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Large-diameter linepipe market recovery slowed

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The global large-diameter linepipe market experienced a severe downturn in demand and outlook in the wake of the global Covid-19 pandemic as a result of the immediate cuts in energy demand as well as rising questions concerning the long-term viability of traditional oil and gas demand. While other steel product markets are in recovery, even in the energy-focused OCTG market, linepipe is still on the side-lines.

High costs are to blame for the immediate slow interest in tendering for large-tonnage projects. Indeed, large-diameter linepipe prices are holding at levels well above historical averages in most regions, mainly as a result of passing high steel costs on to buyers. Compared to 2020, linepipe prices are 50-60% higher than the 2020 average in the United States, 40-50% higher in the Middle East and Asia, and 20-30% in Europe. Meanwhile, steel costs are up by higher rates across the regions, resulting in tight margins for pipe producers.

The price pressure is expected to moderate in 2022 and beyond, but steel prices could provide a higher floor to downstream linepipe prices. In terms of market fundamentals, reduced demand from delayed or cancelled projects as well as competitive pressure between global producers will weigh on pipe prices and lead to potential margin squeeze throughout the forecast.

North America’s demand lull

North American pipeline operators continue to weigh their options on new projects. For the US and Canada, the planned projects were largely set to supply new planned LNG projects or alleviate energy bottlenecks. In the wake of the global pandemic, many planned projects were delayed or cancelled. In the US, Fastmarkets estimates that around 26 projects, totaling 15,000 km of pipeline and 3.8 Mt of pipe were halted, with most of them destined to be cancelled as the associated LNG projects were cancelled.

Given the long-term nature of pipeline projects and the current high steel prices, large-diameter linepipe consumption through 2022 is expected to be subdued below 2 Mt per year. From 2023 to 2026, consumption in North America is expected to remain above 2 Mt per year, driven by natural gas infrastructure needs for supply to LNG facilities, power generation and for US exports to Mexico.

In the US and Canada, development of hydrogen and carbon capture infrastructure, which would affect linepipe demand, is beginning to take shape. In June 2021, Equinor and US Steel partnered to investigate hydrogen and carbon capture and storage around the steelmaker’s Northeast and Midwest operations. Canada, Pembina and TC Energy are developing a carbon capture and sequestration system in Alberta. The system will utilize existing and new transportation and storage capacity for various industries in the province.

South America poised for growth

South America holds large energy reserves, particularly in Venezuela, but development has been slowed by political upheaval and more recently the Covid-19 pandemic. Once again, investment activity is picking up, especially in Brazil, Argentina, Colombia and Guyana, which will boost infrastructure development.

In Argentina, for example, the government is developing an energy plan to eliminate all LNG imports, replacing that supply with domestically produced natural gas. With that initiative, the plan aims to improve transport capacity from the producing basins to the consumption centers and build connections with neighboring countries. They also plan to convert all electricity generation to natural gas. Initial upgrades will be completed within the next two years, but the bulk of the exploration, development and infrastructure work will take place beyond the five-year time horizon. Moreover, resurging Covid-19 numbers and changes in political leadership could further alter these goals.
For South America, we forecast a slight increase in large-diameter linepipe consumption in 2021 over 2020, but then a much stronger recovery starting in 2022. The peak year in the coming five- year forecast will be 2023, and then a modest drop off in 2024-2026.

ME and African demand

Middle Eastern and African large-diameter linepipe consumption has not yet recovered from the pandemic this year, but projects are lining up and a jump in demand is expected for 2022. Fastmarkets’ analysts forecast 2021 apparent consumption at 2.3 Mt, up from 2.1 Mt last year, but still well below the 2017-19 average of 3 Mt. Projects in the region have been postponed a number of times as Middle Eastern National Oil Companies (NOCs), by far the largest buyers within the two regions, were trying to manage cash flow amid reduced global oil demand, as well as to time new production with expected recoveries in hydrocarbon demand. High pipe prices and long lead times for substrate also did not help.
However, we understand that NOCs are now closing in on a number of projects which will require large amounts of pipe. Qatar has already awarded tenders for its North Field projects this year, with significant tonnage expected to be delivered in 2022. Other projects include a large onshore network extension in the UAE, and the Marjan and Zuluf field developments in Saudi Arabia. Further delays are still possible, but overall apparent consumption is forecast to reach 2.9 Mt next year and to increase further in the coming years.

Europe loses appetite

Demand in Europe has in recent years been driven by EU-led plans to improve cross-border gas connections to ensure that national gas grids are resilient and sources of supply are diversified, also with a view to replacing coal with gas in order to reduce carbon dioxide emissions. This push, however, is coming to an end amid calls for a quicker transition away from fossil fuels. New regulations proposed by the European Commission would prevent pipelines from both receiving funding and benefiting from expedited approval procedures reserved to “projects of common interest”. While negotiations are still ongoing and some exceptions to the general rule are likely to be allowed, this part of a broader change of attitude is going to get in the way of linepipe demand in the region in the future.

There is still some interest in pipeline construction. Poland, for example, will remain a large buyer of linepipe as it works to build a resilient domestic gas grid in a shift from Russian supply in order to reduce coal consumption. Cyprus is eager to see pipelines being built to monetize its large untapped gas resources. Cross-border connections in the Balkans need improving and this will be addressed in the coming years, with or without EU support. We expect apparent consumption to slowly increase in the medium term after the low point of 870 kt forecast for 2021, but it will remain well below the 1.4 Mt of 2017-19.

CIS poised for recovery

CIS demand was severely hit by the pandemic, and high steel prices also contributed to purchase delays in 2021. Apparent consumption is expected to be 1.8 Mt this year, down from 2.2 Mt in 2017-19. Still, the region is expected to remain a reliable source of large-diameter pipe demand over the long term. Apparent consumption is forecast to increase by an average of 8% a year in 2021-2026, comfortably moving back to pre-pandemic levels. Russia is by far the largest purchaser in the region, and it must be noted that linepipe demand is for the most part supplied by national mills.

China is bullish

Chinese large-diameter linepipe demand in 2020 displayed resilience and even growth, compared with much of the rest of the world. Last year, as the pandemic and economic recovery picked up speed, the Chinese government released large-scale infrastructure plans to stimulate growth. As a result, China's apparent consumption for large-diameter linepipe jumped 6.6% year-on-year.

Meanwhile, steel, and more specifically pipe producers’ focus, shifted to supplying the domestic market over exports as a result of increased demand at home as well as the cancellation of the export rebates in the first half of 2021. Although global demand is recovering and poised to strengthen in 2022, the government's attitude of discouraging exports hidden behind the series of export policy initiatives implies that the export volume of next years will be limited.
PipeChina, established in September 2020, now controls the existing pipeline infrastructure formerly held by CNPC, Sinopec as well as large provinces, making it the main tender issuer for welded pipe in China. The agency plans to build the framework of pipelines called ‘Five Horizontal and Five Vertical Pipeline Network’, of which three-fifths has been finished.

For Chinese pipe producers, seaborne wind power, expansion of chemical products refineries and future pipeline plans will be the major consumers of welded linepipe during the 14th Five-year period. The length of new oil and gas pipelines will reach 25,000 km during next five years, which supports Fastmarkets' view that China’s apparent consumption will post annual growth of 2.3% through 2026 from 2020.

Rest of Asia to recover

With the support of stimulus programs in 2020 as a result of the pandemic, linepipe apparent consumption in India, Japan and Australia did not drop as far as in other parts of the world. Additionally, exports fell faster than production, boosting apparent consumption but also potentially inventories.

With the reoccurrence of the virus in many countries in the region in 2021, their further recovery has been delayed. Increased costs of raw materials, steel substrate and freight have further affected pipe-producers’ prospects. Moreover, international barriers to trade have been further implemented from US and other destination countries, putting pressure on exports compared to historical levels. Japan continues to concentrate on the domestic market, even after the completion of the Olympics, while India looks to maintain export price competitiveness when domestic pipe demand is limited.
For the longer-term, India, Pakistan and other countries state their willingness to build more gas pipelines and attract more foreign energy investment in next 8-10 years for rising energy consumption, while Japan and Australia now transfer their focus on production and pipeline construction of clean energy and shale gas.

Therefore, considering the current pandemic situation and the energy market outlook, Fastmarkets expects that large-diameter ERW, HSAW and LSAW consumption in this region would gradually move up through 2026, with LSAW posting the strongest annual growth of 4.8% from 2020 levels in the region.

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