Forecast for OCTG? 'Fair' as in Fair Trade
Will the ITC's ruling to counter unfair trade of foreign oil country tubular goods raise OCTG prices? Indeed, it may already have.
By Dan Markham, Senior Editor
Last month’s ruling by the International Trade Commission won’t stop the flow of oil country tubular goods from Korea and other foreign countries, experts say, but the duties the foreign suppliers must now pay will counter the unfair advantage they have wielded over domestic OCTG producers in the last few years. Now the commission’s long-awaited decision begs the question: What will happen to pipe and tube prices?
The ITC’s finding is a win not just for U.S. steel producers but for the U.S. economy as a whole, says Philip K. Bell, president of the Steel Manufacturers Association in Washington. “Our market has been inundated with unfairly traded, dumped and subsidized material. This has prevented the U.S. economy from realizing the full benefit of energy resource development, and has harmed communities across the nation.”
“We are pleased that the ITC made affirmative injury determinations” adds Thomas Gibson, president and CEO of the American Iron and Steel Institute in Washington. “Unfairly traded imports of OCTG from these countries have been very damaging to American steel producers, taking away significant sales in the energy sector, which should be a bright spot for the industry given increased oil and gas development in the U.S.”
In its ruling, the ITC found that dumped and subsidized imports from Korea, Taiwan, India, Turkey, Ukraine and Vietnam were causing injury to the domestic industry. The ITC found little or no injury due to imports from Thailand, the Philippines and Saudi Arabia.
How much, and how quickly, the new duties on foreign imports will change the competition in the OCTG market is open to debate. U.S. Steel Chairman and CEO Mario Longhi doubts the market will feel any effects until after the third quarter. Kurt Minnich, a partner with Tulsa, Okla.-based Spear and Associates and publisher of PipeLogix, contends the market has already reacted. He believes the ITC’s preliminary decision in February, reversing an earlier Commerce Department ruling that rejected unfair trade claims against Korea and Taiwan, was behind the OCTG price hike that occurred in July. His company’s index showed a 3-4 percent increase to $1,715 per ton, a gain of about $57.
The positive result from the trade case, even against a major supplier such as Korea, will not be a market-shaking event, contends Minnich. This contrasts sharply with the 2009-10 ruling against Chinese OCTG products. “That was a much steeper tariff and it definitely changed the supply side more significantly than what we’ve seen with this latest case.”
Korea will remain a significant supplier of OCTG materials to North America, Minnich adds. “It doesn’t take Korean volumes completely off the market, but it will increase their costs, so it will help boost pricing.”
In any case, this victory on the trade front clears the way for domestic OCTG producers to reclaim some market share and firm up prices as the energy sector continues to lead the economy’s recovery.
“The market has been fairly strong. Drilling activity, on a historical basis, has been good,” says Rick Preckel, a partner at Preston Pipe Report, Ballwin, Mo.
According to Baker Hughes, an oilfield services company based in Houston, the U.S. rig count in July totaled 1,876, the high-water mark for the year, and an increase of 6.2 percent from the same month in 2013. The story was similar in Canada, where the rig count of 350 was 20 percent better than the same time last year. Coupled with a trend toward greater efficiency at the rigs in use, energy production is clearly on the rise.
That upward trajectory is likely to continue. In remarks during U.S. Steel’s recent quarterly conference call, Longhi told investors the company expects the U.S. rig count to hit its highest level in the past two years during the third quarter, generating increased consumption of OCTG.
The healthy price of oil, at just below $100 for West Texas crude, has been the primary engine of OCTG demand. Flatter natural gas prices, at around $4 per million BTUs last month, have not been high enough to incentivize heavy drilling.
“The oil price seems to be pretty resilient in the $95 to $105 range, while the natural gas price remains reasonably low,” says Preckel. “A natural gas price that stays steady at reasonable levels is good for consumption, which typically means the reserves will have to be replaced over time.”
Other observers predict the natural gas price is poised to strengthen. “The view here is we’ll see a little cooling in the market on the oil side. We expect to see natural gas recover in the next year or so, which we’re hoping will take up some of the slack [in pipe demand],” says Minnich at PipeLogix. “Overall, it’s maybe down a bit, but still a strong picture for OCTG demand.”
Resolution of the trade case eases some of the uncertainty in the marketplace, say suppliers. Keith Stecher, spokesman for SB International in Dallas, says there was some inventory build in advance of the ruling, as service centers and others in the chain tried to hedge their bets. Following the ruling, there was a lull in demand for the casings his company provides as customers began to work down their stocks.
Now that the U.S. case has wrapped up, Canada’s pipe producers want to make sure those displaced imports don’t find a home in their market. Tenaris and Evraz have charged dumping and subsidization by the same countries cited in the U.S. case, as well as Indonesia. The Canadian Border Services Agency is investigating the claim.
“We are eager to compete with OCTG manufacturers around the globe based on product quality and actual economics rather than foreign government subsidies and foreign manufacturers’ dumping practices,” says Conrad Winkler, president and CEO of Evraz North America, Chicago.
Welded Tube of Canada was a supporter of the trade cases in both countries. Jeff Hanley, vice president of energy products for the Concord, Ontario-based producer, says that while the importers hold a smaller share of the Canadian market than they do of the U.S., their effect on the
marketplace is just as great. “We’re a one-million-ton market for casing and tubing in Canada. If they did a percentage increase in Canada like they have in the United States, it would wipe us out. They’re doing almost 50 percent of the U.S. market. That’s three times the size of the Canadian market.”
The energy revolution in North America, coupled with the flood of imports vying to serve that industry, has caused a major shakeup in the supply base. Several companies have launched new facilities to serve the OCTG market in the United States, Canada and Mexico.
In 2013, Welded Tube completed a 350,000-ton facility in Lackawanna, N.Y., to produce ERW pipe. That mill complements the company’s existing heat-treat and threading facility across the border in Welland, Ontario.
Later this year, long-time tubemaker PTC Alliance will make its first foray into the OCTG business with the opening of its PTC Seamless subsidiary in Hopkinsville, Ky., in a former automotive tubulars plant. “We are trying to get this mill up and running and get an entry into the energy sector,” says Chuck King, commercial director for PTC Seamless. “That is the driving force behind it.”
The company will produce 6-inch through 16-inch seamless OCTG line pipe, coupling stock and mechanical tube at the facility. Trial production is expected to begin in the fourth quarter. “Geographically, we’re well-suited to go to the Marcellus area and even to the Bakken. We’re not as close to the Permian base or the Southwest, but they’re within reach,” King says.
Some of the foreign producers faced with tougher import restrictions have opted to bypass that issue by constructing facilities in the United States. Turkish steelmaker Borusan Mannesmann opened a $150 million ERW pipe mill and heat-treat operation in Baytown, Texas, earlier this year. Similarly, China’s first foray into the U.S. tubular market is with TPCO America in San Patricio County, Texas.
Northwest Pipe Co. exited the OCTG business with the sale of its assets to Centric Pipe LLC, a subsidiary of SB International. SB quickly restarted the Bossier City, La., facility, but has no immediate plans to reopen the plant in Houston that it obtained in the deal. “We have to find a way to operate that mill or find a new location. It’s a good mill, but it’s not profitable to run it at that site right now,” says Stecher.
SB International has long been in the OCTG business, but primarily sourced material from overseas. The new assets, coupled with access to a heat-treat furnace through an agreement with Boomerang Tube, gives it an American brand to bring to market. “This allowed us to penetrate new customers that have a strong preference for American-made, and it also smoothes the inventory process,” he says. “With the trade case, there was going to be a drop of foreign-made material. Now we can totally assure, one way or the other, that we’ll have the material available that the customer needs.”
Earlier this year, U.S. Steel idled two of its pipe-making plants: McKeesport, Pa., and Bellville, Texas. The company cited the import influx for its decision to close the two money-losing operations. U.S. Steel still operates eight other pipe manufacturing facilities, so it remains in the OCTG market for the long-term.
Geographically, some parts of the market are stronger than others. In 2014, the oil plays or wet gas areas have been strong, while the dry gas locations, such as North Louisiana and East Texas, have lagged, say the experts.
“There’s a lot of strength in the Bakken in North Dakota and West Texas in the Permian Basin,” says Preckel. “If you peg the shale plays, particularly the ones that are more liquid rich, you’ll find the stronger ones.”
One of the more active areas can be found in the Northeast, where the Marcellus and Utica plays overlap. “It has continued to impress people with its results,” says Hanley. “There’s some evidence there could be a third play there. That would be pretty amazing, to have some properties with drillers accessing three plays in one spot.”
In Canada, oil and gas activity in the western provinces has increased this year. Russel Metals reported 17 percent growth in its energy segment sales in the second quarter, led by significant increases in western Canada. More shale exploration and a better-than-normal breakup period, the spring season when melting snow typically reduces work in the oilfields, contributed to Russel’s improved numbers.
Some offshore drilling has resumed after being stalled by the 2010 BP oil spill disaster in the Gulf of Mexico.
With more stringent regulations in place to govern the industry, activity has started to slowly resume, says Tom Slaughter, president of the OCTG division for Energy Alloys, Houston. “We’re still not back up to where it was pre-Macondo, but we’re starting again.”
Deepwater wells take much longer to get up and running, often a year to complete. On the other hand, the new rigs are true “pipe eaters,” requiring far more metal, Slaughter says.
Besides the tighter regulatory environment, the nature of safer drilling in the deepwater areas has changed the tubing and pipe requirements. “It’s not quite like in the past, where you had your standard APIs and your standard ODs and walls. It’s much more customized,” Slaughter says.
Clearing governmental hurdles is a fact of life for the energy sector. Concerns about limitations on rail cars carrying petroleum products could dampen activity in the Bakken, where there’s not a lot of pipeline capacity to move the product. At the state level, legislators and activists are sparring over fracking in Colorado and other states. “That has been an ongoing issue, with extreme opinions on both sides of the equation. The industry will continue to battle those,” Minnich says.
Up north, the Canadian government is slightly more accepting of the oil and gas industry, Hanley says. “Politically, there’s more of a will to do the pipelines than there is in the United States.” Even if the Keystone XL pipeline through the U.S. never comes to pass, Canada will ship its oil and gas to one or both of its coasts through other proposed pipelines. “We see it as solving our own problem, rather than waiting for Keystone to get decided once and for all,” Hanley says.
Other than government interference, the primary risk to the oil and gas sector is a significant decline in the price of the energy commodities. But long-term forecasts remain positive. Moreover, the North American energy sector could get a huge boost in the coming years if LNG export facilities get government approval. Access to the world’s natural gas markets, where the price tends to be much higher, would be a boon to the U.S. and Canadian industries. “That would seem to be a game-changer for the United States and the American drilling companies,” says Stecher. “And for OCTG suppliers, it would mean more demand for our product.”