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Steel tube and pipe dreams

Keywords: Tags  steel, oil country tubular goods, OCTG, merger, acquisition, Gary Ittner, MRC Global, Robert Bauer LB Foster

Demand from the energy sector continues to grow and metal companies are seeking ways to capitalize on market share opportunities. With foreign products filling some of that demand, U.S. producers are looking for new approaches to maximize their portion of potential business.

Last year was good for oil country tubular goods (OCTG) and line pipe consumption domestically. “Originally we were anticipating somewhere in the range of 5.5 million tons, but the latest number indicates over 6 million tons of OCTG consumption in the United States in 2013,” Gary A. Ittner, executive vice president of supply chain management at Houston-based MRC Global Inc., said. “The line pipe market was also very good in 2013, though there was a lot of pressure on the price side with imports. In terms of tons, 2013 was a good year.”

MRC expects the trend toward more-complex energy tubular goods to continue this year in light of the evolution of drilling technologies in domestic shale plays. “There are certain complex environments our customers are running into that require more-sophisticated services and products, for example sour gas services among other things. These environments continue to evolve our customers’ demands from a metallurgy side, heat-treat side, connection side, etc. We’re going to continue to see that,” Ittner said.

Meanwhile, “rig efficiency gains, especially in shale basins, contributed to putting more tons in the ground in 2013, and we expect this trend will continue in 2014,” he said.

Former steel financier and ArcelorMittal SA director Wilbur Ross is banking on the shale gas revolution to drive a North American manufacturing renaissance. “I’m a big believer in shale gas and it’s cousin, tight oil,” the chairman and chief executive officer of New York-based investment firm Wilbur Ross & Co. LLC said earlier this year.

“We remain bullish on the oil and gas markets, particularly the segment serving shale production, which is driving demand for coated pipe and products,” Robert P. Bauer, president and chief executive officer of L.B. Foster Co., said during the Pittsburgh-based company’s earnings call in November.

Still, the OCTG market could become crowded if all planned expansion projects come online and anti-dumping duties on imports from nine countries change little in the U.S. Commerce Department’s final determination scheduled for July, mill executives said at AMM’s seventh annual Steel Tube and Pipe Conference in Houston.

“If the existing domestic players are still producing what they were producing in 2013 and the duties only affect 24 percent of imports, or 300,000 tons, by ... the third quarter of this year the new entrants are going to be taking over that 300,000 tons quite easily,” said Joel Johnson, president and chief executive officer of OMK Tube Inc., the Houston-based domestic division of Moscow-based pipe producer United Metallurgical Co. “After that, the production that’s coming onboard, I don’t see demand coming up to take up that new production and one of two things is going to happen: the new projects are going to be delayed or the capacity that’s already here (will be retired).”

One response to these issues has been merger-and-acquisition activity in the steel tube and pipe sector, but it is unknown whether this will be an effective means of solving market challenges.

“We view M&A activity remaining broader and strategic in nature for most large consolidators, though the energy sector could be viewed as a strategic sector—specifically in (steel tube and pipe),” said Josh P. Cole, principal of manufacturing and distribution performance at Chicago-based Crowe Horwath LLP.

Other analysts see different factors pushing potential steel tube and pipe growth.

“There can be some new deals as a result of this trend, but we don’t think they will be as significant a factor in contributing to deals as other drivers of M&A activity, such as the direction of commodity prices and economic growth,” said Michael Portnoy, an industry analyst with London-based PricewaterhouseCoopers LLP’s industrial products practice.

“Our experience shows many of the energy opportunities are regional in nature, and the focus/benefits associated with the sector are likely dependent on both markets served as well as geography,” Andrew Callaghan, a manager in Crowe Horwath LLP’s performance services group, said. “Acquisition could be a means to invest, but many metal consolidators are taking a broader strategic view of M&A investments ... i.e., longer term in nature and synergistic to their company’s overall vision.”

Anticipated growth in the global energy market was a major factor behind energy tubular distributor MRC Global’s recent acquisition of two international companies, Ittner said. “(We want) to position ourselves so that we can better service customers that are looking for more global solutions. We anticipate that roughly 75 percent of (capital expenditure) dollars (on oil and gas exploration and production) are going to be spent outside of North America, (and) we’re looking to position ourselves to participate in more of that activity.”

In addition to the acquisition of Norwegian pipe, valve and fittings (PVF) distributor Stream AS and English pipe, flange and fittings distributor Flangefitt Stainless Ltd., MRC also made the strategic decision last year to rein in its OCTG sales, particularly in the volatile spot market, and focus on large supply contracts tied in with other products. “The margin and the risk associated with that business is such that while we wanted to continue to be a player, we wanted to be more strategic in picking our spots and our customers,” Ittner said. However, “OCTG is still a nice piece of business for us.”

The domestic shale gas boom has international companies increasingly looking to gain a foothold in the United States, explaining the recent acquisitions of large domestic energy tubular distributors Sooner Inc., Houston, and Baton Rouge, La.-based Edgen Group Inc. by Japanese firms, Ittner said. “(Foreign firms) see their route to the U.S. market through the acquisition of companies like Sooner and Edgen and their associations.” He noted that the U.S. market accounts for more than 40 percent of global OCTG consumption in the exploration and production industry.

In addition to international competitors, MRC is keeping a wary eye on the proposed spin-off of Houston-based National Oilwell Varco Inc.’s distribution business. “They offer a full package of line pipe and PVF products and services. We’re keenly aware of them and their capabilities,” Ittner said.

On the energy tubular supply side, MRC is unperturbed by the impact a pending OCTG trade case against nine countries could have on its supply base. “Here in the U.S. and North America we feel good about the availability of supply,” Ittner said. “Regardless of what happens with the trade suit, we anticipate supply will be adequate.”

In another recent consolidation move, Northwest Pipe Co. sold its OCTG assets in Bossier City, La., and Houston to Centric Pipe LLC, an affiliate of energy tubulars trading firm SB International Inc., for $42.7 million. SB International, led by president and chief executive officer Satish Gupta, has more than 30 years of steel distribution experience and started distributing OCTG and line pipe in 2004.

Market sources anticipate little immediate impact from the sale as the two assets are said to be relatively small in terms of production volume. However, some were surprised that a trading company was making a jump into production.

“We think there is going to be huge growth in the energy sector and this complements our supply sources from overseas and gives ease to our customers if there is any change in the trade case,” Gupta said, although he noted that impact from the case had been “almost negligible” following the preliminary decisions in mid-February.

The acquisition is expected to significantly broaden the Dallas-based company’s customer base. “It opens up a whole new segment,” said Michael Fielding, SB International vice president of strategy and planning. “There are some customers who only want domestic.”

Other firms have turned to expansion to better meet energy sector demand, despite the long-term investment of time and money. “The options include greenfield plants, as well as expansion of existing capacity, to meet demand for pipe for wells as well as increased demand from refineries,” Portnoy said. “The return on these projects depends upon factors such as the level of oil and gas production, which will be influenced by the price of the underlying commodities.”

As just one example, Cargill Inc. plans to build its eighth U.S. steel processing center to help meet increasing demand in the manufacturing and shale oil industries. Construction of a 60,000-square-foot processing and distribution facility in Windsor, Colo., is scheduled to begin soon, a spokesman for the Minneapolis-based company said.

Cargill also has a steel depot in an 18,000-square-foot leased facility in Fort Collins, Colo., it retrofitted in 2011, but rapid growth in manufacturing needs, as well as the recent development of regional shale oil, has prompted the need for additional steel. “By locating in ... the heart of one of the largest oil shale formations in the U.S., Cargill can better serve and bring more value to our customers,” Cargill Steel Service Center president Mike Taylor said.

And although Northwest Pipe sold some of its assets, it still intends to use expansion to continue its goal of increasing market presence. “The (sale) announcement in no way affects the company’s commitment to, and continued investment in, our Atchison, Kan., line pipe facility, which is on schedule to complete a major expansion project,” Northwest Pipe president and chief executive officer Scott Montross said.

After M&As and expansions, operational improvements—implementing new processes or technologies—are another strategy to meet demand. “Technology and processes can include the substitution of natural gas for coking coal, as well as the expansion of direct-reduced iron plants, in order to save money by using affordable natural gas as an input,” Portnoy said.

But ultimately there is a risk associated with any attempts to boost production and capture greater market share. “While acquisitions can make sense to increase exposure to this end market, we have already seen a lot of new investment in capacity by both foreign and domestic steelmakers as a way to satisfy this demand, to the point of potential disruption or near-term overcapacity,” Portnoy said.

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