Mechanical Tubing Report
By Myra Pinkham | Contributing Editor
on Feb 7, 2023
Despite some challenges, demand for all mechanical tubing remained healthy throughout 2022.
While the market dynamics vary by the type of product, demand for both welded and seamless mechanical tubing has been resilient and is expected to remain fairly strong at least over the next few months. The outlook beyond then, however, remains somewhat cloudy, depending upon whether the U.S. economy falls into a recession and what impact that will have upon mechanical tube’s diverse end-use markets.
According to Paul Vivian, a partner at the Preston Pipe report, overall U.S. mechanical tube shipments remained fairly steady, and they have even seen low- to mid-single digit growth rates over the past few years – even through the COVID-19 pandemic. This was helped by its broad end uses, ranging from such “simple” applications as recreational equipment, lawnmower handles and outdoor furniture to oil and gas completion equipment, hydraulic cylinders and structural components for both transportation equipment and solar panels and other forms of renewable energy.
Even with consumption starting to ease slightly toward the end of 2022, year-to-date shipments were up 7.5 percent compared with the first 11 months of 2021. This despite the fact 2021 was a quite strong year. Vivian credits most U.S. manufacturing sectors “popping up pretty quickly” as they emerged from the depths of the recession, taking advantage of pent-up demand.
Also, it isn’t all that surprising that shipments edged down toward the end of last year, says Kim Leppold, head of research at Fastmarkets, noting a large percent of mechanical tubing goes through distribution and it is traditionally a slow time of the year. “And even though we didn’t see as much of an inventory build as we have seen in some other years, we could see some restocking by early in 2023 in preparation for some upcoming projects.”
She says it is uncertain whether that is a good or a bad thing. “When you see distributor inventories building, that could either mean that they have confidence in the future or that shipments to their customers have slowed down.”
This comes after what Damon Gaynor, co-president of Industrial Tube and Steel Corp., Kent, Ohio, described as “a wild couple years,” particularly for drawn over mandrel and seamless mechanical tube product. There was a lot of panic buying early in 2022, which led the few U.S. producers of those types of mechanical tubing to get way over their head. “They continued to take bookings without knowing how they would get the tubing out of the door,” he says, adding that eventually, about six months ago, they temporarily stopped taking orders.
This, he says, came at a time when some U.S. DOM and seamless mill lead times had stretched out as long as 32 to 35 weeks. But Gaynor says those mills have since figured out how to dig themselves out of that hole and started taking orders for either late in the first quarter or into the second quarter, depending upon the specific product.
This is a very different story than the one faced by welded mechanical tube, largely because there are many more players – therefore greater welded mechanical tube production capacity – in the U.S. In fact, last year mill lead times for welded product got very short, down to only about four weeks, says Stacie Griffin, vice president of sales and marketing for Totten Tubes, Los Angeles. By late December, they had stretched back out to a healthier six to eight weeks.
She could not say whether they would continue to extend. “That will largely depend upon how much distributors and end users will be willing to restock,” which isn’t entirely clear, given the current somewhat uncertain marketplace. But that said, she notes that distributor mechanical tube inventories are currently very low, even at those companies that don’t pare down their inventories for year-end accounting purposes.
That isn’t surprising, says Mike Hubbell, executive vice president for strategy at Chesterfield, Mo.-based American Piping Products – a distributor that recently expanded its tubular offerings to include more mechanical tube. Given the risk of a recession and the potential for mechanical tubing prices to ease downwards, distributors are very cautious about their inventories.
Griffin says the varied and largely uncertain, market dynamics last year contributed to that caution. She notes consumers spent less on such “toys” as recreational equipment and aftermarket automotive components as they had in 2021, when they were receiving money from the government aimed to prop up the economy.
Also, Leppold notes that after being strong in the first half of the 2022, demand in the construction sector – particularly for some non-manufacturing related privately financed projects – has recently been getting a bit shaky with not only fewer new projects being added to the pipeline but some announced projects potentially being in jeopardy. This view is supported by the American Institute of Architects’ Architecture Billings Index, which for the first time since May 2020 fell into negative territory in November. Also, with housing starts slowing there is less of a need for certain mechanical tube-containing products used in new homes.
There, however, was heightened demand for mechanical tube elsewhere, including for certain energy- and mining-related end use markets. Hubbell pointed to its use in drill stems to extract coal, as well as for components for the generation and distribution of such other energy sources as natural gas and solar and wind power.
Mechanical tube demand by the automotive industry has been somewhat constrained by certain supply chain issues, including the shortage of semiconductor chips. “But it is believed that we should get over that hump in the near term,” Hubbell says, noting plans for new chip production plants to be built domestically. “There are already more semiconductor chips available than there had been 12 to 18 months ago,” he notes.
Energy-related mechanical tube demand is helped by the push for more renewable energy generation, Leppold says. Vivian agrees. “Solar has come out of the box like a house on fire,” he says, noting it will continue on an upward trajectory. At the same time, drilling for oil and natural gas has been solid. While easing slightly the first week of January, the number of drill rigs operating in the U.S. were up 33 percent year on year at the end of December, based on data from Baker Hughes. With the combination of economic concerns and the war in Ukraine, drilling activity is expected to remain at or near the current level.
While it could be a bit of a balancing act, Hubbell expects mechanical-tube-containing project activity to continue in line with expectations at least through the first six months of 2023. He’s projecting stability despite concerns rising interest rates could result in a recession. He says the impact could be at least partially countered by companies that are reshoring the manufacture of certain products, including those that contain mechanical tubing.
Last year’s pricing volatility – covering both mechanical tube itself and hot-rolled coil and other inputs – was another factor that affected the distributors’ (and their OEM customers’) buying decisions.
Welded mechanical tube prices jumped to all-time highs shortly after Russia invaded Ukraine due to fears the U.S. would sanction both Russian HRC and tube at the same time as Ukraine would not be able to ship product, Leppold says.
But, Leppold says once it became apparent that this high point was artificial in nature solely resulting from geopolitical tensions, prices for mechanical tubing correced downward for much of the second half of last year, at least until December.
As one mill source pointed out, while that decline was significant, it was nowhere as drastic as the decline of HRC, which, after peaking at about $1,960 per short ton in September 2021, plummeted to about $660 per ton at the beginning of December 2022.
Hubbell says that after being depressed for the past six months, it appears that mechanical tube input costs – including hot-rolled coil and scrap – have bottomed out and are starting to move upwards. Consequently, mechanical tube prices could do the same.
As of early January, HRC prices had already moved above $730 per ton – the highest they had been since October. There is also speculation that with Midwest ferrous scrap prices settling up $30 to $60 per gross ton in January and potential for them to move up further in February and possibly beyond that, HRC prices could see further upward momentum.
As welded mechanical tube tends to follow HRC trends, this is positive for mechanical tube prices, which, while not falling as steeply as HRC, did dip to about $1,400 to $1,450 per ton late last year, down from its April 2022 peak of about $2,250 per ton.
While as of mid-January prices remained relatively flat, mechanical tube is likely to feel the effects of those increase costs for inputs, Totten’s Griffin says. This is supported by the $60-per-ton price hike led by Atlas Tube and followed by several other mechanical and hollow structural tubing mills, timed when welded mechanical imports were not seen as being worth the risk. She notes that with Section 232 still in place – and likely to remain so – and ample domestic availability and uncertainty about the future, no one is comfortable ordering imports, which not only have longer lead times but aren’t guaranteed to come in at a much lower price than domestic product.
Preston’s Vivian says that with welded imports being basically flat year on year in 2022, that allowed domestic tube mills to step up their production by a small, but nice, percentage, enabling them to gain some market share. And even with all the seamless mechanical that needs to be imported, he says overall mechanical tube import licenses in December were not very different than the actual November import volumes.
“Hot-rolled seamless tube has been, and will continue to be tough to get,” Gaynor says, given that there isn’t a lot of heavy wall mechanical tube being produced in the U.S.
“Domestic seamless tube mills are producing all they can,” running at about 85 to 90 percent capacity utilization,” Vivian points out. “But they would be able to accept more orders if they had the ability to produce more.” This has led to a greater desire to import vs. a year ago.
But Gaynor says there have also been issues getting seamless tube from overseas – some related to the Section 232 tariffs, but also because China isn’t producing nearly as much steel as it used to ever since its COVID-related lockdowns. “Also, Europe has been struggling to keep up with its own demand, let alone sending it overseas.”
“It is an absolute must for imports to be part of our mechanical tube offerings,” Hubbell says, explaining that it is impossible for distributors to meet all their customers’ needs just with domestically produced tube. Despite that, he doesn’t see mills adding new mechanical tube production capacity.
Overall, 2022 was a very solid year for mechanical tubing, Vivian says, with about 5 percent year-on-year growth from 2021, which was also generally viewed as being a good year.
“All indications are that it will remain strong at least in the first half of 2023,” Hubbell says, although it is unclear what will happen beyond that. “It will depend upon what impact, if any, rising interest rates and the potential for a recession will have upon its end use markets.”
But if it does weaken somewhat in the second half of the year, Gaynor says there shouldn’t be a precipitous drop. “Our end use markets are still fairly robust so I am hopeful that any recession will be slight and will just be a small blip on the radar vs. a seismic shift. Vivian agrees, predicting about 4 percent growth for the year as a whole.