By Myra Pinkham,
Stainless pipe and tube—a small, diverse and profitable segment of the stainless steel market—is recovering, say the experts, but it still has a long way to go before returning to its pre-recession strength.
|Stainless Pipe and tube sales are on the upswing, report producers and distributors, but at a frustratingly slow pace. (Photo courtesy TW Metals)
“Obviously, it isn’t like it was two to three years ago, but it is significantly better than six months ago,” says Jack Cullinan, general manager of master distributor Great Plains Stainless, Tulsa, Okla.
The big question: how much of this improvement is due to true demand and increased consumption vs. restocking by distributors and speculative buying ahead of price increases? The stainless pipe and tube market often experiences volatile inventory swings, notes one insider. “When demand declines, inventories go down real hard. When things pick up, inventories also rise very fast.”
Currently, distributors seem to be filling holes in their inventories, which have fallen to historically low levels, but they aren’t actively building up their stocks. “We are trying to increase ours a little, but not much,” says Anthony Amabile, director of marketing for TW Metals Inc., Exton, Pa. “We aren’t looking to make big import buys and are just purchasing what we need.”
Cullinan says he is taking a similar approach, keeping inventories lean, but replenishing where necessary. “You can’t sell out of an empty wagon. If you don’t have a respectable inventory level, then you will lose orders. People want what they want right away. They no longer have three months of stock on hand.”
There is still much confusion about what the future will bring, including speculation about base prices and surcharges, says Paul Vivian, a partner with the Preston Pipe Report, Ballwin, Mo. “It is tough for people to know what is happening, so they are just hanging out waiting for the economy to improve, and for true demand to get better.”
Mike Beck, national marketing manager for stainless and aluminum products at Marmon/Keystone Corp., Butler, Pa., says demand has been steadily improving since late third-quarter 2009. “It hasn’t been in leaps and bounds, but incrementally rising about 5 to 10 percent.” While it is hard to anticipate what 2010 will bring, he adds, “it seems as if there are more positives than there were last year.”
While there is no question that 2009 was a very depressed year for stainless pipe and tube sales, quoting activity remained reasonably strong even at the market’s lowest point. Companies were still planning for future projects at the depth of the economic downturn, says Christophe Le Rigoleur, vice president of sales and marketing for Germany’s Salzgitter Mannesmann Stainless Tubes, which has a U.S. subsidiary in Houston.
Kirk A. Thorne, vice president of sales and marketing at RathGibson Inc., Lincolnshire, Ill., believes most stainless pipe and tube segments began to turn around in October 2009. RathGibson’s order book for that month was the strongest it had been since February 2009.
“The United States experienced positive GDP growth in the third quarter, indicating that markets in general have realized the same uplift that we have,” says Thorne. This gives him hope for a moderate V-shaped recovery, as opposed to the W-shaped recovery that would indicate a double-dip recession.
“Overall, destocking trends have subsided as firms find it difficult to drive down inventory levels further while still meeting consumers’ needs as end-market demand picks up,” says Thorne. “Capital expenditures are beginning to free up, primarily in support of necessary repair and maintenance,” he adds, which is good news for the stainless pipe and tube often used in such upgrades.
It is also possible that some of the recent strength is due to speculative activity prompted by the high prices of nickel and molybdenum, says Le Rigoleur. The LME spot nickel price is currently about $18,300 per metric ton, up from about $16,100 early in December. Meanwhile, American Metal Market reports that the price of free market canned molybdic oxide is at $15 a pound, up from about $11 in December. While the uptrend in the cost of these alloying ingredients has helped to keep stainless pipe and tube prices from declining, significant price increases are unlikely until end-use demand improves. “My gut tells me that there will be a sustained demand pickup soon,” Le Rigoleur adds.
Stainless pipe and tube is often used in corrosive environments such as those in chemical processing, energy (including both oil and natural gas drilling and refining), power generation, food processing, sanitation and other industries. Other major uses include automotive and heavy truck exhaust systems and ornamental tubing.
Due to the many diverse applications for stainless pipe and tube, it is difficult to accurately gauge the size of the market, says Christopher Plummer, managing director for Metal Strategies Inc., West Chester, Pa. He estimates that apparent consumption (excluding automotive exhausts) was down approximately 30 to 40 percent in 2009—to roughly 135,000 to 160,000 tons from 226,000 tons in 2008. Of that, about 70 percent was welded and 30 percent seamless. Apparent consumption for the exhaust market was down about 35 percent to around 250,000 tons.
Though it accounts for only about 2 percent of steel pipe and tube consumption, the stainless segment is an important market for tubular producers and distributors because stainless products sell at higher prices than carbon pipe and tube, notes Rohan Paul, managing director of investment banking industrials for Wells Fargo Securities, Charlotte, N.C.
Le Rigoleur expects to see a slow recovery over the next six months followed by a more dramatic pickup in the second half, with the oil and gas and power generation markets leading the way.
Vivian, at Preston Pipe Report, says these markets took big hits in 2009, as did most applications, with the possible exception of food service and sanitation, which held their own but saw no growth.
With oil and natural gas prices up—oil at $70 to $80 a barrel and natural gas around $5.50 per thousand cubic feet—“it is possible that oil and gas drilling could pick up quickly, especially if prices continue to rise,” says TW’s Amabile. Natural gas exploration accounts for most of the drilling activity in the United States.
Even current energy price levels make it economical for drilling, says Gene Shiels, assistant director of investor relations for energy services company Baker Hughes Inc., Houston. The U.S. drill rig count has been on the increase in recent weeks, reaching 1,282 rigs by Jan. 22, up 2.7 percent from the previous week but down 15.4 percent from 1,515 rigs a year earlier. The number of U.S. rigs peaked in September 2008 at about 2,014, then fell to 875 rigs in June 2009. “It has been increasing fairly consistently since then,” Shiels says.
Thorne feels the increase in energy-market activity has been largely price-related and should continue as long as oil prices remain above $75 a barrel. Le Rigoleur agrees, noting that prices are even high enough to support the economics of oil sands exploration in Canada, which is a costly way of extracting oil.
The energy price is not the only driver for natural gas-related tubular sales, Shiels says. Demand has also been boosted by advances in the more complex horizontal drilling techniques, which utilize stainless pipe to fracture tight rock formations in shale plays to release the gas.
Will drilling activity continue to increase in 2010? That is hard to predict, says Shiels, especially since weak economic conditions and full storage facilities continue to dampen demand. “The question is whether we will continue to drill as we go through the winter or if natural gas will be pulled out of inventory.” Excessively high drilling rates could result in an oversupply of gas, which could affect prices and drilling levels later in the year, he adds.
Demand for stainless pipe and tube used in power generation is also uncertain. Le Rigoleur is optimistic that power providers will increase their purchasing as they upgrade the overstrained power grid. Thorne believes power generation expenditures are likely to remain soft in 2010, however.
“While the power generation market had been decent over the last few years, more recently it has gotten beaten up,” says Beck. “But we might start to see some bounce back, especially from generators of wind energy.”
Some contractors have found it difficult to borrow money for such alternative energy projects, but the financial markets are easing, says TW’s Amabile. “It isn’t that money is really flowing, though. Banks continue to be cautious.”
He also reports recent upticks in demand for stainless pipe and tube for water treatment plants. Certain projects for both waste water treatment and water purification facilities, which had been on hold, have been revived in recent weeks. “Some of this is due to economic stimulus monies being released. Some of it is just because of need,” he says.
The chemical processing market, another major consumer of stainless tube and pipe, is likely to see a modest pickup in business this year. Martha Gilchrist Moore, senior director of policy analysis and economics for the American Chemistry Council, Arlington, Va., says that U.S. production of chemicals, excluding pharmaceuticals, is expected to increase about 3 percent in 2010, 3.3 percent in 2011 and 3.4 percent in 2012, after declining 6.2 percent in 2009. Petrochemicals, which account for about 32 percent of all chemical production, will lead the way with a 5.2 percent increase in 2010.
While the second half of 2009 was significantly better than the first half for the U.S. chemicals industry, much of that gain was due to restocking of lean inventories by both distributors and end-users, and increased exports, rather than real consumption, Moore says. Chemical exports are expected to increase about 8 percent this year. “True demand will increase as the industrial sector recovers,” she adds, and so should capital investments, including those involving the use of stainless pipe and tube.
Paul at Wells Fargo notes that chemical industry operating rates are expected to rise to 73 percent in 2010 from 71 percent in 2009, which could give a small boost to capital spending. “We expect to see modest improvement in 2010 as companies regain health and confidence improves,” he says.
Plummer, at Metal Strategies, says that while the auto exhaust market was down about 33 percent last year, it turned positive on a monthly basis in October and November. According to industry data, car and light truck builds are predicted to increase 15 to 20 percent in 2010, which bodes well for sales of automotive tubulars.
One German producer is confident enough in the economic recovery to expand into the United States. Wilh. Schultz, GMBH, plans to break ground on a new tubemaking plant in Tunica, Miss., this spring, which could start production as soon as first-quarter 2011.
“The demand is low at the moment, globally and in the U.S., but there are a lot of projects out there that will be realized in the next four or five months. With the expectation of rising energy prices, plus the new projects that need to be built, we see a positive trend for 2011. Nevertheless, we don’t expect the demand to be as strong as in 2006 or 2007. Before we get back to these levels, I believe it will take another three years,” says Wolfgang Schulz, chairman and CEO.
The new plant, with a 20,000-ton capacity, will increase Schulz’s ability to produce seamless pipe, offering sizes from 8- to 24-inch diameter in the first phase of the project. “A pipe mill like this has not been built in the last 15 years. We are going to use the most modern technology available. This plant will serve not only the U.S., but the whole world. We expect exports to be in the range of at least 50 percent,” he adds.
“2009 was the year to reduce costs, manage the business as closely as possible, improve internal processes and get close to customers,” says Thorne at RathGibson. “2010 brings the same focus, albeit hopefully in an environment where surcharges maintain a flat to moderate increase and with the demand picture improving in the low double digits.”
As demand increases, stainless pipe and tube mills could see raw material lead times extend. “The mills providing strip [for tubular production] have had to significantly cut back capacity and expenses to weather the recession,” Thorne adds, noting mills are currently operating at 60 to 70 percent of their rated capacity. “We are working very closely with strip providers to turn inventory at greater rates than pre-recession. With distributors stocking less, it is incumbent on us to achieve even shorter lead times in order to capture the business.”
While individual orders continue to be smaller than normal as end-users purchase only what they need, Marmon/Keystone forecasts slow, incremental improvement in the stainless pipe and tube market this year, with the second half stronger than the first, Beck says.
“We are starting to see a light at the end of the tunnel,” adds Cullinan at Great Plains Stainless. “It isn’t a bright light yet. That is still another year or so away. But it will be a year where some people will actually be making money.”