OCTG projects might already be sufficient for market

Jun 30, 2011 | 07:00 PM | Michael Cowden

Tags  OCTG, Vallourec SA, Paul Vivian, Eric Klenz, Mark Hanson, Permian Basin, Michael Cowden

Nice work, guys, but take a break. That appears to be the advice offered to companies who are building new oil country tubular goods (OCTG) manufacturing facilities or those still mulling whether to add new capacity.

OCTG projects that have come online recently or are in the works will provide more than enough supply to meet even current strong demand, Paul Vivian, principal of tubular market research firm Preston Publishing Co., Ballwin, Mo., said. "Stop building. If you haven’t announced, that means don’t announce . . . we’re not overbuilt. We’re not underbuilt. We’re in a good range. But it’s time to stop."

Vivian isn’t concerned so much about the high end of the OCTG market as he is with the lower, carbon commodity end. "We have way too much carbon," he said.

Part of the problem with new capacity might be that some old capacity that was expected to fold following the 2008-09 financial crisis didn’t, Vivian said, noting that while the drill rig count fell dramatically in the wake of the crisis it also spiked again with equal drama. "People that were thinking, ‘Maybe we ought to mothball this thing,’ started to get orders, and the orders came on strong."

If the rig count were to retreat from above 1,800 rigs to around 1,500, a normal correction situation, current OCTG capacity utilization might fall to the 60-percent range, something that would be dangerous but not deadly, he said, adding that he didn’t expect anything like the hyperventilated crisis of late 2008 and early 2009 when import orders—mostly from China—continued to enter the market six months after drilling activity had collapsed. That traumatic event for the industry saw capacity utilization fall to around 25 percent, Vivian said. But he speculated that if it hadn’t been for the import overhang, capacity utilization might have fallen only to around 40 percent.....