NEW YORK The pipe and tube sector is set to face a major oversupply problem, with new players entering the market just as existing companies plan new expansions, and industry observers fear that not everyone will make it through.
"The problem isnt how many are coming; the problem is that not all of them will survive. Today we dont need one more joint of pipe, yet theyre all coming," Dolty Cheramie, president of Houston-based line pipe distributor Pipe Exchange Inc., said. "Across the nation, our inventories are very reduced and were scared to buy anything. Whatever you buy today is a bad deal tomorrow."
Dolty was among the participants speaking at the recent Critical Commodities Conference hosted by the American Institute for International Steel and the Port of New Orleans. Many said that margins in the pipe and tube sector are being hurt due to additional capacity being brought online.
While the pipe market has been among the few bright spots in the steel sector, some worry that the momentum will be short-lived.
"Theres a metamorphosis taking place in this business right now. The whole systems we used to live are going to break," Leon Goldenberg, president of New York-based steel trader Fremak Industries Inc., said. "All these guys are building mills right now. But its not only here: Its also in Taiwan, the Philippines, Korea. For business today, there are a handful of guys who control the game. Margins have been squeezed, and were not making any money."
Cheramie agreed, noting that recent oil country tubular goods (OCTG) price hikes have failed to garner momentum.
"OCTG sales prices have been in the red for most of the last year. With the $100 price increases we saw a few weeks ago, I thought: Why dont you make it a billion dollars? What difference does it make? You aint gonna get it, anyway, " he said.
But panelists at the New Orleans event warned that tapping into the shale plays will require high-performance steels with more advanced connections, particularly as environmentalists cite fears of directional drilling and hydraulic fracturing. They point out that more stringent requirements will mean clear winners and losers.
"Quality issues will be a problem, and there is no margin for error. Were drilling in places weve never explored, and the weld designs are constantly being changed," Goldenberg added. "Most of the shale plays need seamless pipe with premium connections. My personal feeling is that with the environmental issue, most of the shale plays will end up using seamless. Those building ERW (electric-resistance weld) mills will be the losers."
In recent months, a growing number of foreign playersincluding Luxembourg-based Tenaris SA; Borusan Mannesmann, Istanbul; Benteler Steel/Tube GmbH, Paderborn, Germany; United Metallurgical Co. OMK, Moscow; and TPCO America Corp., a unit of Tianjin, China-based Tianjin Pipe (Group) Corp.have announced new projects in the U.S. Gulf in an effort to take advantage of the game-changing shale plays and burgeoning energy sector. A number of domestic producers have also expanded capacity.
On the import side, long lead times for foreign material, along with depressed U.S. prices, have effectively shut traders out from the market. And with more foreign players wanting a larger stake in the U.S. market, the competition could continue to heat up.
"My customers tell me, I dont need you; I can buy domestic, " Goldenberg said. "I offer them August shipments compared to domestic shipments of three weeks. The steel side isnt any better. In about two years from now, certain people will disappear. Not all the guys will survive."