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Dip in mechanical tube demand dampens growth forecast

Keywords: Tags  mechanical tube, seamless tube, steel tube, steel pipe, automotive market, heavy equipment sales, natural gas market, Paul Vivian Shawn Seanor

Growth in the U.S. mechanical tubing market has flattened out somewhat this year and is expected to remain so for the next year or so unless the domestic or global economies pick up unexpectedly.

“There hasn’t been a big downturn. Rather, the mechanical tubing market is likely to be flat to slightly down for the rest of the year” in light of the slowing of general manufacturing activity since April and May through at least summer, according to Paul Vivian, a partner at Preston Pipe Report, Ballwin, Mo.

Mechanical tubing, especially seamless product, was on track to have a very good year, at least through the first half, said Shawn Seanor, vice president of oil and gas engineered steel solutions at Canton, Ohio-based Timken Co. That, however, has been somewhat impacted by certain “headwinds” that started to develop in the second half.

Despite this, demand isn’t bad and has flattened out at a pretty good level, said Bill Jones, vice chairman of O’Neal Industries Inc., Birmingham, Ala.

That isn’t that surprising, according to William A. Wolfe, executive director of the Steel Tube Institute of North America, noting that mechanical tubing’s use in some of the stronger end-use sectors, like automotive, heavy equipment, and oil and natural gas, has helped prop up demand.

It just isn’t the same “super strong” market as it was last year, when many tube mills had their customers on allocation or controlled order entry, according to Tim Spatafore, president of Marmon/Keystone LLC, Butler, Pa.

The mechanical tubing market had been growing at a pretty good clip ever since shipments bottomed out at 1.93 million tons in 2009, said Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa. But even though 2011 shipments were up 55 percent from that trough to just under 3 million tons, levels remain about one-third below the 2006 peak of 4.69 million tons.

But as many mechanical tubing consumers are small businesses, the lack of clarity regarding federal tax policies and sequestration spending cuts have forced many to delay growth action until they better understand their financial obligations in 2013 and beyond, Edward Vore, vice president of marketing and sales at ArcelorMittal Tubular Products North America, said. As a result, some customers have been reluctant to build inventories.

Declining flat-rolled steel prices and short lead times also dampened demand through the second quarter as companies closely watched their raw material acquisition costs and inventory values, he said.

While distributors generally have been cautious about the months of supply on hand, mechanical tubing inventories increased slightly during the summer, Seanor said, partly attributing that to rising imports, especially for mechanical tubing used in oilfield applications.

Rising imports have been impacting the market, especially on the West Coast, Wolfe said. “But it is just the classic, ongoing situation and it isn’t as acute as it had been some times in the past,” he said, adding that there hasn’t been the same pricing umbrella to prompt a flood of imports.

Mechanical tubing demand generally is reflective of overall industrial production, which rose 4.4 percent year on year as of July; and gross domestic product (GDP) growth, which was 1.7 percent in the second quarter, according to Vore. U.S. durable goods manufacturers also have been able to increase their export volumes to developing countries with higher GDP growth rates, he added.

One big area for this activity is heavy equipment, or yellow goods, according to Jim Hoffman, senior vice president of operations at Reliance Steel & Aluminum Co., Los Angeles, noting that overall yellow goods demand is up about 10 percent year on year.

Agricultural equipment has been particularly strong for much of this year, but issues during the summer, including drought conditions in the Midwest, could impact farm income and in turn farmers’ purchases of replacement equipment, Wolfe said.

Nevertheless, demand should continue to rise, given the demographics of the developing world, Hoffman said. “Increased wealth is affecting the way people eat, and that affects the need for farm implements.”

Demand for construction equipment also is quite strong, up about 12 percent year to date, Plummer said. However, it could be stronger if not for the glut of nonresidential buildings in the United States. Exports have made up the difference, especially with China still growing, albeit at a slower rate, and still building up its cities, he said, although there is concern that this could slow if the U.S. dollar continues to strengthen.

One of the bright spots has been transportation, according to Plummer, noting that North American auto builds rose 22.6 percent year to date through July. While some of this stemmed from slower production of Japanese-owned brands a year earlier due to supply constraints following the earthquake and tsunami in Japan, he noted that there has been a lot of pent-up demand as consumers held off buying vehicles during the economic downturn.

Heavy-duty truck sales, which had been extremely hot last year and earlier this year, have been easing, Plummer said, falling 5 percent in July vs. June, but are still up 22.3 percent year to date following a 57-percent rise last year.

Vivian said that any softening in the U.S. economy could affect auto sales, but Seanor said that, given current sales estimates of as many as 14.8 million vehicles next year, he is at least cautiously optimistic that demand from the auto sector will continue to hold up.

The energy sector is another end-use market that, while easing slightly recently, is expected to have legs going forward. Seanor said that while the number of drill rig completions, especially those for natural gas, are down 10 percent year on year in North America following declines in the past three to four months, the number of rigs operating continues to be high historically, and more permits are being granted for offshore drilling.

“Hopefully, that sector won’t be too negative,” Vivian said. “It depends on what happens with the global economy.”

Hoffman believes the market continues to have a great upside. “No one believes that it isn’t a good idea to lessen our dependence on Middle East oil,” he said.

When the mechanical tubing market was tighter, several producers added production capacity. While there currently might not be enough demand to absorb all of the new capacity that is coming on-stream, “it is a good product and once the economy picks up again demand for mechanical will pick up and the capacity will adjust,” Hoffman said.

Despite this, producers have attempted to pass along raw material price increases to their customers, although it has been difficult as tubing producers often find themselves between a few large suppliers and large customers with buying power, Vore said. “It is challenging for companies to protect themselves from these competing forces as they manage their raw material acquisition costs on one end and their selling price recovery on the other.”

Looking forward, this year is likely to be slightly better than last year, and next year could be slightly better than 2012, Plummer said, estimating an increase of about 5 percent. “But the market still has a way to go to get to full recovery. That isn’t likely to happen until 2014-15.” 

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