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Oilfield Chaos Triggers Grief for OCTG Market

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For the steel industry, North America’s energy market has shifted from a feel-good story to a cautionary tale seemingly overnight. OCTG might as well stand for Oilfield Chaos Triggers Grief.

Demand in the oil country tubular goods market is down sharply and could decline another 25 percent or more in the first half of the year, say the experts, as domestic drillers and a defiant OPEC continue to oversupply the market. At less than $50 a barrel, energy companies have little incentive to sink new wells. Pipe mills have already started to cut capacity in anticipation of the lost business.

OCTG imports jumped by over 22 percent in 2014 as the price differential versus domestic approached $200 per ton, by some estimates. Pipe imports will almost certainly slow this year, but only because of weakening demand, which benefits no one. Although today’s oil prices defy predictability, some forecasters calculate they will rebound to about $70 per barrel
in late summer or fall, triggering renewed drilling—and probably renewed imports.

The U.S. economy, the strongest in the world, has attracted record steel imports, which have had a devastating effect on prices, and not just OCTG. Steel imports of all types increased by 38 percent last year, driven by a strong dollar that gives an advantage to foreign producers. U.S. imports of hot-roll spiked by over 45 percent. Spot market prices for hot-roll reportedly have declined by $100 in the past four months to less than $540 per ton. Some say it could even dip below $500 as U.S. mills counter the imports to fill their order books.

Many distributors are watching the price game play out from the sidelines, as their inventories are already overstocked. U.S. service centers were among the largest buyers of foreign steel last year. As of fourth-quarter 2014, distributor inventories were 20-25 percent higher than in fourth-quarter 2013. Their price shopping overseas has contributed heavily to the downward pressure on domestic pricing and the value of their own stocks. Experts say the first half of the year will feel the drag of cautious buying and inventory balancing by service centers.

Certainly, the outlook for the steel market in 2015 is not all bad. The demand side of the equation should remain very positive with GDP growth forecast at over 3 percent. Lower gas prices at the pump could boost consumer spending by over $100 billion. Steel consumption already has rebounded to just 6 percent below pre-recession levels. But as one executive pointed out: "You can’t decouple the U.S. market from the rest of the world, which means imports will continue to add to price pressures for some time to come."