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Pipemakers optimistic as energy market stabilizes

Apr 30, 2013 | 08:00 PM | AMM staff

Tags  OCTG, Lynn Lupori-Gray, Hatch Ltd., natural gas drilling, oil drilling, steel pipe, steel tube, Welspun Global Trade LLC National Association of Pipe Distributors

Natural gas drilling is the single biggest factor that will keep the oil country tubular goods (OCTG) sector robust and profitable throughout 2013 and beyond, according to market players.

OCTG demand in the United States was poised to improve at the close of 2012, and although the sector started the new year slowly, prospects are still good, some industry observers believe.

“We’re seeing a little uptick in demand. The extremely cold weather we received from Canada all the way down to the southern U.S., in opposition to construction, was actually good for drilling oil and gas wells,” one trader said.

Low natural gas prices, high levels of OCTG imports and increased domestic capacity were all cited as headwinds by market players. But improvements in natural gas prices, natural gas drilling activity and, thus, OCTG demand--as well as a possible trade case against South Korea and perhaps other foreign OCTG suppliers--could bring a turnaround, sources said.

An industry analyst agreed that demand is expected to improve in the near term, echoing recent comments by large mills that the drill rig count might be at its lowest level for the year as previously declining gas drill rig numbers have stabilized. Meanwhile, oil drilling continues to increase.

“We certainly think the trend will be more toward the positive side going forward,” Lynn Lupori-Gray, managing consultant at Mississauga, Ontario-based consulting firm Hatch Ltd., told AMM.

Others agree that the U.S. pipe industry is set to benefit from growing natural gas demand, according to Joel Johnson, senior vice president of sales and marketing for the Americas at Houston-based Welspun Global Trade LLC’s.

The reshoring of manufacturing is one factor likely to increase demand, he told participants at the National Association of Steel Pipe Distributors’ annual convention in Las Vegas earlier this year. “There’s a lot of manufacturing, due to the low energy prices, that’s moving back to the U.S.,” he said.

At the same time, gas is supplanting more-expensive coal as an energy source. “Due to the low gas prices, (coal) doesn’t make sense,” he said.

Natural gas prices are expected to rise amid increased demand, which should once again spur exploration, Johnson said. “The (U.S. Energy Information Administration) predicts a steady rise in natural gas prices.”

And with 60 percent of the country’s gas and liquid pipelines at least half a century old, replacement needs also should spur demand for line pipe, according to Johnson, with domestic mills particularly likely to benefit. “A lot of these pipeline companies have a ‘Buy America’ philosophy,” he said.

However, growing competition from railroads could pose a threat to the pipe industry. “We do see railroads increasing their share of transporting oil,” Johnson said, adding that rail, while still an “expensive option,” poses fewer right-of-way issues.

Environmental opposition also has slowed work on such pipelines as Calgary, Alberta-based TransCanada Corp.’s Keystone XL, for which Welspun is supplying some product. “Our government gets in the way of making pipe and distributing pipe,” Johnson said.

Welspun Tubular LLC, a division of Mumbai, India-based Welspun Corp. Ltd., is in the process of ramping up its electric-resistance welded (ERW) steel pipe mill in Little Rock, Ark.

The number of drill rigs running in the United States totaled 1,758 in the week ended April 19, down 10.9 percent from 1,972 rigs a year earlier, according to Houston-based oilfield services firm Baker Hughes Inc. The number of rigs drilling for oil was up 2.5 percent to 1,371 from 1,337 in the same comparison--accounting for 78 percent of all drilling activity vs. 67.8 percent a year earlier--while rigs directed toward natural gas were down 39.9 percent to 379 from 631.

The weekly average crude oil spot prices were 8.9 percent lower than at the same point last year, while natural gas spot prices doubled in the same comparison.

While demand for OCTG could pick up, prices for most products continued to slide throughout the first quarter as imports, especially from South Korea, shot up. “As long as those continue to come in as they are and without some fundamental change in demand, prices will continue to remain low,” Lupori-Gray said.

Average distributor selling prices for all OCTG products fell to $1,686 per short ton in March, down 0.9 percent from $1,702 in February and 2 percent below $1,720 in January, according to Tulsa, Okla.-based Pipe Logix Inc., the 12th consecutive monthly drop. Average welded OCTG prices fell 1.3 percent to $1,554 per ton in March from $1,574 in February, while average seamless prices fell 0.7 percent to $1,818 per ton from $1,830 in the same comparison.

Some sources remain adamant that a trade case against Korean producers of welded OCTG products is looming.

“The Koreans are just sure they’re going to get slammed with an anti-dumping suit. The U.S. mills are calling everybody, saying they’re definitely going to do this. They’re not even hiding it,” the trader said, adding that it likely was the reason for soaring imports from the Asian country in January. “They’re trying to load up in advance of these looming dumping suits. They know it’s going to happen.”

Lupori-Gray expressed caution, however, saying there was “no clear direction” for a case, which has been subject of industry discussion for years.

Shipments of OCTG from South Korea totaled a record 107,790 tons in January but fell to 62,434 tons in February, bucking market speculation that imports from Korea would increase as producers try to land material before the possible filing of a trade case.

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