Disappointing First Half Crimps Steel Tubing
 
Slow growth of the U.S. manufacturing sector has compressed demand for mechanical tubing.

By Myra Pinkham, Contributing Editor

Given the many diverse uses for mechanical tubing—from structural members in construction projects to rigid components in cars and trucks—demand for the versatile product tends to track with the overall economy. The U.S. manufacturing sector was fairly flat in the first half of the year, “and it’s been pretty much the same for mechanical tubing,” reports Paul Vivian, a partner at the Preston Pipe Report, Ballwin, Mo. Domestic shipments of mechanical tubing were down 9.4 percent year to date through July, with each month weaker than the last, he says.

While somewhat disappointing, demand for carbon steel mechanical tubing is certainly better than for other pipe and tube products, especially oil country tubular goods and small-diameter line pipe, which have been hurt by the dramatic drop in the price of oil and gas. Different types of mechanical tubing are experiencing varying levels of demand, say the experts, depending on the markets that consume them. Strongest among them is the automotive market, which is forecast to produce 17.5 million vehicles this year.

Demand also varies by type of mechanical tubing. Orders have been much stronger for higher-engineered precision tubing versus commodity grades. Likewise, smaller-diameter tubing, sizes three inches in diameter and less, which often are used for automotive and light equipment applications, have fared better than larger sizes, says Kimberly Leppold, a senior analyst with Metal Bulletin Research.

Buyers continue to order welded galvanized mechanical tubing used in applications where corrosion resistance is particularly important, such as construction, playground equipment and solar energy, says David Devine, general manager for fence and mechanical products at Wheatland Tube in Chicago. Product made using an in-line galvanized process rather than using hot-dipped galvanized sheet is more corrosion resistant and easier to fabricate, he maintains.

“Automotive is the sector that everyone has been counting on,” says Alan Wilkinson, president of Marmon Distribution Services, Inc., Butler, Pa. Demand from automotive OEMs, as well as their parts suppliers, should remain strong for the next year or so. Orders from heavy truck manufacturers, especially in the Midwest and West, should also sustain good levels for at least the next nine months, he forecasts.

Leppold agrees the automotive sector is the bright spot for steel tubing suppliers as demand for new vehicles has surpassed pre-recessionary levels. North American auto output is expected to reach a record 17.5 million light vehicles this year with the potential to reach as high as 19 million vehicles by 2020.

Lower gasoline prices have led to greater purchases of larger, less-fuel-efficient vehicles, which require more tubing in their construction. The light truck share of the auto market jumped to 58.2 percent last year, its highest level since 2005, and is likely to remain at that level or higher for the next several years. Over the summer, automakers shortened the typical downtime for retooling, which is another positive indicator for tubing demand, Leppold says.

The situation is very different in the oil and gas markets. “The rapid drop-off in the energy sector caught everyone off guard,” including suppliers of mechanical tubing, says Wilkinson at Marmon. Energy prices could weaken even further if oil output increases in the Middle East. Demand for mechanical tubing among energy companies is already down 15-25 percent so far this year, he estimates.

After drifting downward in mid-2014 and dropping significantly early in 2015, oil prices began stabilizing this spring at around $60 per barrel. While that’s far below the $150 per barrel peak in mid-2008, it’s still high enough for some low-cost producers to drill profitably, Leppold says. However, prices started falling again in July as supplies increased in North America and the Middle East, tumbling below $40 per barrel last month to the lowest level since March 2009.

“Natural gas is also going nowhere fast with a multi-year supply in storage,” Wilkinson notes. Natural gas prices, around $2.71 per MMBtu as of Aug. 19, will remain low unless the U.S. finds a way to export natural gas, he adds. There are several liquefied natural gas export terminals either seeking licenses or under construction, but none are running yet.

Price pressures had reduced oil drilling by nearly 58 percent and gas drilling by over 34 percent as of mid-August, compared to a year earlier, according to Baker Hughes, Inc., Houston. Vivian at Preston Pipe Report says, “it could be another two to three years before the energy sector gets better.”

Weak energy prices have made buyers of mechanical tubing very cautious, says Joseph Anderson, executive director of the Steel Tube Institute of North America. “They are still buying product, but they are being careful to not go too long, especially given today’s short mill lead times.”

Low conventional energy prices have not dampened demand for galvanized mechanical tubing for solar energy applications, says Wheatland’s Devine. “The solar energy industry has found a way to be competitive despite that.”

According to the Solar Energy Industries Association, the U.S. installed 1.3 gigawatts of residential solar energy-generating panels in first-quarter 2015. Solar energy installations could dip in the future if the U.S. government reduces or discontinues its rebates and subsidies, however, Devine says.

The heavy equipment sector is suffering from low commodity prices. “Mining equipment is taking a hit because of weakness in the coal market,” Leppold notes. Low grain prices are expected to reduce farm income by 43 percent this year, to $73.6 billion, its lowest level since 2009, sharply curtailing purchases of new tractors and combines. “It could be another three planting seasons before ag turns around,” Wilkinson says. Even demand for construction equipment could weaken despite increases in both housing and nonresidential construction starts. “There’s so much equipment out there already, and rental fleets are in good shape,” Wilkinson adds. Prospects are also poor for exports of American-made heavy equipment due to the strong U.S. dollar and weak economies overseas, note Wilkinson and Leppold.

While mechanical tubing producers clearly have all the production they need, they are not actively curtailing capacity like producers of OCTG and line pipe, Anderson notes. That said, domestic lead times are currently quite short—just three to four weeks for drawn over mandrel products. That ready availability has allowed distributors to reduce their inventories and get them more in line with demand, Wilkinson says.

Competition in the mechanical tubing market, while not as extreme as some, is still pretty intense. Imports are an issue, though not to the same degree as OCTG and line pipe, Anderson says. “While some import offers are very attractive, other foreign companies are being more cautious given all the trade action over other tubular products,” he adds.

But there are a lot of global competitors interested in the U.S. market. Some, especially those from Europe that make high-quality products, are hard for domestic producers to compete against, especially given the currency advantage of the euro, Leppold says.

In light of the dicey market conditions, however, many distributors are shying away from buying offshore due to the long lead times. To keep their inventories in check, they are only buying on an as-needed basis, Wilkinson says.

Even with import pressure and falling domestic steel and scrap prices, mechanical tubing producers have been able to hold the line on pricing of engineered and niche products, Leppold says, but less so on commodity tubing.

What’s the forecast for next year? Industry observers say the crystal ball is cloudy. “What we really need is for end-use demand to improve,” says Wilkinson, who expects a moderately better year in 2016. “I’m not sure it will hit Jan. 1, but activity should pick up by the end of the first quarter or early in the second,” he predicts.

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Monday, November 20, 2017