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Conference Report: CRU

Oil and Gas Outlook is ‘Positively Flat’

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In 2018, the energy pipe and tube business fully and unequivocally emerged from its mid-decade trough. The growth will slow next year, but activity will remain at high levels, said Rick Preckel, principal for Preston Publishing, producers of the industry journal Preston Pipe Report.

It was just two years ago when rig counts fell to the lowest level in decades, with oil prices that didn’t support any new drilling. Finally, OPEC announced that it would begin to cut production to rebalance the market, which slowly enticed exploration and production to resume. 

The climb back started in 2017 but really took off this year. From an average rig count of 639 in 2016, rig counts spiked to 1,065 last year, and this year has grown to more than 1,200. But Preckel believes that the strong growth has come to an end. Rig counts have been relatively flat since May, and he expects that to continue on for the remainder of the year. 

“Next year, there’s probably some growth, but we identify it as ‘positively flat.’ There’s going to be an upward trend, but overall, at least in terms of the oil and gas business, it will be relatively flat activity as we go forward,” he said. 

A big reason for the slowing growth is the inability to move the product from the drilling locations to the rest of the country. “Most regions in the U.S., except for the Eagle Ford, are affected by takeaway capacity constraints. There are some new regulations in North Dakota related to the amount of flared gas that is permissible. Those need to be addressed by pipelines or it’s going to limit oil and gas development,” Preckel said. 

Furthermore, while prices have climbed significantly since the lows of 2015-16, they “are not high enough to stimulate that next level of activity, particularly given the discounts due to capacity constraints.”

Fortunately, the capacity constraints will be a short-term phenomenon, he predicted. Preckel said plans to relieve the bottlenecks in the Permian Basin and elsewhere are targeted for completion in late 2019, though he pegs mid 2020 as more likely given how permitting and construction typically slow projects down. 

Any growth in pipelines to alleviate some of the takeaway woes will be a boon to the line pipe segment of the business. A year ago, there were plans for 24,000 miles of projects. Today, the number has grown to 46,000. “That doesn’t mean all of them are going to get built. There may be some of the announcements that don’t make it through the process and there are some competing projects, but the idea is that activity in the industry is much stronger than it was last year at this point,” Preckel said. 

Conrad Winkler, president and CEO of EVRAZ North America, supported that position. He said several pipeline projects in Canada have been advancing through the permitting stages, most notably a 416-mile effort to move natural gas across British Columbia.   

“TransCanada is building Coastal GasLink and an entire system to support that. And if the Coastal GasLink gets built, which we expect it will, it means there are a whole series of pipelines that need to get built to support it as well,” Winkler said. “There’s a record amount of oil being shipped via rail in Canada right now.”

In the U.S., the story is similar. “In the Permian, everyone knows the liquids, natural gas and oil, have to find a way out. These pipelines are going to be critical for that,” Winkler said. 

Analysts: Steel Price to Keep Sliding

The high steel prices of summer have eroded throughout the second half of the year, and more deterioration is on the way. That was the conclusion of both Josh Spoores and Curt Woodworth during a panel on pricing. 

The price of hot-rolled band peaked at $918 in July. By the first week of October, the price had fallen to $840 per ton. CRU Principal Consultant Spoores envisions further decline to about $800 per ton by year’s end. 

“As we’ve seen prices come down, they’ve come along with shorter lead times,” Spoores said. 

The spike was driven by the Section 232 tariffs, which will continue to buoy the domestic steel price, Spoores said. Sheet imports have fallen 19 percent for the year to date, and steel consumers remain hesitant to buy foreign product. 

But other factors are working against the elevated price. “Positive yet slower industrial growth will equate to slower sheet demand,” he said. “The strong rates of apparent consumption we saw in 2017 will back off a little.”

Additionally, rising interest rates and the impact of the tariffs could be a drag on the overall economy. 

There are also several wild cards that could have a significant impact. The November election could result in a change of power in Congress, damaging the president’s ability to enact his agenda. Inventories have moved into fairly decent balance, but balance isn’t always maintained. “The tricky thing is when you look into the next couple of months, December into February, how will inventories look?”

Finally, there are the ongoing labor issues at domestic mills, which could cut into supply, though U.S. Steel has reached a tentative deal. “Mills don’t want to make a deal that lasts beyond 232. But if you’re a steelworker, if you can’t make a deal now, when can you?” Spoores asked. 

Woodworth, director of U.S. Metals and Mining for Credit Suisse Research, said his company has created three separate base case scenarios, depending on how the trade situation shakes out in 2019. If tariffs remain in place, the company envisions a 2019 base price of $850 per ton, or $300 above the global price for HRC. 

If more steel-producing countries follow South Korea’s lead and enter into a quota system, Credit Suisse pegs the base price at $775 per ton, which would represent a $225 edge over the world price, still above the historical norm. 

Finally, in the unlikely event that neither tariffs or quotas are in place for the bulk of 2019, the HRC price would fall to $700 per ton, and the $150 spread with the global price would be closer to average. 

Of those three scenarios, Credit Suisse is anticipating something between the first and second options as the most plausible. “Our view is you do get some moderation on trade policy. Some of the tariffs will be replaced by quotas,” he said.

One factor that will bear watching in the coming years is how much the planned capacity increases affect the domestic marketplace. The United States could add close to 10 million tons of steel capacity if all of the announced projects came to fruition. 

“There’s a pretty robust amount of rolling capacity coming on in the next two to four years.  Where does it all go? If it all comes online, it could be a disaster. I don’t think the market can support it,” Woodworth said. 

Steel Fab Industry Needs Import Protection

The steelmakers in attendance at the CRU event have largely been happy with the results of the Section 232 tariffs. That same sentiment is not shared by the entire supply chain. 

David Zalesne is the president of steel fabrication company Owen Steel and the chairman of the American Institute for Steel Construction. In his view, the partial nature of the Section 232 ruling has created a major headache for structural steel fabricators. 

During the investigation, Zalesne testified before various D.C. groups pushing the idea that protecting America’s vital infrastructure was at the heart of the national security argument required for Section 232 protection. “No country that has its own steelmaking capacity should be outsourcing its critical infrastructure projects, both as a matter of policy and domestic health.  Why would you take your most critical bridges, your most critical power plants, your most critical infrastructure projects away from American companies?” he asked. 

The Commerce Department partly agreed with Zalesne’s argument, he said. Commerce agreed that supporting infrastructure was critical to our nation’s interests, but did not grant protection for the steel fabrication industry in the process. “Just because we’re addressing the problem at the mill level doesn’t mean we’re solving it, or not making it worse, at the fab level.”

With no tariff protection in place for the steel fabricators, major project operators are bypassing domestic steel in favor of material fabricated elsewhere and shipped into the United States. “The argument we’re making to Congress and USTR is that if you don’t extend the tariff codes down to fabricated steel, you’re putting the domestic fabricated steel industry at risk and allowing an end-run around this signature trade policy.”

Two of the prime culprits, Zalesne said, were our partners in the United States-Mexico-Canada Trade Pact, the new version of NAFTA announced just before the start of the conference. When Owen Steel is working on major construction projects, such as the LaGuardia Airport upgrades taking place in New York, most of his competitors are companies using fabricated steel from Canada. 

“The cost of steel is higher domestically because of tariffs, and the Mexicans and Canadians can bring in offshore steel at a lower cost, fabricated, with no tariffs. It obviously puts the domestic industry at a greater disadvantage.”

The industry received some relief when the Section 301 tariff determination against China included some fabricated metal products on its list of protected material. But he said the tax isn’t enough to keep out Chinese material. 

Zalesne said unlike the steel production market, the domestic structural fabrication industry has the capacity to meet all of the United States’ needs, even if strong Buy American provisions became the rule. The industry built up its capacity during the boom before the economic crisis. “You have probably 1.5 million tons of imported fabricated structural steel that could easily be replaced by domestic capacity on the ground right now,” he said.

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