Steady pricing for crude oil has created a healthy environment for energy pipe products in 2018, and the fundamentals suggest demand will continue to be strong for the foreseeable future.
Still, the markets for both oil country tubular goods and line pipe are not without challenges, most notably the future impact of the Section 232 steel tariffs and a pending trade case on large-diameter welded line pipe.
Both OCTG and line pipe have registered strong gains during the first half of the year, reports Paul Vivian, a partner at the Preston Pipe Report. U.S. OCTG consumption was up 28.5 percent year to date through March, while consumption of line pipe – both small- and large-diameter pipe – was up 17.8 percent.
Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa., says much of the line pipe increase was from small-diameter pipe, which has grown 33.5 percent year to date through June. Small-diameter pipe tends to be closely connected with OCTG as it is largely used for oil and natural gas gathering purposes. By comparison, over-16-inch diameter line pipe is up 4.4 percent year to date.
Vivian is optimistic demand for both OCTG and line pipe will remain strong through the balance of this year and even into next year, though the rate of growth could slow down. Of course, that depends upon the still-unknown supply and demand factors, including energy prices and the full weight of the steel Section 232 tariffs and quotas.
Kurt Minnich, president of Pipe Logix, predicts OCTG demand will increase about 10 to 15 percent in 2019.
“A major factor increasing energy pipe and tube demand is the recovery of oil prices to a level that is profitable for drilling in various shale plays. That encourages increasing capital investment following the lean years after the downturn that began in late 2014,” says Amy Ebben, manager of strategic marketing for ArcelorMittal USA, who notes that another factor is the need to replenish energy tubular products inventory levels to be in better alignment with today’s higher demand levels.
Josh Croix, chief commercial officer with Baytown, Texas-based Borusan Mannesmann Pipe US Inc., agrees, noting that with West Texas Intermediate oil prices in the high $60s per barrel, most everyone is making money.
This has resulted in an inflow of capital investment from exploration and production companies, which has enabled the U.S. drilling activity to hover at about 1,050 rigs, a level that hadn’t been seen since March 2015. According to the latest data from Baker Hughes, U.S. drilling activity as of Aug. 10 was up 11.4 percent from a year earlier, with 1,057 rigs running.
This, combined with increased OCTG consumption per rig, has been good news for domestic producers. Partly because of the increased lengths of the laterals being used in the Permian Basin and certain other shale plays, it has been estimated that the consumption of OCTG per rig has increased to about 500 tons per month, up from about 360 tons per month in 2015.
“There has, however, been an interesting quagmire in the Permian Basin,” Minnich says. While there has been incredible growth in drilling activity there and it continues to account for about 46 percent of all U.S. drilling for oil, natural gas and natural gas liquids, it appears as if the growth was a little too rapid, overwhelming the pipeline infrastructure needed to transport the energy products from the Permian to the Gulf Coast and Mexico.
Croix says this bottleneck in energy takeaway capacity has resulted in some E&P companies beginning to move rigs to regions such as the Eagle Ford shale play, although there have already been some moves to rectify the situation. In fact, Jack McCarthy, vice president of carbon steel pipe, fittings and flanges for Houston-based MRC Global, says there are 10 major pipeline projects under way to move oil, natural gas and natural gas liquids from the Permian Basin to the Gulf Coast. This comes as five to seven major natural gas pipelines have recently or will soon be built in the Marcellus Shale on the East Coast to alleviate congestion there, McCarthy says.
Natural gas prices have remained fairly stagnant at just under $3/MMBtu, a price that is generally considered too low to motivate increased drilling. That’s why roughly 82 percent of U.S. drilling has been for oil, with most of the natural gas being a byproduct of that drilling. “But there is still a need to move the natural gas to market,” Minnich says. “Companies can’t just flare the gas forever.”
Phil Tucker, vice president of strategic sourcing for Houston-based Edgen Murray Corp., says this and the potential to step up the natural gas exports are playing a positive role in the uptick in pipeline activity, especially for those consuming 20-inch-and-larger line pipe.
Preston’s Vivian says there has been a growing number of liquefied natural gas export terminals being built, largely along the Gulf Coast, a byproduct of the U.S. natural gas prices being cheaper than many other places in the world. This has created a need for pipelines to get the natural gas from the Permian and elsewhere to those facilities. In addition, there are several pipelines being built to get natural gas to Mexico, which is in the midst of building up its energy grid.
The increase in demand, coupled with the supply challenges as a result of the trade issues, have pushed lead times for large diameter line pipe. According to Tucker, lead times for 20-inch-and-up diameter line pipe is currently out about five to six months, while those for 16-inch-and-below are three months or less.
Lead times for OCTG are even leaner than that – only about 45 to 60 days according to one domestic pipe distributor. Kelly Hanlon, vice president of sales and marketing with Chesterfield, Mo.-based Boomerang Tube LLC, says a lot of that was because of the uncertainty Section 232 has caused. She explains that earlier in the year several pipe distributors and some operators bought ahead to ensure they have enough inventory to get through the end of the year. This included purchasing large quantities of imports, seeing it as their last chance to purchase those imports at a cheap price.
“Right now we are paying for that,” she says, noting that there continues to be excess inventories – about 5.5 months of supply or more throughout the supply chain. The glut is not just at the distributor level, but also at domestic mills. While there have been some efforts to work them down, Plummer says there were 1.44 million tons of U.S. OCTG inventories in June vs. 925,000 tons a year earlier. This is even though June U.S. OCTG imports were down 32 percent year on year.
“Section 232 has kept a lot of folks guessing,” Croix says. Kim Leppold, a senior analyst with Metal Bulletin Research, agrees, noting that the perception of its impact upon the OCTG market has changed markedly over the past year. “Originally, when it was thought that it would involve a 25 percent tariff on all steel products from all countries, it wasn’t expected to have much of an impact.”
That changed once South Korea, which is the largest importer of both OCTG and line pipe into the United States, agreed to a quota equal to 70 percent of its total over the past three years. That resulted in its OCTG imports being cut from more than 1 million tons in 2017 to only 460,000 tons this year.
Despite the decline in South Korean imports, there haven’t been many instances of shortages of OCTG products, Croix says. Supply could tighten, however, as South Korea has already run through its quota for the year. The same is true for other countries with quotas. Brazil, for instance, is one of the largest exporters of seamless line pipe, McCarthy says.
How much it will tighten next year could depend upon how many imports were already on the water and are now sitting in bonded warehouses in the Free Trade Zone ready to be brought into the United States next year, which would be applied to the 2019 quota.
In the meantime, utilization rates indicate that domestic pipe and tube mills can grow shipments in the second half to meet increased demand, says ArcelorMittal’s Ebben. In fact, Tenaris SA is in the process of ramping up its new Bay City, Texas, mill, as well as increasing production at its Hickman, Ark., mill and its McCarty premium threading facility in Houston. The company is also planning to restart the pipe processing and finishing facilities at its Conroe, Texas-based mill, which it idled in 2015.
While a number of pipe mills, as well as several pipeline companies, have applied for Section 232 tariff exemptions, not a lot have been approved at this point, Leopold says. “The whole exclusion process is very confusing,” she says, adding that it is hard to get a feel why some applications were accepted while others were denied. It’s particularly confounding when the products involved in some of the requests are ones that domestic producers are able to make but choose not to, she says. “If any U.S. producer comments on exemptions in a negative way, for the most part, the application gets denied.
One example of this is Borusan, which requested a two-year tariff exemption for imports from its Turkish parent company in exchange for a promise to build a new mill in Baytown that would enable it to become a 100 percent domestic producer. This request was initially denied, although Croix says the company plans to appeal the administration’s decision. “We need the exemption for us to make the necessary investment,” he declares. That was the case even before President Trump announced he was doubling tariffs on steel, including steel pipe, from Turkey to 50 percent.
Similarly, Plains All American’s exemption application for line pipe for its 526-mile Cactus II pipeline was turned down. The denial came even though 26-inch X65 ERW pipe, which the company had already ordered from Greece’s Corinth Pipeworks, is not made in the United States.
“The impact of the Section 232 on energy pipe depends upon where you are in the supply chain,” Minnich says. For companies using imported material to produce a final product in the U.S., the tariffs have been a negative. “But for fully domestic producers it has been a plus.”
Boomerang’s Hanlon sees it somewhat differently. “It has been very difficult for us being a full domestic welded pipe producer buying domestic steel as prices for hot-rolled coil – our raw material – have gone up more than the tariffs on imports.”
Croix agrees, noting that while pipe producers have been able to pass along a portion of the HRC price increases to their customers, they haven’t been able to pass along the total increase. While OCTG prices are only up about 25 to 30 percent from the end of last year, HRC has climbed about 45 percent from late 2017 to its highest price in a decade, Leppold says. It’s even more challenging with line pipe, as prices haven’t risen as much as OCTG products, while the steel plate prices used for some line pipe are up nearly 50 percent.
Meanwhile, an ongoing trade case on large-diameter welded line pipe has caused some companies to take a wait and see attitude, at least until there is more clarity about what duties will be imposed. McCarthy notes the six named countries – Canada, China, Greece, India, South Korea and Turkey – account for about 84 percent of the import of greater than 16-inch diameter welded line pipe coming into the United States.
Preliminary results from the U.S. Commerce Department assessed a 132.63 percent margin on goods from China, followed by India at 50.55 percent and Canada at 24.38 percent. On the low end, Turkey’s rates ranged from 3.45-5.29 percent. Final duty determinations are expected by Nov. 6.
“Overall we have a positive outlook for both OCTG and line pipe for the balance of this year and into 2019,” Vivian says, while noting the uncertainties that could stifle growth.
“Both HRC and plate prices have seemed to have peaked and will eventually fall,” says John Anton, director of steel analytics for the pricing and purchasing service of IHS Markit. He doesn’t expect there to be a significant drop until early next year. And he says it is likely that, just as has been the case on the way up, there will be a lag in declines for both OCTG and line pipe prices as well.
Leppold agrees, noting that she expects energy pipe prices to max out in the first quarter, “even though we have already seen some slight wavering.”