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Overcapacity fears loom large for OCTG market

Keywords: Tags  Benteler Steel/Tube GmbH, Borusan Mannesmann, USA Investment Group LLC, OCTG, Vallourec SA, South Korea, drill rigs, Michael G. Rippey AreclorMittal USA LLC

Oil country tubular goods (OCTG) manufacturers have spent the past three years adding capacity, and that trend likely will continue for at least another three years, according to many market experts.

The looming threat of overcapacity--along with concerns about imported steel, particularly from South Korea--has distributors and others in the domestic market concerned about the near-term future even as the drill rig count remains an open question.

Sources estimate that the market is set to add 2 million to 3 million tons of welded and seamless OCTG capacity in the coming years, with a host of companies--including Germany’s Benteler Steel/Tube GmbH, Turkish producer Borusan Mannesmann and investment firm USA Investment Group LLC--recently announcing new U.S. projects.

Even with robust demand expected from the development of shale plays, sources wonder whether the domestic market will be able to soak up the extra capacity.

“Unless we completely drop imports, I don’t think domestic (demand) can handle that,” a source at a Mid-Atlantic distributor said.

“I’m shaking my head. My customers shake their heads,” one trader said of the planned expansions.

The expected growth here and slack demand elsewhere is driving the investments, sources said. “The United States has more than half the rigs worldwide. It’s clearly the single largest market,” a second trader said.

Vallourec SA remains positive about the oil and gas markets globally in 2013, but it’s especially optimistic about the United States. “Drilling activity in the U.S. is expected to progressively pick up from current levels, while indicators for the global oil and gas markets are positive,” Philippe Crouzet, chairman of the Boulogne-Billancourt, France-based steel tube and pipe producer’s management board, said in a statement released earlier this year with its 2012 earnings report.

However, exploration has shifted recently from natural gas to oil due to plummeting gas prices, leading to a lull in the drill rig count. “The rig count is coming down right now. I still maintain that’s temporary,” another trader said, adding that eventually oil exploration will make up for the cutback in natural gas. “At (current price levels for oil), everybody can make a lot of money.”

The number of drill rigs running in the United States totaled 1,758 in the week ended April 19, down 10.9 percent from 1,972 rigs a year earlier, according to Houston-based oilfield services firm Baker Hughes Inc. The number of rigs drilling for oil was up 2.5 percent to 1,371 from 1,337 in the same comparison--accounting for 78 percent of all drilling activity vs. 67.8 percent a year earlier--while rigs directed toward natural gas were down 39.9 percent to 379 from 631.

And if uncertainty about rig counts wasn’t enough, OCTG imports also are raising concerns. Such imports totaled nearly 3.6 million tons last year, according to the Commerce Department’s Import Administration. The biggest player is South Korea, which shipped around 247,000 tons of OCTG to the United States in the first quarter of this year, based on import data for the first two months and license applications for March, as well as around 234,000 tons of line pipe, by far the largest overseas supplier in both categories.

“We are threatened every day by the unfair trade practices of our foreign competitors,” Michael G. Rippey, president and chief executive officer of Chicago-based ArcelorMittal USA LLC, testified before the House subcommittee on Commerce, Manufacturing and Trade in March. “We need the U.S. government to ferret out such practices that continue to distort steel markets and take strong action to challenge them through aggressive enforcement of U.S. trade remedies.”

“Some foreign producers have been even more aggressive,” John P. Surma, chairman and chief executive officer of U.S. Steel Corp., Pittsburgh, said. “Since 2010, casing and tubing imports from South Korea are up more than 58 percent, imports from Taiwan are up more than 88 percent and imports from Saudi Arabia are up more than 420 percent. The same story is true for many other pipe products.”

Imports would certainly need to be cut back for the added U.S. capacity to find a home, sources said. The projected 2 million to 3 million tons of new domestic OCTG capacity is a best estimate, and some believe the total will be much higher. The number is only a rough estimate because some projects, such as Tenaris SA’s 650,000-ton-per-year seamless mill in Texas, aren’t expected to begin supplying the market until 2016, while others, such as Evraz Inc. North America’s capacity expansion at its Portland, Ore., facility, aren’t entirely devoted to OCTG but include nonenergy products, such as structural tubing.

Other capacity increases are happening on a much smaller scale. For example, TMK Ipsco, Downers Grove, Ill., has boosted seamless tubular capacity at its Ambridge, Pa., facility by 35,000 tons per year and welded tubular capacity at its Wilder, Ky., operation by 20,000 tons per year, a company spokesman said.

Chicago-based Evraz NA; JMC Steel Group Inc., Chicago, which acquired the former Lakeside Steel and its new facilities in Thomasville, Ala.; and Vancouver, Wash.-based Northwest Pipe Co., which retooled its Bossier City, La., facility to make energy tubulars, all declined to provide specific OCTG capacity figures, so AMM relied on company releases, public statements by executives and its own archives to arrive at estimates, particularly on the welded side of the equation, for which some sources expressed the most concern about possible overcapacity.

Whatever the exact number may be, new OCTG capacity in a range of 2 million to 3 million tons would represent a huge gain in domestic production capabilities.

“This is a market that has strong demand. But that demand has been very aggressively anticipated over the last couple of years. And the result is you have capacity coming to meet, if not exceed, that demand over the next couple of years, which will probably put a cap on margins,” Bank of America Merrill Lynch senior research analyst Timna Tanners said in assessing the situation during the first quarter. Existing producers will have to “keep on their toes” to be able to stay competitive as they face the prospect of squeezed margins.

The figures on current domestic OCTG shipments vs. new capacity indeed suggest that additional production capabilities could see the United States amply able to supply its own OCTG requirements, even in an environment of strong OCTG demand.

Domestic mills shipped about 2.6 million tons of OCTG in 2011, according to American Iron and Steel Institute statistics, and shipments through the first nine months of last year, the latest data available, were around 2.1 million tons, a pace that would put the 2012 total on par or slightly above 2011. Those shipments account for roughly half of apparent U.S. OCTG demand, with imports taking the other half. The United States imported 2.9 million tons of OCTG in 2011, according to data compiled by McKees Rocks, Pa.-based SteelFacts, and the Commerce Department’s Import Administration put 2012 imports at around 3.56 million tons.

But the biggest question, some market sources maintain, is what would happen if new domestic capacity were to collide with current import volumes.

“It looks like a dumping suit against South Korea will be filed,” a trader source said, echoing the sentiment of other market sources and, to some extent, comments made by mill executives during earnings conference calls. “Without that dumping suit, it’s going to be a bloodbath. There is no question about that.”

OCTG market participants said that a trade case against Korean producers of welded energy tubulars is “imminent,” with a distributor reporting that at least one producer has already reserved the right to cancel shipments if a trade petition is filed. Korea shipped 870,600 tons of OCTG to the United States last year, a 28.3-percent increase from 678,600 tons in 2011, according to Commerce Department figures.

A number of mills in the United States, including Tenaris and U.S. Steel, have said that they are mulling a trade case against producers in the Asian nation due to a substantial increase in low-priced imports. Vallourec also has said that a U.S. trade case is in the works.

A trader said that he sees a distinct possibility of an anti-dumping suit being filed, although he cautioned that such talk has been ongoing for the past couple of years. “There’s always somebody else that tells somebody that it’s imminent. It can only be imminent for a week or two, but not two years,” he said. He suggested that mills could be waiting for first-quarter earnings to be posted “that might show their earnings going down or whatever they need to prove.”

Some sources said that a dumping suit would be one way to address a growing oversupply of energy tubulars in the U.S. market.

“More capacity is coming onstream both in the U.S. and overseas. The only salvation would be a dumping suit,” the trader said.

Sources said the possible trade case also could include other Asian or even East European nations. Vietnam was the second-largest supplier of welded OCTG to the U.S. market in 2012 at 220,200 tons, nearly quadruple the 56,700 tons shipped the previous year, Commerce figures show.

But Korean producers of energy tubulars deny they are dumping their products in the U.S. market. “Our price is very ... fair. We’re not dumping. We think that we can defend ourself ... about the price,” a source at one Korean tube and pipe manufacturer told AMM.

“There always have been rumors (of a trade case). The main reason is that Korean shipments to the United States are very (large) over other countries. Korean manufacturers generally export over the cost price so we don’t think that they’re dumping in the United States,” a market source said, adding that Korean manufacturers were “ready for a possible anti-dumping case.”

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