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OCTG ruling is credit negative for tube producers

Keywords: Tags  steel, oil country tubular goods, OCTG, tradew case, credit ratings, Moody's Investors Service, Michael Corelli, impact JMC Steel Group

NEW YORK — The U.S. Commerce Department’s preliminary determination not to impose anti-dumping duties on imports of South Korean oil country tubular goods (OCTG) has stirred a reaction from at least one credit rating agency: Moody’s Investors Service Inc. views the decision as a credit negative for OCTG producers and distributors.

"Since the preliminary ruling (, Feb. 18) levies only minor duties on most of the countries cited in the case, most will continue exporting at similar levels and pay the duties and the ruling will encourage South Korea to ramp up exports," Michael Corelli, vice president and senior analyst for the New York-based agency, said in a Feb. 24 report. "Any such rise in imports would reduce U.S. prices and weaken demand further."

Corelli said that Chicago-based JMC Steel Group Inc. "will be most affected by lower prices, and must now evaluate significant cost reductions or capacity curtailment initiatives in the OCTG division or continue facing significant operating losses." JMC acquired its EnergeX Tube division, which produces carbon and alloy welded OCTG products, for $146 million in March 2012, when tubular goods prices were at their peak, he added.

"The unit has generated losses ever since," Corelli said, although JMC has reduced head count and made other efficiency improvements at the division and had hoped that a favorable ruling would reduce its losses later in 2014. "Now JMC will have to reduce costs even more, curtail capacity or hope for a material improvement in nonresidential construction activity to achieve better operating results," he said.

Other companies cited in the Moody’s report include Edgen Group Inc., a Baton Rouge, La.-based tubular goods distributor, Mississauga, Ontario-based Russel Metals Inc. and McJunkin Red Man Corp., Houston.

"The U.S. decision not to penalize South Korea for dumping also hurts Edgen Group ... since the product line accounts for about half of its sales and 60 percent of its segment-level operating income," Corelli said. However, a $100-per-ton decline in OCTG prices would reduce Edgen’s earnings before interest, taxes, depreciation and amortization (Ebitda) only by about $4 million, he said. "And Edgen could increase its imports to protect its market position."

Russel Metals, which generates about $700 million in annual sales from OCTG, also will see its Ebitda decline by about $4 million with a $100-per-ton decrease, Corelli said.

"Meanwhile, McJunkin Red Man ... has reduced its OCTG exposure to just 8- to 9-percent of its sales, so a $100-per-ton price decline would reduce its Ebitda by only approximately $1 million," he said.

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