Year-over-year volume declines in the steel pipe market during 2019 are a function of last year's Section 232 tariffs, which caused buyers to bloat their inventories in response to supply uncertainty, according to the top executive at Synalloy.
Second-quarter sales of seamless carbon pipe fell 20.2% compared with the second quarter of 2018, Synalloy said in its quarterly earnings release on Tuesday August 13. The backlog at the company's steel tanks subsidiary dropped by 61.1% over that period, partially because of the increased throughput during last year's quarter.
"The market for welded stainless steel pipe has been especially challenging over the past several months," president and chief executive officer Craig Bram said in the press release. "The combination of heavy buying in the first half of 2018 by distribution center in advance of the Section 232 tariffs and consolidation within the supply chain has resulted in excessive inventories and associated destocking."
Metal Services Center Institute figures showed the total amount of North American shipments of welded stainless steel pipe in the first half of the year were 24% below shipment levels in the same period of 2018, Bram said.
"End-market demand should be growing in low single digits, so the decline in pounds shipped year over year speaks to the level of excess inventory created by the tariffs," Bram said.
Less frequent and smaller inventory buys of small-diameter items and commodity alloys in 2019 have resulted in "an aggressive pricing environment." Synalloy's CEO said. "We expect this trend to continue for the balance of the year."
Fastmarkets' price assessment for stainless steel 304 cold-rolled sheet fob mill US stood at $121 per hundredweight on Friday August 12, down from a multi-year high of $144 per cwt in mid-July 2018.
The slowdown in the US energy industry is also weighing down Synalloy's results, particularly in the Permian Basin of Texas and New Mexico (the most important region for oil and gas), Bram said on the Richmond, Virginia-based company's earnings conference call on Tuesday.
The number of active oil and gas rigs in the United States had declined to a total of 934 rigs as of Friday August 9, according to Baker Hughes. That's an 11.6% drop from one year earlier and a 19-month low.
"In response to the slowing activity, we have started to rationalize production and cost, and we will monitor this closely in the coming weeks," Bram said.
Output at a Synalloy heavy-wall line was interrupted by an equipment breakdown, Bram said during the call. During the second quarter, a crew discovered that a hydraulic cylinder had cracked inside a heavy-wall press. The lead time for a new installation and commissioning will stretch to November.
Bram said nickel prices in July were 17% above the second-quarter average and "in the last several days, have climbed above $7 per lb" and "should hold at current levels." He believes nickel faces a long-term upward price trend.
"Looking out over the next three to five years, we do believe that there is a bias for nickel prices to increase due to strong demand for stainless steel and increasing demand for vehicle batteries," Bram said.