Energy Pipe and Tube Market
How Low Will it Go?
By Myra Pinkham, Contributing Editor
Historic declines in the price of oil and natural gas promise to make this year a difficult one for producers and distributors of oil country tubular goods. North American pipe mills have already started to take action to prepare for what many fear could be a 25 to 50 percent decline in OCTG demand in the first half of this year.
Pittsburgh-based U.S. Steel Corp. announced plans to temporarily idle tubular operations at its facilities in Lorain, Ohio, and Houston starting in early March. It also plans to reduce production at its Fairfield, Ala., and Lone Star, Texas, tubular mills (see Metal Industry News, page 104, for details). The steelmaker had already curtailed operations at its plants in Bellville, Texas, and McKeesport, Pa., last year.
In addition, Tenaris has announced plans to cut production at several U.S. and Canadian operations. They include those in Blytheville, Ark., and Conroe, Texas, as well as Tenaris Prudential in Calgary, Alberta, and Algoma Tubes in Sault Ste. Marie, Ontario. Likewise, Evraz Plc has delayed a planned initial public offering at its Evraz North America subsidiary. Industry observers say they expect further moves by various companies to follow.
Why? Oil prices peaked around $110 per barrel in late June and were drifting downward at a more gradual pace until shortly after the New Year when they suddenly plummeted. As of late January, the price was below $50 per barrel, causing companies to scramble. The average breakeven point for an oil well is typically around $65 to $70 per barrel, though it can vary significantly by region. While oil prices defy predictability, especially today, some experts forecast they will remain in the $40 to $50 range for the next several months before rebounding to about $70 per barrel by late summer or fall.
Christopher Plummer, managing director of Metal Strategies, Inc., West Chester, Pa., says the nose-diving energy prices have shocked the marketplace and caused several large energy exploration companies to slash their 2015 drilling budgets. Among them are Helmerich & Payne, Inc., Naybors Industries Ltd. and Patterson-UTI Energy, Inc., which together account for about a quarter of all U.S. drilling activity.
The rapid and unexpected price change has had an immediate effect on U.S. drilling and OCTG demand, concurs Kurt Minnich, a partner with Spear & Associates, Inc., the publisher of Pipe Logix. The publication’s pipe and tube distributor sentiment index reflected the market’s alarm, dipping to 34 points in December from 54 points the month before. Any reading below 50 indicates contraction. But the real back-breaker, he adds, was OPEC’s decision to maintain oil production rates despite the global oversupply. The Organization of the Petroleum Exporting Countries announced its decision Nov. 27 and by early December crude oil prices had fallen below $70 per barrel.
“At first it was thought this would only be a temporary blip,” says Kimberly Leppold, senior metals analyst with Metal Bulletin Research. “Now everyone is battening down the hatches, fearful this will be a repeat of 2008-09 when oil prices dropped, OCTG lead times shrunk and inventories swelled.”
Compounding the uncertainty in the OCTG market are natural gas prices that have followed crude oil downward. Henry Hub natural gas fell below $3 per MMBtu in mid-January after peaking around $4.50 in November. Normally, natural gas prices strengthen as demand increases during the winter months, then decline again when the weather warms up. Will already low gas prices get even lower this spring? Hard to predict, says Paul Vivian, a partner with the Preston Pipe Report. Longer term, the opportunity to export natural gas to Europe and Asia may help prop up prices. Several liquefied natural gas export facilities are currently under construction and others have received the required permits.
Due to this depressed business environment, some sources believe a further falloff in U.S. drilling activity is not only possible, but inevitable. “No one knows how far it will fall,” Vivian says.
As of mid-January, the number of active drill rigs was down to 1,676, a decline of 13.1 percent from the November peak around 1,930. That includes a 13.2 percent decline to 1,366 rigs drilling for oil and a 12.7 percent decline to 310 rigs drilling for natural gas, reports energy services company Baker Hughes, Inc.
If predictions of a 700-rig decline come true, OCTG demand could plummet by 25 percent or more in the first half of this year, Minnich says. “We don’t know exactly how much it will drop. We are still waiting to see what happens.”
It’s not just the pipe producers who are feeling the pinch. One OCTG distributor, who asked for anonymity, says 21 of his company’s 22 drilling supply programs have been scaled back. “I had initially thought the exploration and production companies would only curtail marginal properties. Now we are starting to see closures across all aspects of the market—even high-producing wells,” he says.
At the same time demand is declining, more new OCTG production capacity is coming on-stream. In fact, OCTG capacity could double by 2017. From 2011 to 2013, the market added about 2.4 million tons of capacity to produce a mixture of seamless and welded OCTG. Another million tons of capacity, mostly for welded product, came online last year. Yet another 1.5 million tons of largely seamless pipe capacity is slated for 2015 and 2016, although some of that could be delayed or canceled, Leppold says.
A spokeswoman for Austria-based Benteler International, which is building a 300,000-ton-per-year seamless OCTG mill in Caddo, La., told Metal Center News its pipe mill will come on stream this August as planned. Leppold says the 600,000-ton seamless pipe mill being built by Luxembourg-based Tenaris in Bay City, Texas, also is likely to begin producing pipe in 2016.
On the other hand, she says, the already-late 550,000-ton seamless mill that China’s Tianjin Pipe Corp. plans to open next year in Gregory, Texas, could be further delayed. Two welded pipe projects—a 250,000-ton mill by Alamo Tube Co. in San Antonio, Texas, and a 150,000-ton mill by Alita USA Holdings, Inc., in Buffalo, N.Y.—are at risk of being canceled or at least postponed.
Even before the decline in energy prices slowed drilling activity, many experts questioned whether there would be enough demand for pipe and tube to absorb all the planned capacity. Domestic suppliers were hopeful that their OCTG trade case would ease the competition from imports. But many observers believe the duties imposed by the International Trade Commission in June are not high enough to discourage aggressive importers, especially given the strong U.S. dollar.
Last year, OCTG imports into the U.S. were 57 percent higher than in 2013 despite the trade case, which imposed only negligible tariffs on the nine countries named, says Minnich. Even the duties on the larger offenders, South Korea and Turkey, failed to affect their shipments in any meaningful way, he adds. As of October, OCTG imports from South Korea were on track to hit 1.8 million tons in 2014.
The gap between foreign and domestic OCTG pricing has gotten wider in recent months, Plummer says, reaching $203 per ton in December, up from $132 in October. Regardless of that price advantage, some sources believe OCTG imports will slow this year—due to weakening demand rather than trade action.
Domestic OCTG prices, which strengthened through much of 2014, are on the decline. They dipped by $20 to $30 per ton in December and were expected to do the same in January. The market has already given back the bump in pricing it enjoyed following the trade ruling, Plummer says.
When will the OCTG market begin to rebound? Later rather than sooner, says Vivian. With so much supply already in the market, OCTG production will not likely increase until well after energy prices begin to recover.