Later In, Later Out for OCTG
The pipe and tube market in North America—and the oil country tubular goods sector in particular—entered the recession behind the rest of the steel industry, and most likely will lag the rest of the industry on the way out.
By Dan Markham, Senior Editor
In October 2008, when the bottom fell out of most steel markets, North America’s pipe and tube distributors looked upon the chaos with a sense of detachment. A short time later, they would come to understand what all the moaning was about.
“In October, we were wondering what people were talking about. In November, somebody turned the light switch off and it was our turn,” says Tim Spatafore, executive vice president of Marmon/Keystone Corp., Butler, Pa., a leading distributor of tubular products.
Makers and distributors of oil country tubular goods did not sense the switch in demand until even later. Booming just a year earlier, the market for OCTG products is experiencing some of the worst conditions industry executives have ever seen. Today, Houston and other oil country hotspots are teeming with excess inventory that will take considerable time to sell off.
“Oil and gas has the weakest outlook [in pipe and tube],” says Cengiz Kurkcu, president of industrial products for The Timken Company, Canton, Ohio. “There’s very little recovery through the end of the year.”
In August 2008, demand for OCTG was in overdrive, with domestic mills running at nearly full production. The price of oil was still more than $100 per barrel, while the price of natural gas exceeded $13 per mcf. But as summer ended, these lofty energy prices began to soften.
Drilling for natural gas at the Barnett Shale in Texas, and similar locations, was producing better than expected output. “The same and increased amounts of drilling were yielding greater and greater results. That led to an oversupply of gas,” says Paul Vivian of the Preston Pipe & Tube Report in St. Louis.
That oversupply put downward pressure on the price of natural gas. As the recession took hold last fall, demand for all types of industrial materials dried up, including energy, sending the prices of oil and natural gas tumbling even further. “We would have to say the speed at which the market disintegrated was unprecedented,” says Vivian. “It fell, for lack of a better term, like a rock.”
The decline was evident in the North American rig count. In August 2008, 1,998 drill rigs were in use in the United States, while another 457 were active in Canada, according to data from Baker Hughes, the Houston-based consultant to the oil and gas industry. Within six months, the domestic rig count suffered more than a 50 percent drop. Despite some recent upticks, drilling activity still lags year-earlier levels. As of late last month, the U.S. rig count was at 985, and Canada at 164.
With domestic tube mills running near full capacity through the first three quarters of 2008, it took time for them to react to the sudden drop in demand. Moreover, imported pipe kept coming ashore (see sidebar on page 31).
“[By late summer], imports had been approaching 50 percent of market share,” Vivian recalls. “A lot of pipe that had been purchased in July, August, September and even into October still came barreling into the United States in March and April.”
This confluence of events—sharply curtailed industrial activity, declining demand for oil and gas, collapsing rig counts and unrestrained imports—created the glut of OCTG goods that continues to weigh down the market.
Supplies of pipe for petroleum production typically exceed other products, Vivian notes. Due to the uncertainty involved with drilling underground, and the need to keep plenty of pipe nearby so costly drilling operations never run short, OCTG inventories tend to run from four to six months. By late spring, the market’s supply of material on hand reached an estimated 15 to 16 months.
“Our contacts in the Houston area say they have never seen so much pipe in their lives,” says Larry Soehrman, vice president of materials management at Chicago Tube & Iron Co., Romeoville, Ill.
While the months-on-hand figure has declined a bit since its peak, it still ranges from 13 to 14 months. Paring inventory in such a downtrodden market is difficult.
“The entire industry is depressed,” says Bill Buckland, president of Atlanta-based Mandal Pipe Co., who also serves as president of the National Association of Steel Pipe Distributors, Victoria, Texas. “Drilling is down to extreme levels.”
The result is a persistent surplus of pipe with no place to go. “There is a lot of inventory in the oil country sector at very high prices,” Buckland says. “We’re looking to eat up that high-priced inventory, and there’s a lot of selling below cost.”
Recent quarterly financial results from steel mills reflect the trouble with the OCTG market. For example, while U.S. Steel saw some rebound in its flat-rolled and European divisions during the second quarter, its tubular sales suffered, primarily due to its weak oil and gas business. Foreign tubemaker Tenaris S.A. also reported plummeting demand in North America.
While the price of natural gas has dropped dramatically, oil was trading around $68 per barrel on Sept. 1, down from historical peaks over $100 last year, but still generally considered respectable. But that may not be enough to kick start exploration in some areas, such as the Canadian tar sands, where much of the drilling activity became uneconomical when the oil price slipped as low as $40 per barrel in the first quarter.
“Oil that comes out of the tar sands is high-cost oil. It costs them about $60 per barrel to ship it, so they have to see a number well north of $60 before they will be gung ho to move ahead on [stalled drilling] projects,” Wayne Bassett, president and CEO of Samuel Son & Co. Ltd., Mississauga, Ont., told Metal Center News in June. “Unfortunately, with the way the industry works in Western Canada, it will be early next year before they can get back on track, assuming they want to, with those projects.”
With its lagging start and more serious oversupply situation, recovery of OCTG promises to be even more difficult and protracted than other pipe and tube markets. Vivian predicts a slight rebound for OCTG in 2010, but says the industry won’t see another good year until 2011 at the earliest.
“The outlook is not very good in the short term,” adds Buckland. “We’re basically just protecting our own, keeping ourselves afloat. When the economy starts to recover, we will as well.”
Domestic OCTG Producers Await ITC Antidumping Ruling
For much of the past two years, steel imports into the United States have been held in check by weakening domestic demand and relatively high prices overseas. One exception is the oil country tubular goods sector, where sharply increased imports have contributed to the serious oversupply of the market.
According to many domestic OCTG suppliers, much of the pipe that came ashore was not being sold at market prices. In April, seven U.S. manufacturers filed an antidumping and countervailing duty trade case against Chinese imports, including U.S. Steel Corp., Maverick Tube Corp., Evraz Rocky Mountain Steel, TMK IPSCO, V&M Star LLP, V&M TCA and Wheatland Tube Corp., as well as the United Steelworkers. The complaint, filed with the U.S. Department of Commerce and the U.S. International Trade Commission, accuses Chinese producers of dumping subsidized OCTG products into the United States, noting that imports from China rose from 725,000 tons in 2006 to 2.2 million tons in 2008. The ITC was scheduled to issue a preliminary determination this month.
Roger Schagrin of the Committee on Pipe and Tube Imports, Washington, D.C., says excessive Chinese imports are a key cause of the 15-month inventory overhang that hit the OCTG market earlier this year. “OCTG imports have stopped because [the Chinese are] afraid of having to pay significant duties. But before they stopped, they had already oversupplied the market for the previous 18 months,” he says.
While OCTG has been the primary focus of the Committee on Pipe and Tube Imports, Schagrin points to a similar pattern of excessive imports of circular welded pipe, though the market was better able to absorb that influx.
He expects more trade cases to be filed on behalf of domestic producers of pipe and tube and other steel products, unless at least one of two things happens. “Either the government of China stops subsidizing massive overcapacity—and I don’t think that’s ever going to happen—or they have a real surge in consumer demand outside of government-propelled demand.”
Schagrin adds: “I anticipate more filings in every field.”
Non-Energy Tubulars Turning the Corner?
While the outlook for oil country tubular goods is the most daunting, prospects are marginally better for other pipe and tube markets, which are suffering from excess inventories, as well.
“If someone was to say pipe and tube inventories are already corrected, I’d say I don’t think so,” says Tim Spatafore at Marmon/Keystone. “It still has a little way to go.”
Ed Kurasz, global vice president for Allied Tube & Conduit, Harvey, Ill., says his company has seen a small uptick in orders in the third quarter as some service centers’ stocks have fallen below two months on hand. But even when destocking has run its course, he’s not certain there will be a substantial amount of inventory replenishing. “With 50 percent demand decline in mechanical tubing, why keep up the inventory?” he asks.
Virtually all end markets have been down this year, though some have held up better than others. Topping the list, executives agree, are the farm and military markets.
“The ag market is still pretty decent,” says Terry Flanary, national sales manager for National Tube Supply, University Park, Ill. “It’s more from the implement standpoint. You don’t see guys buying big tractors, but they are buying stuff that turns the earth.”
While most industrial segments were down in excess of 50 percent from 2008, farm and defense spending were only off in the 20 percent range, estimates Cengiz Kurkcu of The Timken Company, who reports a slight improvement in third-quarter activity. Timken sees promise in the company’s transportation markets, with various incentive programs helping to boost auto sales.
Mills have begun to increase prices on structural tubing and other pipe products, notes Larry Soehrman at Chicago Tube & Iron Co., who considers it a welcome sign after seven consecutive months of declines. “It’s an indication we’re starting to turn the corner.”
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