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Challenging times for US energy pipe

Mar 05, 2020 | 08:00 PM |


The impacts of global economic uncertainties on oil & gas prices together with structural changes in the US tube & pipe industry are creating challenging times for OCTG and line pipe markets, reports Myra Pinkham

It is expected that 2020 will be a challenging year for the United States energy pipe market, particularly for oil country tubular goods (OCTG) and small-diameter line pipe. Even the demand for large-diameter line pipe, which has been resilient given the long lead times for pipeline projects, is expected to start waning later this year into next year with fewer new projects being announced.
 
This comes after 2019 had been a worst year than had been expected, with both drilling rates and pricing continuing to fall throughout the year, Kim Leppold, Fastmarkets MB’s principal tube and pipe analyst, pointed out, noting that while it had been forecast to slowdown a bit, “We didn’t think that weakness would continue as long as it did. We thought that it would level off midyear, but it continued to decline throughout the year.”

Christopher Plummer, managing director of Metal Strategies Inc., observed that the rate of decline of apparent consumption accelerated sequentially with every passing month, especially for OCTG. He said that US OCTG apparent consumption fell by 8.1% last year after two very strong recovery years – a 43.7% increase in 2017 and a 10.1% increase on 2018.

Given that in December US OCTG apparent consumption was down by 25.7% year on year, including a 29.2% decline in domestic shipments and a 17.1% decline in US OCTG imports, he forecast that OCTG apparent consumption will decline at a steeper rate in 2020 – about 20%, including a 23% decline in domestic mill shipments and a 15% decline in OCTG imports.

This, Plummer pointed out, is a reversal of what occurred for most of 2019. “Last year one of the few bright spots for the US OCTG producers was that the import decline had been much more pronounced – falling 16.2% – than that for domestic shipments which were just down 1.2% from 2018 levels,” he noted.

Leppold forecasts that US OCTG consumption will inch up to 4.9 million metric tons this year from 4.7 million tonnes last year, and to possibly slightly over 5 million tonnes in 2021. “I don’t, however, expect consumption to return to 6 million tonnes (its recent peak achieved in 2017) until sometime after 2025,” she said.

Drill rig counts
Josh Croix, chief commercial officer for Borusan Mannesmann Pipe US Inc., observed that domestic OCTG mill lead times have recently extended slightly to about three to four months even though, as of late last year, average OCTG pipe mill capacity utilization was just above 50%. “But we would need to see an increase in the rig count to keep lead times at these levels,” he said.

Tyler Kenyon, a metals and mining analyst with Cowen & Co., pointed out that the average US drill rig count was down close to 10% in 2019. “Because of that, we are currently seeing a rig count – at 791 rigs as of mid-February, down from 1,047 rigs a year earlier – that would indicate about a 15% decline from the average 2019 levels, which will likely continue to put pressure upon the energy pipe supply chain – distributors and mills alike.”

While the US rig count seemed to bottom out late in January, Croix said that he does not expect it to increase sharply anytime soon, given the scrutiny that energy exploration and production (E&P) and energy service companies are under to operate more efficiently.
Leppold said that she thinks that the rig count will most likely fluctuate somewhere between the high 700s and about 850 rigs depending upon energy prices and the earnings of the E&P companies, but she does not expect that there will be a big change in demand – especially on the upside – in 2020.

“There are also some external factors that could come into play,” Croix said, noting that fear about the impact of the coronavirus caused West Texas Intermediate (WTI) crude oil prices to fall to just under $50 per barrel in early February, before coming back to $52/barrel as of mid-February.

Paul Vivian, a partner at Preston Pipe, agreed, stating that the future impact of the coronavirus upon the market remains a wildcard, given that at this point it is still unknown how long it will continue to be a threat and what the economic impact will ultimately be. “It could result in a 20-25% decline in crude oil demand just in China over the next several months, which is a big deal,” he said, adding that – given the potential for the virus to spread elsewhere in the world and for it to have a further impact upon energy prices, including WTI oil prices – even just the uncertainty is having an impact upon US energy prices and, more generally, the US energy pipe sector.

Structural changes

While energy prices continue to be important, some industry observers argue that they are not as much of an important indicator of OCTG demand as they had been in the past. Kenyon pointed out that WTI oil prices have actually been more or less range-bound between the low-$50s and mid-$60s per barrel over the past year. This, Leppold said, is slightly above what is considered to be the profitability breakeven price of $40 to $50 per barrel.

But the biggest impact is said to be the structural change in the exploration and production (E&P) company, or drilling company, investment strategies. “The days of E&Ps pumping more and more oil at a lower profit are now over with Wall Street investors falling out of love with the energy sector, questioning why they should invest there if they can get better returns elsewhere,” Leppold explained, adding that because of this everyone in the energy sector has had to tighten their belts.

The impact, however, has not been universal. “Because of this a lot of wildcat companies are exiting the market and large companies, such as Chevron and ExxonMobil, taking bigger stakes in shale plays, especially the Permian Basin, as they are more financially sound,” Plummer pointed out.

With the recent challenging business conditions, there has been a concerted effort to drawdown OCTG inventories on a monthly basis ever since mid-2018. Despite this, Kenyon estimated that distributors are still holding somewhere between 4.0 and 4.5 months of supply, which is still a little bit on the high side versus their target of three to four months of supply on hand. It is, however, expected that they will be closer to being in balance soon, possibly by sometime in the first half. Croix said that pipe mills have already seen a slight pick-up in demand because of this destocking.

Capacity utilization

Meanwhile, Leppold pointed out that generally US OCTG capacity utilization has been declining, although that varies mill by mill. Croix said that some older facilities, or mills that were not operated very efficiently, have been stepping down production, or are being shut down or idled until better pricing occurs.

The impact, however, has been moderated to some extent with some additional capacity with the restart of the former US Steel Lone Star welded OCTG facility in Bellville, Texas, and the ramping up of a new mill in Houston by SeAH Steel USA.

There has also been some industry consolidation – most notably with Tenaris acquiring the Ipsco US assets from OAO TMK, which has resulted in the shuttering of some welded OCTG capacity there. Leppold said that the “jewel in Ipsco’s crown” was its steel and seamless pipe mills in western Pennsylvania, which are giving Tenaris a bigger presence in the 

Northeast, adding that the acquisition has also given the company a domestic round billet source for its Bay City, Texas, seamless pipe mill. However, Tenaris has suspended operations at Ipsco’s welded pipe mill in Blytheville, Arkansas, and announced that it is laying off workers at its Wilder, Kentucky, facility.

It is possible that Tenaris’ acquisition will change the landscape of the OCTG market as Ipsco is gradually integrated, Leppold said, given that 75% of Tenaris’ pre-acquisition North American production had gone through their rig direct program and it is assumed that at some point the Ipsco tonnage could also be shifted away from the distributor market.

Overall, Vivian said that its Ipsco acquisition will make Tenaris more of a powerhouse in the US OCTG market, giving the company more leverage in terms of price, which would be positive for the overall market. He says that this, however, is not an indication of further consolidation in the domestic OCTG market, since the Ipsco assets were for sale for a while and other pipe mills has shown little interest in buying them.

Prices bottom out

After declining for the past 18 months, it appears that prices of both OCTG and line pipe have now bottomed out and are starting to move up. “But I’m not bullish that there will be a big rebound,” Leppold said.

There have, however, been a few moves by domestic mills to increase OCTG prices – a $50 per short ton price hike that went into effect January 1, which was followed in the beginning of February with Vallourec USA floating a $75 per ton hike with a March 1 effective date that as of mid-February had not yet been followed.

Croix said that since prices are coming off a pretty hard bottom, the initial hike was even more successful than usual. He also said there is a need, especially by less efficient mills, to pass along raw material price increases, especially HRC prices for welded mills.
 
HRC prices, however, are projected to flatten out this year, or even decline slightly, with Kenyon forecasting that they will average about $590 per ton for the year, going from about $600 per ton early in 2020 to the mid-$500s per ton later in the year. As of February 21, they had already eased to $585 per ton from $595 per ton at the beginning of February.

“It will be the survival of the fittest this year,” Croix said, with the more efficient US OCTG mills that can offer more grades and connections being the ones that survive.

The story for small-diameter line pipe – under 16-inch diameter pipe that is largely used for gathering lines as well as connecting pipelines to new construction – is similar to that for OCTG, Vivian said, observing that small-diameter linepipe demand was down by about 15% last year.

There are conflicting views, however, about the direction it will take this year. While Leppold said that a rising completion rate for drilled but uncompleted wells (DUCs) will spur additional demand for gathering lines, Croix observed that even with the recent destocking there has still been a small- diameter line pipe inventory overhang thus far this year, and more than for OCTG. That has resulted in some mills changing to a “roll to order” policy. 

Such pipe, however, only accounts for about a third of all line pipe volume, Plummer estimated. He said that US apparent consumption of large-diameter line pipe increased by 10.6% last year on top of the 16.0% pick-up in 2018 after the market bottomed out in 2017.

Linepipe demand

Croix said that he believes that 2019 was the end of a big wave of large-diameter line pipe inquiries and new project announcements. “Much of that pipe has mostly been purchased for pipelines under construction,” he said, “But this year inquiry levels have come down and we are predicting a lull in activity through 2022.” He said that some pipelines bringing natural gas to liquefied natural gas (LNG) export facilities will continue to be built over the next few years, but at a slower pace than in the past year or so. Also, much of the buildout of cross-border pipelines from the US to Mexico has already been completed.

Large-diameter line pipe demand, however, should continue to hold up at least through the first half of this year, another US line pipe executive predicted. “But current commodity prices don’t support much growth,” adding that this is especially the case for natural gas pipelines. “Oil prices aren’t terrible but natural gas prices are wretched, the lowest they have been in many years,” at $1.81 per MMBtu as of mid-February.

“While there is still some need for more pipeline infrastructure – even in the Permian Basin, but especially in the Northeast,” Leppold said that such project work is moving very slowly given concerns about the presidential election and how permitting could be affected. Also, while President Trump has promised the fast tracking of pipeline projects, that has not gone as quickly as expected, given that a lot of it is in state and local control, not federal control. “He can’t just do this through executive orders,” she said.

Beyond that, Vivian said that the biggest hold up, especially for certain pipeline projects, such as the Keystone XL pipeline, is due to community resistance and protest. He noted that while it generally takes a long time – about 15 to 36 months – to bring a new project on-stream, Keystone XL has been going through the approval process for about eight years.

At this point companies are now fulfilling pipeline projects that are already on the books, much of which was the result of constrained takeaway capacity in the Permian basin, but Vivian said it is now forecast that that the takeaway capacity there will be in excess within another year or so because of drilling cutbacks.

There also continues to be some potential for additional pipelines to bring natural gas to LNG export facilities, the pipe mill executive pointed out. But even that is expected to progress at a slower pace over the next few years, Leppold said, as the global LNG market is now a bit oversupplied and there has been a bottleneck with the building of LNG import facilities to re-gasify the LNG overseas.

On pricing, Croix said that while there have been some small-diameter line pipe price increases, they have not stuck as well as they have for OCTG. Large-diameter line pipe prices have been more resilient through the most recent wave of activity, given that the great majority of large-diameter line pipe – 95-98% by some estimations – is project-, and therefore contract-, driven.

Vivian said that overall 2020 will be a mediocre, but still acceptable, year for the US energy pipe market overall, although he said that it remains difficult to forecast given that it will be driven by several outside factors. That not only includes what happens with the US and global economies and the negotiation of future trade agreements, but what impact the coronavirus will have upon commodity prices and pipe demand.

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