Dont ask some oil country
tubular goods (OCTG) buyers about whether there is looming
overcapacity in North America; its already here, they
Sentiment ranges from optimism
about the potential for shale play business and a pickup in
offshore activity to downright bearishness among some traders
"Effectively, the North American
market, including Mexico, is totally self-sufficient," one
trader said. "You can get anything you want from the mills on
short notice. Anyone that says different is dreaming."
Thats left some traders
who dont like to carry inventory holding thousands of
tons that they dont want, he said. "You have almost 2,000
rigs running. The phones should be ringing off the hook. People
should be desperate. But right now prices are falling."
Buying is slow in part because
there are two separate markets: the shale plays, which use "P"
grades and other alloy grades of OCTG, and the commodity carbon
market, which largely has been saturated by lower-priced welded
OCTG from South Korea, the trader said.
Even on the seamless side, U.S.
Steel Corp. and Vallourec SA alone should be able to service
the high-end U.S. shale market well, especially once Vallourec
completes its new OCTG mill in Youngstown, Ohio, late this
year, the trader said. Plus, Tenaris SA already has seamless
facilities in Sault Ste. Marie, Ontario, and recently
commissioned a new seamless mill in Veracruz, Mexico, both of
which can supply the high-end seamless market in the United
States, as well as Canada and Mexico.
The big mills probably saw the
shale boom coming and built to what they thought needed
capacity would be, he said. Assuming offshore activity picks up
again, the premium seamless market in North America should be
in decent shapebut if offshore continues to drag, the
premium seamless market also could be at risk of big
overcapacity in the North American Free-Trade Agreement (Nafta)
region, he cautioned.
But the real problem isnt
so much domestic capacity as it is the structure of
distribution in the United States, where only a handful of
distributors have alliances with domestic mills while many more
depend largely on imports, the trader said. "Those people
(without a domestic connection) are going to buy import. It
doesnt matter how much capacity you have here. If they
dont have the ability to buy that product, they have to
buy it somewhere else." Even while traders might not be as busy
as theyd like, offshore tons will continue to come into
the market because some customers have no choice but to buy
So what do distributors
If just 1 million tons in annual
capacity is addedsomething which appears to be almost a
givenprices "are going to suffer," one distributor said.
One or two mill projects to serve growing demand from the
shales or offshore might have made sense, but not all of the
announced new projects make sense anymore.