The near-term prospects look bright for producers of large-diameter line pipe, but overcapacity in the spiral-weld section of the market could cloud the horizon, several analysts say.
That might at first seem counterintuitive because spiral submerged arc-welded (SAW) pipe appears to be gaining acceptance for overland energy transmission projects, such as the Rockies Express Pipeline. The estimated 1,700-mile pipeline will eventually carry natural gas from deposits in the West to markets on the East Coast.
The two types of SAW pipe—helically submerged arc-welded (HSAW), which is made from hot-rolled coil, and longitudinally submerged arc-welded (LSAW) pipe, which is made from plate—appear to be in somewhat of a face-off. At about $800 a ton, plate is far more expensive than coil, which sells for roughly $540 a ton. Long lead times for LSAW and cheaper prices for HSAW have made the latter attractive for big pipeline projects, although LSAW pipe remains the preferred material for transmission lines that run under water or through other difficult or corrosive environments, according to analysts.
Steelmakers see opportunities for HSAW, and everyone seems to want a piece of the action. Berg Steel Pipe Corp., Panama City, Fla., plans to add 180,000 tons of annual spiral-weld capacity at its new mill near Mobile, Ala., by 2008 (AMM, March 12); Ipsco Inc., a Lisle, Ill.-based division of Swedish steelmaker Svenskt Stål AB (SSAB), intends to add 200,000 tons of spiral-weld capacity to its mill in Regina, Saskatchewan (AMM, Jan. 29); and Stupp Corp., Baton Rouge, La., is building an HSAW mill that is expected to have an annual capacity of 150,000 to 180,000 tons when it is completed in 2009. Other producers planning to build new spiral-weld pipe mills with a capacity of about 300,000 tons annually include India's Wellspun Group; United Spiral Pipe LLC, a joint venture between U.S. Steel Corp., Pittsburgh, and Posco Ltd. and SeAH Steel Corp., both of South Korea; PSL-North America LLC; and Man Industries (India) Ltd.
That could mean more than 1.7 million tons of new North American HSAW capacity annually by 2009, nearly doubling existing capacity for both HSAW and LSAW combined, said Kimberly H. Leppold, an analyst at Metal Bulletin Research. HSAW capacity, alone, would more than quadruple from its current level of around 425,000 tons a year.
"For the next year or so, I think the market will be strong; 2009 is when you're going to see more competition," Leppold said. "There is some concern out there." However, she cautioned that pipe mills are notorious for producing at less-than-optimal capacity, and the credit crunch could prevent some projects from going forward as planned.
"Initially, this new capacity will provide more competition and shorter lead times, but I don't see a crash in terms of pricing because demand has been so strong," Leppold said.
The pipe market is notorious for its booms and busts, said Charles A. Bradford, president of Bradford Research/Soleil Securities Inc., New York. Historically, for every two good years the pipe market has seen five bad ones, he said, although the current strong cycle could run longer than normal because of a dire need for repairs to existing pipeline infrastructures and projected increases in natural gas usage.
But overcapacity could become a problem if some of the announced pipeline projects don't materialize and if all of the new spiral-weld mill projects come online at the same time. "It's fundamentally a decent business," Bradford said. "But if you're going to have seven or eight (spiral-weld pipe mills), that's got to be a problem."
Others agreed. "There are certainly a lot of construction projects that have been announced, which is encouraging," said Kurt Minnich, partner and project manager at Spears & Associates Inc., Tulsa, Okla., which publishes Pipe Logix reports on oil country tubular goods. "But you've got to wonder whether capacity is going to exceed actual demand."
Existing mills, for example, could easily expand capacity and undercut the new mills, Minnich said, questioning whether there are enough construction crews to lay pipe for all the announced projects. If there aren't, some projects could be delayed, he said. "That could be a potential surprise to the whole market."