Search Back Issues

Downward pricing pressures challenge growth of energy pipe and tube sector.

It has been somewhat of a challenging year for energy pipe and tube, though there have been some recent signs the market is starting to stabilize and could start to improve later this year, with additional gains to follow in  2025. Even now, while down from its 2022 peak for both, demand for oil country tubular goods and line pipe is seen as still being decent, if currently somewhat stagnant.

For most of the recent past, energy pipe prices have been facing downward pressure. Kim Leppold, head of steel research at Fastmarkets, notes that due to its meager demand growth and relatively high availability, their prices have dropped rather consistently over the past 18 months or so. 

In fact, according to Narayan Bhargava, president of Houston-based SDB Steel & Pipe, OCTG prices are currently about half what they had been in 2021 and ’22 – a time when demand had been so strong that in some cases companies had to buy pipe nine months in advance to be sure they could get what they needed. He says line pipe prices are currently about 50 percent below their 2022 peak. 

Partly because of the onset of the Russian-Ukrainian War, companies had to go into the market and pay exorbitant prices for their pipe and tended to overbuy given the long lead times. “But by the time the delayed deliveries came in, demand wasn’t quite as strong anymore,” he notes. And because of the resultant oversupply, that put pipe into their inventories. 

Rick Preckel, a partner at the Preston Pipe Report, says this is coming at a time when everyone is keeping an eye on the U.S. economy amid growing signs that consumers, who account for about 70 percent of the nation’s GDP, could be pulling back. For example, the University of Michigan’s consumer sentiment index is expected to reach an eight-month low in July and the Conference Board’s consumer confidence expectations index has been down for five consecutive months. Also, the Baker Hughes North American drill rig count had fallen to 586 rigs by mid-July, down from 675 rigs a year ago. According to Philip Gibbs, senior equity analyst with KeyBanc Capital Markets, notes, that represents a two-year low for the rig count.

Bhargava says OCTG tonnage had come down about 25 percent year to date through June. He says one reason is because drilling activity has fallen so precipitously. This, he explains, has occurred as a lot of drilled but uncompleted wells were being completed to bring oil and natural gas production online. Consequently, this has helped the energy industry to boost shareholder value without drilling new wells and building up their reservoirs.

Also, Preckel says recent mergers of some large exploration and production companies have dragged the rig count down somewhat despite relatively stable oil prices.

On the other hand, Luca Zanotti, Tenaris’ U.S. president and chairman of the United States OCTG Manufacturers Association (USOMA), points out that certain new technologies resulting in increased drilling efficiencies continue to offer an upside as it has resulted in a growing disconnect between the rig count and OCTG demand. 

“It is a new normal,” one Southern pipe distributor says, maintaining there is no need for the rig count to jump back up to where it had been. In fact, Thomas McCartin, a principal economist with S&P Global Market Intelligence, observes that at the current rig count the U.S. is producing at or near all-time levels – more than 13 million barrels of oil and natural gas liquids per day.

Zanotti says one of the reasons for this disconnect is the use of laterals that are as much as two times as long as in the past. This additional length, coupled with the fact that these wells tend to be drilled deeper, means more pipe is needed per well. 

Also, part of the disconnect is related to things such as the move toward more horizontal drilling and to increased pad drilling – where several wells are drilled on one pad, Preston’s Preckel points out. “Because of these technologies that change the structure of the well, the amount of OCTG consumption could be different for the same number of rigs.” 

But while these new technologies have improved drilling efficiency and improved drillers’ costs and profitability, S&P Global’s McCartin points out that it doesn’t impact the number of wells drilled, which is dependent on crude oil and natural gas supply and demand dynamics. 

Preckel notes that line pipe demand has been better than that for OCTG as it tends to be less subject to the swings in drilling. While that might not be the case for small-diameter line pipe, which is used for gathering purposes, he notes that large diameter line pipe tends to be more infrastructure in nature – related to pipeline projects. 

However, while U.S. line pipe demand is up year on year, McCartin says last year was a very weak year given there wasn’t much need for new pipeline capacity after the buildup over the past 12 years or so. He adds that line pipe demand will likely continue to face downward pressure over the next few years as there hasn’t been a spate of recent announcements of large new pipeline projects and that line pipe tends to be produced on a project-by-project basis. 

A domestic pipe mill executive agrees, observing that any new pipelines that are being built are either related to moving natural gas from the Permian in West Texas to the Gulf Coast or from current natural gas producing areas to liquefied natural gas export facilities. He adds that while the U.S. government has recently put a hold on permits for new LNG export facilities, there are still a number of projects to build new LNG facilities going forward. 

McCartin, however, notes that as far as the pipelines being built to move natural gas to those new LNG facilities, they are often just small extensions connecting to existing pipelines; therefore, there aren’t large volumes of line pipe needed for these projects. In addition to these short pipelines, SDB Steel’s Bhargava says there is some line pipe replacement and repair work, as well as the need for small-diameter line pipe for gathering lines. 

One concern in the energy pipe and tube market – particularly the OCTG market – has been imports. In fact, Kevin Dempsey, president and CEO of the American Iron and Steel Institute, says that, like other parts of the steel sector, unfair foreign trade practices have harmed the market. 

Zanotti agrees, stating that it was because of high imports combined with low activity amid high inventory levels why the U.S. OCTG market failed to rebound in 2024 as expected. 

U.S. Census Bureau data indicates that imports account for nearly half of all U.S. OCTG consumption. That, according to Dempsey is more than double “the already-too-high” U.S. steel market import share of 23 percent. 

“Significant volumes of OCTG imports come from countries such as South Korea that have no significant domestic consumption of OCTG and, therefore produce this pipe almost exclusively for export,” Dempsey declares. In addition, he points out that many pipe and tube products imported into the U.S. are made in China and then transshipped through countries such as Thailand and then sold at less than fair value in the U.S. 

Dempsey notes that recently Customs and Border Protection found that there is “reasonable suspicion” that two Thai companies have been transshipping OCTG made in China to the U.S., falsely declaring it to be of Thai origin. “As such, CBP is implementing several interim measures, including extending and suspending the liquidation of the subject OCTG and requiring additional documentation for entry.” 

Such concerns helped to promote the formation of the USOMA. “The domestic OCTG industry needs a level playing field to compete,” Zanotti says. “We are not against trade, but against unfair trade that threatens the viability of domestic producers,” he explains. “Energy development, production and its transportation are matters of national security, and a strong, healthy domestic OCTG supply chain can deliver safe, reliable products with a lower carbon footprint.” 

Dempsey believes more things must be done to meet that goal, which is why the American steel industry supports the Leveling the Playing Field 2.0 Act, which, he says would update trade remedy laws to ensure that the U.S. government has every tool available to fight for the American steel industry and its workers.

The current oversupply situation – including high imports – has also had a dampening effect on energy pipe and tube prices. Bhargava observes that line pipe prices are currently about 50 percent below their 2022 peak and could drop another $50 to $100 a ton by early next year. Meanwhile, OCTG prices are already down about 50 to 70 percent from their peak. 

Given there continues to be some excess inventories on the back of easing demand, KeyBanc’s Gibbs says it is possible that energy pipe and tube prices could drift slightly further down, although he believes that the rate of decline will ease given that they have already come down substantially from their peak. 

“They could even flatten out later this year,” McCartin says. “But in general they will remain low.” Preckel agrees, noting that it has been hard for the pipe mills to move prices in an advantageous direction given that, partly due to imports, there is too much supply for the current level of demand.

[Caption:]
Hope remains that activity level in the energy sector will pick up next year. (Photo courtesy Tenaris)