Price, Availability Concerns Dominate DOM Market
By Dan Markham, Senior Editor
Distributors say reduced capacity and rising steel prices are the biggest threats to an otherwise healthy market for drawn-over-mandrel and other mechanical tube products.
Mechanical tubing continues to rebound from the depths of the recession. The market experienced double-digit growth in 2010 and further increases are anticipated this year. But distributors of tubing are not without concerns at the start of 2011. While demand from end-users has rebounded to healthier levels, mechanical tube suppliers are now saddled with the question of where the supply will come from.
The problem is particularly acute in the drawn-over-mandrel market. Lead times for the product have stretched out considerably in recent months, north of 20 weeks, with no relief in sight.
“The biggest problem is getting the material,” says Norm Gottschalk, president of Marmon/Keystone, Butler, Pa. “It’s a good market, a steady market, but it’s difficult to keep it in stock.”
The supply issue’s roots date back several years, to U.S. Steel’s purchase of Lone Star in 2007. Lone Star was a large supplier of the material, but U.S. Steel took the DOM capacity out of play to focus on oil country tubular goods production.
Brady: Energy, Power Markets in Different Parts of the Cycle
For tubemakers and distributors serving the energy market, the outlook for the coming years is a decidedly mixed bag, says analyst Aaron Brady. The director of global oil for Cambridge Energy Research Associates gave a comprehensive overview of the three major energy segments during February’s Metals Service Center Institute Tubular Products Conference in Phoenix.
According to Brady, the markets for global oil, North American oil and gas and North American power are all in different parts of their investment cycles.
The most promising market, at the moment, is global oil, Brady says. The rising price of oil and the long lead times between upstream investment and downstream impact will result in activity in many oil-producing regions.
“Back in the early part of the last decade as oil prices were rising, people weren’t sure those oil prices were here to stay. Once the industry became convinced those stronger prices were here to stay, they started ramping up spending. We’re seeing today the impact of that with supply continuing to grow.”
Those investments fell off in 2009 and 2010, the product of the recession. But with oil prices recovering, the market can expect cap ex to be 8 to 10 percent higher in 2011 than last year and continuing to grow from there, he says. Additionally, most forecasts call for oil prices to continue to grow throughout the decade, the byproduct of strong demand from China, India and other emerging markets.
Another factor working in the favor of oil market investments, Brady says, is supply depletion. Today’s productive capacity will produce half as much oil in 2030, while fields under development, fields under appraisal and fields yet to be discovered will have to make up the difference. “We have to keep investing just to keep up. Even flat demand implies a rising investment over time.”
In North America, Brady projects investments will continue in the Canadian oil sands, as the rising oil prices will make what was a marginal investment now more consistently profitable. By 2030, the oil sands could supply as much as 40 percent of U.S. demand, he estimates. Furthermore, continued growth in the Canadian oil market will require additional investment in pipelines to get the product to the major refineries on the Gulf of Mexico and other markets.
The one area where investments will not be on the rise is in the Gulf of Mexico itself, the result of the oil spill of 2010 and its political fallout. Brady says production in the gulf is expected to be about 400,000 barrels per day, or 30 percent, lower than it would have been by 2015 had the accident not occurred.
However, the aftereffects of the accident are not spilling over to other locales. There are few changes in the deepwater drilling plans in places such as Brazil and West Africa, he says.
In the North American gas segment, while the long-term prognosis is healthy, the market is in the middle of a modest pause, Brady says. Weaker gas prices compared to previous years will likely cool off investment.
On the other hand, the development of unconventional and more economical gas recovery techniques in shale plays will continue to propel the market for years to come. “Gas prices don’t have to stay very high to motivate investment over the long term,” Brady says.
And like the oil sands, full exploitation of these shale gas fields will require more pipelines to deliver the gas to the market hubs and more processing infrastructure to extract liquids from the natural gases. “Much bigger gas production is no longer opportunity constrained. Now it’s more market constrained,” Brady says.
Finally, North American power generation is in the midst of a longer trough in investment, the result of overinvestment in the preceding years. Following the recession, most markets will not need new power plants until 2015 or even later.
Environmental and regulatory issues revolving around CO2 concerns will affect power generation in the future, opening the door for more renewable power options such as wind and solar. And while nuclear is becoming a more palatable option again, the lead times on such facilities are even longer than on other plants, meaning most won’t come on line before 2020.
Ultimately, Brady believes natural gas will be the fuel of choice for North American power generation in the future, due to its domestic availability, lower carbon content and ability to be dispatched at any time, unlike wind or solar. “We think gas is going to be the default fuel for the industry going forward,” he says.
Initially, the departure was not felt in the marketplace. “Nobody noticed, because nobody needed any tubing,” says Larry Soehrman, vice president of materials management at Chicago Tube & Iron Company, Romeoville, Ill. “But when the 2010 uptick came, very quickly lead times jumped out.”
Brad Fenstermaker, sales coordinator of Tenaris in Houston, agrees. “With welded DOM, lead times got pushed out because there aren’t a lot of players.”
Additionally, the increase in orders came on the heels of an industry-wide inventory drawdown. So, when demand from end-users started to bounce back, “all of a sudden, everybody’s realizing there’s no inventory in the chain,” says Soehrman.
Exacerbating the problem is the inability of the other domestic suppliers to quickly fill in the gaps. The main company really capable of expanding capacity, PTC Alliance, Wexford, Pa., was in the middle of bankruptcy proceedings and working through a restructuring as demand was starting to pick back up.
The extent of the issue became apparent in January when ArcelorMittal’s Shelby, Ohio, facility, one of the primary suppliers of DOM product, told its customers it was not taking any new orders until at least early February.
At about the same time ArcelorMittal made its announcement, PTC Alliance reported it was in the process of expanding capacity at two of its U.S. facilities. The company’s Hopkinsville, Ky., operation doubled its manufacturing output through the rehiring of 45 employees. The facility produces DOM and seamless tubing in sizes up to 6 inches in diameter.
The company also reopened its Chicago Heights facility, idled since 2004. The location produces tubing up to 3 inches in diameter. Additional capacity expansions are planned, as the company eventually expects to produce tubing up to 6 inches in diameter.
“We continue to make investments in our facilities to increase capacities in order to meet the demands of our customers,” says Cary Hart, PTC Alliance president-North America.
Soehrman says any capacity increases from PTC Alliance are a start, but probably not enough to substantially reduce lead times. Imports have only been effective at filling in some of the gaps in the availability of small tubular sizes, he adds.
Any impulse to seek out foreign product is dampened by the weak dollar, making imports more expensive. Domestic product is preferable, if hard to get, say executives.
William A. Wolfe, executive director of the Steel Tube Institute of North America, Glenview, Ill., agrees that imports of tubing product are not a major issue at the moment, though the erosion of America’s manufacturing base continues to be a sore spot for his members.
Further complicating matters for tubemakers and distributors is the meteoric rise in steel prices as 2010 drew to a close. Since early December, flat-rolled steel moved from about $545 to more than $800 per ton for March delivery, though the tubers have yet to pass that through the chain.
Rich Dickson, strategic marketing director for Warrenville, Ill.-based Plymouth Tube, believes “the availability of raw materials and its impact on pricing” is the greatest threat to a sustained recovery for tubular products.
That view is shared by Ed Kurasz, vice president of Allied Tube & Conduit, Harvey, Ill. “We want our suppliers to be profitable, but it seems a little drastic and quick,” says Kurasz, whose company was recently divested from its previous ownership group Tico Industries and is now part of a standalone company, Atkore International. “It’s hard to digest further down the market. By the time the end-user sees the price increase, it’s typically come out of somebody’s margin. It doesn’t bode well for the chain.”
Additionally, Kurasz says, this inflationary environment might prompt OEMs to table a facility expansion or the purchase of new equipment “because they have to absorb the raw material costs and may not be able to pass that along to their end customer.”
Soehrman is also concerned about the sustainability of demand. “It remains to be seen if the demand is still there if it’s $800 per ton compared to $600 per ton of steel.”
If the steel prices don’t depress demand, industry observers believe that most of the end markets for mechanical tubing are in relatively good shape. “In the absence of some bizarre non-normal event, this would appear to be a fairly decent year for DOM,” says Wolfe.
As for other mechanical products, Wolfe is equally optimistic. “Most of the mechanical people in our group are looking at decent improvement, in the 5 percent range at the minimum.”
Among the most promising markets for mechanical product is machinery and equipment. “That’s very hot for us right now,” says Gottschalk.
Ken Kremar, a principal for IHS Global Insight’s Industry Practices Group, told attendees of MSCI’s Tubular Conference last month that machinery exhibited significant improvement in 2010 and more of the same is expected this year. “Two factors are helping machinery manufacturing, the domestic side of the business and the export side,” he said.
On the domestic front, Kremar said corporate America is sitting on a sizable amount of cash, the result of slashed capital spending and other cost-saving measures during the recession.
“Pent up demand cannot remain pent-up forever. Projects geared toward improving productivity and efficiency, reducing energy and labor costs, those are the kinds of projects being allowed to move off the backburner. The replacement pressure is there,” Kremar said.
The demand is even greater on the export side of the business. In some important categories, Kremar said, exports can make up 30 to 50 percent of a North American machinery manufacturer’s business.
Another promising market is agriculture, several observers reported. Kremar said American farmers are in a similar position as corporations—sitting on cash.
“When farmers have money, they buy equipment,” Kramer said. “Production fell short of expectations in China, while U.S. production has held up. With this money, farmers are going out and buying all sorts of different equipment.
The transportation market, from automobiles on through heavy trucks, is also expecting another productive year. The resurgent auto market drove much of the growth in mechanical in 2010, Kurasz said. “There was a 35 percent uptick in mechanical year-over-year, and that coincides with a 39 percent year-over-year growth in auto.”
Now, the larger vehicles are starting to propel the market, he notes. Commercial truck manufacturing has been slow for several years, but replacement pressures are starting to creep up. “The absence of deliveries from 2007-09 resulted in an aging fleet, perhaps the oldest fleet in place in a long, long time. It’s just a matter of having a positive economic tilt to allow equipment buyers to go out on a limb. We’re starting to see that now.”
Overall, Gottschalk says, the outlook for all of his company’s major end markets remains healthy. “Mining, machinery, aerospace. We don’t have one that’s really in the dumps.”
Growth in most markets, however, is steady, not spectacular. “GDP growth will hover around 3 percent. The industrial growth output rate will be between 3.5 to 4 percent,” Kremar said. “It may not be the economic recovery you want, but it’s the economic recovery you’ve got. This is the world you’ve got to be operating in.”