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Energy market lull casts doubts on steel pipe and tube

Keywords: Tags  steel pipe and tube market, OCTG, South Korea, drill rig count, energy market, natural gas prices, Baker Hughes, Insteel H.O. Woltz III

You don’t have to drill deep to hit a pocket of doubt in the North American steel tube and pipe sector. Growing concerns over the rig count, natural gas prices, foreign competition and a still-stagnant construction market have made many players in the market less optimistic than they were at the beginning of the year. 

“Everybody I talk to says their business is OK. Nothing is really booming. The oil country (tubular goods) guys are doing a little better (than non-energy customers),” one distributor source said. “But they’re complaining about margins not being what they had been.”

One trader said he was somewhat concerned about a “lull” in the rig count, given “catastrophically low” natural gas prices.

The pipe and tube market appeared to be in a holding pattern in April and early May as the impact of price increases on non-energy-related tubulars remained in doubt. At the same time, concerns have mounted in the long-robust energy tubulars sector over the drill rig count and declining natural gas prices, which fell below $2 per million British thermal units (mmBtus) in mid-April, a level industry observers said could make many shale gas plays unprofitable.

There appeared to be little consensus on the overall health of the pipe and tube markets, or even prices in general. But energy-sector players generally remained more optimistic than those more heavily reliant on construction activity.

It wasn’t immediately clear whether price increases on non-energy tubulars would be successful or merely keep them from falling further. Most market sources suggested the latter might be the case, with some continuing to question whether the market could credibly support more price increases, given softness in demand and an abundant supply of coil—the substrate used to make welded tubulars—as well as hollow structural sections, which are consumed largely by the construction industry.

One mill source predicted that prices would stay neutral or perhaps move downward, given sluggish demand in the residential and commercial construction sectors. Meanwhile, lower scrap prices and overcapacity in sheet production should “keep a lid on any significant price increases in the next three to six months,” he said.

But a second mill source, whose company makes energy tubulars, had a very different take on the market, saying his company was seeing very strong lead times and firming demand at both the mill and distribution levels thanks to a host of new line pipe projects moving forward. He predicted the trend could lead to higher prices for higher-strength line pipe.

Natural gas prices could be depressed, the second mill source said, but the energy industry is making a switch to oil drilling thanks to oil prices that appear set to remain at $100 per barrel or higher, which should keep demand for both oil country tubular goods (OCTG) and line pipe strong, at least through the summer months.

But not everyone in the energy sector was so sanguine. One distributor source contended that South Korean mills were “destroying” the domestic OCTG market with what he characterized as “dumping.”

South Korea, the largest overseas supplier of OCTG to the United States by volume, was licensed to ship 70,048 tonnes of OCTG to the United States in April, accounting for 23.3 percent of the 300,723-tonne total, according to the latest license data compiled by the U.S. Commerce Department’s Import Administration, up 25.6 percent from imports of 55,751 tonnes the previous month and 26.4 percent ahead of 55,399 tonnes imported in April 2011.

Still, not everyone thinks that imports from Korea are hurting the domestic OCTG market as a whole. Competition between some domestic mills and imports might be fierce in less-value-added sectors, where some domestic mills “get down and dirty and compete with imports,” one trader said, but domestic OCTG mills generally are doing well, especially when it comes to higher-grade material, he said. 

There were 1,974 rotary rigs operating in the United States in mid-May, up 24 from a month earlier, according to Houston-based oilfield services provider Baker Hughes Inc. But the oil rig count climbed by 40 while the gas rig count dropped by 26 in the same comparison.

The trader cautioned against reading too much into data from any particular week, noting that the rig count could gain 15 rigs in a given week. But even if it did, “right now the trend is clearly down, and that’s a little disconcerting,” he added.

There are questions on other fronts, as well. While there are signs that construction activity is improving, landing new business remains a struggle, according to executives at Insteel Industries Inc.

“It’s still a real food fight out there as everyone scrambles for available orders. I wish I could tell you there has been a significant improvement, but unfortunately that’s just not the case,” Insteel president and chief executive officer H.O. Woltz III told analysts during a quarterly earnings conference call. The result has been subsistence-level spreads between wire rod costs and selling prices for finished goods, Woltz said. Mount Airy, N.C.-based Insteel buys wire rod to make downstream products, such as PC strand and welded-wire reinforcements.

One silver lining in the current situation could be the potential for additional acquisitions, Woltz said, noting that Insteel was “very capable” of such activity. However, he stopped short of citing any specific acquisition targets.

But some additional viewpoints at the start of the second quarter opened room for more optimism. U.S. Steel Corp. expected its tubular division to log another strong performance in the second quarter on the back of a possible increase in drilling in the Gulf of Mexico and continued shale resource development, its top executive said.

“It would seem there’s some pretty good expectation of increased activity in the Gulf of Mexico, particularly (in) the deep water,” John P. Surma, chairman and chief executive officer of the Pittsburgh-based steelmaker, told investors during a conference call. “We’ve actually had some orders (related to that pickup) already,” he said, citing increased demand for heavy-gauge, thick-wall, large-diameter material. “To the extent that comes back stronger, that’s really positive for us in the long term.”

Shale plays also will help boost the segment, Surma said in prepared remarks at the company’s annual shareholders’ meeting in Pittsburgh. “The energy industry’s efforts to extract and transmit those resources have led to increased tubular products sales for our company and an extended period of strong financial performance from our tubular segment,” he said. 

In a similar vein, Timken Co. steel group president Salvatore J. Miraglia Jr. said he was “really excited” about shale drilling, calling the opportunity “a wonderful development” for his company and the entire industry.

Miraglia told AMM that demand for seamless tubing made from special bar quality billets will keep growing as the United States taps into the burgeoning resource to produce crude oil and natural gas. “The shale play is a wonderful development because we make products well suited to the needs of deep-shale horizontal drilling,” he said. “It won’t only help our business—in terms of economical energy, it can make our industry much more competitive on a global scale.”

Miraglia said he isn’t worried about low natural gas prices slowing exploration and extraction. “Now that it’s down to $2 (per mmBtus), we need the incubation time to generate the demand that such economical energy will create,” he said. For example, fleet owners are trying to figure out how to convert their vehicles and truck builders are beginning to produce natural gas-fueled models, he said, while electricity providers are starting to build or refit generating plants to use natural gas. During this period, “demand pressure will begin transitioning to the product. Meanwhile, the people doing the drilling (will be) going after the wet gases because oil is still at $103 a barrel,” Miraglia said.

Another opportunity will arise when liquid natural gas terminals at U.S. ports are converted from import to export capability. Shale drilling will have benefits that go beyond any one industry, Miraglia added. “This resource has the ability—over the course of a number of years you can count on one hand—to make the United States energy independent . . . and balance trade.” 

There also are some signs of optimism outside of the United States. Tenaris SA plans to invest $200 million to upgrade its mill in Colombia by 2014. The Luxembourg-based steel tube and pipe maker said the money would go toward construction of a new heat-treatment mill, ultrasound inspection technologies and finishing capabilities at its Tubos del Caribe SA operations in Cartagena de Indias.

Colombia’s energy sector is set for “extraordinary” growth in the coming years due to favorable government policies, Tenaris chief executive officer Paolo Rocca said in a statement. “This opens up important opportunities for the development of an industry like our own, focused on the supply of equipment, products and materials for the oil and gas industry.”

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