 percent in 2008 and could see another 5 to 15 percent decline in 2009, according to Eli Lustgarten, senior vice president and senior analyst for Longbow Research in Independence, Ohio.

Construction equipment demand could get a boost from the $800 billion-plus economic stimulus plan spearheaded by the Obama administration, which includes new spending for infrastructure projects as a means to create jobs. If signed into law, this legislation will eventually boost consumption of mechanical tubing by equipment manufacturers and related industries. “But we are not likely to feel any effect for at least six to eight months,” notes Gottschalk. “The soonest would be early in the fourth quarter if the legislation were signed today.”

One sector that continues to buy tubing is the energy industry, which uses seamless product in oil and natural gas wells. This is true even though energy prices and rig counts have dropped sharply in recent months, Preckel says. “Relatively speaking, demand remains strong. It is better than it has been historically.”

The price of oil and natural gas has taken a hit along with the global economy, says Wolfe. “The oil industry is paying the piper for the euphoric speculation that occurred much of last year,” pushing oil prices up near $150 per barrel. Much of the euphoria has been replaced with “negative speculation” that has brought oil prices down as low as $35 a barrel, adds Preckel.

Baker Hughes reports that the U.S. drill rig count is currently about 1,500, down from a peak of 2,031 in September. “But that decline has been more due to the negative sentiment about the economy. As the economy gets better, energy prices will go higher,” Preckel predicts. Higher energy prices will spur more drilling and boost demand for tubing, among other products.

Preckel believes the fundamentals for energy in the longer term—especially for natural gas—remain strong, especially with recent increases in natural gas exploration in the shale plays aided by new technology for horizontal drilling. “We currently have a gas bubble resulting from high well productivity in the Barnett and Haynesville Shales. With this in place, and depressed demand, we need some time to balance supply and demand. If we get some help from the economy, we expect that drilling will begin a slow recovery in the fourth quarter as industrial activity starts improving,” he says.

Seanor, at Timken, sees a lot of potential new business for mechanical tubing suppliers in alternative energy, including wind and solar. “We are working with our customers to help them develop that market. While we are seeing some weakening in wind power demand because of the lower oil and gas prices, there are more companies making products for the market in the United States, which increases the U.S. supply chain and is good for domestic tubing producers.”

Tubing producers are still waiting anxiously for distributors to begin replenishing depleted inventories. “Service centers have essentially shut their doors since the end of September, reducing their inventories and not taking more product,” says Prolamsa’s Diederichs.

Ed Kurasz, global vice president of Allied Tube & Conduit, Harvey, Ill., agrees that since steel prices began declining in the second half of 2008, “distributors are only buying for need and reducing their inventories whenever they can.”

Mechanical tubing prices have largely followed flat-roll, which plummeted from a peak of over $1,000 per ton during the summer to the current $500 to $600 per ton range.

While he can sympathize with the tube mills’ plight, service centers cannot afford to buy material they cannot sell, says O’Neal’s Jones. “I think the whole supply chain was like a deer looking at headlights in the fourth quarter. No one predicted what happened. Anyone who hasn’t reduced their inventory runs the risk of having far too much material on hand at far too high valuations.”

In this tough business climate, mechanical tube mill capacity utilization has plummeted, with many companies running at operating rates as low as 30 to 40 percent—a 60 to 70 percent drop from a few months ago, Gottschalk says.

Mills that are “disciplined and in tune with the market” have been cutting back capacity to bring it in line with demand, Kurasz says. Going forward, he adds, there could be “some natural culling of capacity due to the weak economy,” depending on how the rest of the year unfolds.

One major move was U.S. Steel’s announcement early in January that it was exiting the drawn over mandrel business, closing the lines in Texas that it acquired along with Lone Star Steel Co., where it produced about 50,000 tons of DOM products last year.

This is significant, says CTI’s Soehr­ man, given that U.S. Steel was one of only three mills that made the entire size range of DOM. “It puts more pressure on other mills and could tighten supply. But even without the U.S. Steel product, there is more supply than demand,” he says.

Several other tube mills have announced capacity cutbacks ranging from extended time off or reduction of shifts to temporary idling of certain facilities. When, and if, they come back depends on what happens with the economy and demand going forward, Preckel says.

In the midst of this downturn, Prolamsa is bringing on approximately 70,000 tons a year of 0.5- to 2.5-inch mechanical tubing production capacity with the installation of three tube mills at its new mechanical and structural steel facility in Laredo, Texas. “We don’t think we are crazy going ahead with our plans for Laredo. This is a great fit for us and our customers,” maintains Craig Winkel, Prolamsa USA’s sales manager.

The company had originally planned to build its first greenfield tubing production plant in the southern U.S., but that project has been put on hold for about two years. Instead, it will equip the leased facility in Laredo by moving two tube mills from its Monterrey, Mexico, facility, as well as installing a third, new production line. The two former Mexican lines will be up and running in mid-February, with the new line starting up early in March, company officials say.

“This will allow us to get material to service centers at a faster speed than we have been able to do from Mexico,” Diederichs says. The output does not really represent new tonnage, he says, but rather a switching of tons that Prolamsa currently supplies to customers in the United States from Mexico. Once Prolamsa builds its greenfield tubing plant in the U.S., the Laredo facility will be shuttered.

Meanwhile, tubing producers and distributors alike are holding their breath, hoping that the government stimulus program lights a fire under the economy sooner rather than later.

“If they give people jobs, then things will turn around,” Gottschalk says. “But until money is flowing again, it will very tough.”

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