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US energy pipe market outlook


Multiple market drivers and uncertainties are impacting the US energy pipe markets. Myra Pinkham summarises their overall direction

The US energy pipe market is generally expected to have a better year, but it continues to be a tale of two markets. While both oil country tubular goods (OCTG) and small-diameter line pipe continue to have the greatest momentum – building on their dramatic turnaround last year – the large-diameter line pipe market, which continued to struggle last year, has just started to see very modest early signs of recovery.

Not only have volatile energy prices and supply bred uncertainty about energy pipe demand, but the future impact of imported pipe on both OCTG and line pipe remains largely unknown at this point. At the time of writing, decisions about the actions that will follow from the steel Section 232 investigation into the impact of imports upon US national security are awaited. While President Donald Trump has not yet made a final decision, in mid-February US Commerce Secretary Wilbur Ross said during a press conference that he, in his report, suggested the imposition of massive across-the-board blanket or targeted tariffs, and/or quotas.

Ross suggested three potential across-the-board measures – a global 24%-plus tariff on steel imports from all countries; a more targeted, 53%-plus tariff from some countries, coupled with a quota for all countries equaling their 2017 exports to the US; or a quota on imports from all countries equaling 63% of their 2017 steel exports. Trump must decide by April 11.

“There continues to be a lot of speculation about which countries will be included in the Section 232,” Kim Leppold, senior analyst for Metal Bulletin Research’s tube and pipe group, points out. A decision about South Korea will be particularly sensitive, given continuing concerns about North Korea’s intentions.

Leppold notes that when it comes to both the countries and products that could be included, there is a delicate balance to be reached: “The administration can’t just swing with a bat. That is why they are walking very carefully.”

Trade cases
While the impact of the Section 232 upon both energy pipe and other steel products continues to be uncertain, Luca Zanotti, Tenaris’ vice-president-USA, says that there have already been some important developments in trade cases. For example, last April, in its first revision of the OCTG antidumping case against South Korea, the US Department of Commerce raised its tariffs. Also, as part of a second administrative review, Commerce preliminarily increased antidumping duties on South Korean OCTG imports to 6.66-58.68%. The final decision on the administrative review on that case is not expected until mid-April. Zanotti calls the preliminary decision in this review, as well as the ongoing enforcement of existing trade laws, a positive indication of the Trump administration’s desire to take actions to ensure an environment of fair competition.

In mid-January the American Line Pipe Producers Association filed an antidumping trade case against the imports of welded carbon and alloy steel large-diameter line pipe (16 inches in diameter and larger) from six countries – China, Canada, South Korea, India, Turkey and Greece – alleging dumping margins of 16.18% to 132.63%. It is also seeking countervailing duties against China, India, South Korea and Turkey. The International Trade Commission is expected to decide sometime before March 5 whether these imports caused injury to the domestic line pipe market.

Speculation about a line pipe trade case escalated last year after it had been reported that October line pipe imports had quadrupled from a year earlier. As of January 2018, total line pipe imports (both large- and small-diameter imports) were up 118.3% year-on-year, according to the latest Commerce Department import license data.

“The line pipe producers had nothing to lose in filing this trade case, given that it would be another three to five months if they waited for the Section 232 decision. They wanted to get out there and deal with it,” Leppold says, predicting that they are likely to be successful for at least some of the countries named, particularly China, but will have a harder time against some others – especially Canada.

Availability concerns
Some distributors voiced concerns about what impact these trade cases could have upon pipe availability. One mill also notes that it is uncertain what they will mean to some foreign-owned companies that both produce pipe in the US and import product from their parent companies.

“The US OCTG market was a whole lot stronger last year than it was in 2016, helped up by higher energy prices,” Leppold notes, with apparent demand more than doubling to 5.95 million tonnes from 2.53 million tonnes a year earlier. And while the growth has largely stabilized after it had been “going like gangbusters” in the first half of 2017, she says as long as West Texas Intermediate (WTI) crude oil prices remain at $50-$65/barrel, as is expected, OCTG demand should be up slightly from 2017 levels.

This has come on the back of a big jump in US drilling activity. While there has been some volatility, generally the number of drill rigs, as reported by oil services company Baker Hughes, has been seeing a healthy increase – rising to 975 rigs as of mid-February, up from 751 rigs a year earlier and a trough of 407 rigs in May 2016. Just in 2017, US drilling activity jumped from about 660 rigs in January to about 930 rigs at the end of the year for an annual average of 880 rigs.

But despite this big gain, Kurt Minnich, president of Tulsa, Oklahoma-based Pipe Logix LLC, points out that US OCTG consumption remains about 30% lower than it had been in September 2014, when drilling activity peaked at 1,930 rigs. He says that while he believes that US drilling activity will continue to improve this year, it will not occur at the same pace as it did in 2017, possibly increasing by about 15% to an annual average of approximately 1,010 rigs.

Volatile prices
This comes as US energy prices – especially crude oil prices – have shown a lot of volatility in the past few months. And the US drilling story is all about oil, Mark Kays, senior vice president and head of OCTG for Sumitomo Corp of Americas, points out, given that over 80% of drilling in the US is for oil.

First, due to a combination of increased geopolitical risks and a tightening of supply on the back of cutbacks by OPEC nations, oil prices, which had already been recovering, jumped to three-year highs by mid-January with WTI prices crossing $65/barrel, up from approximately $60/barrel at the end of last year – a level that they returned to in early February.

Leppold says that it was expected that oil prices would fall. “But this correction was faster than the consensus expectation.” That was partly because of the dramatic US stock market decline, but mainly due to a rise in US shale oil production and inventories. “I believe that as long as oil prices are at least in the $50-60/barrel range (ideally $55/barrel or higher), that is in line with the expectations that the oil companies have for the year.

Even this level represents a considerable improvement from 2015-16 prices. Christopher Plummer, managing director of Metal Strategies Inc, West Chester, Pennsylvania, notes that, after peaking at $106/barrel in June 2014, oil prices bottomed out at $28/barrel in February 2016.

There has also been some recent volatility in natural gas prices, but they have generally remained too low to encourage additional drilling. Largely due to very cold wintry conditions, Nymex natural gas prices moved up to over $3.40/MMBtu late in January from $2.66/MMBtu a month earlier, but as the weather improved they came back down again, falling to $2.56/MMBtu by mid-February.

There is some speculation that, with more liquefied natural gas (LNG) export facilities coming online in the Gulf of Mexico, additional demand could firm up natural gas prices. Leppold observes that there has been some increased drilling in the Marcellus and Utica shale plays in the US Northeast. Nevertheless, Joe Druzak, president and chief executive officer of Kreher Steel Co. LLC, says that unless natural gas prices remain at greater than $3/MMBtu and stay there for a sustained period of time, it is unlikely that the flood gates for drilling for natural gas will open up.

It is also very unlikely that such recent moves by the Trump administration, including the opening for drilling in the Arctic National Wildlife Reserve (ANWR) as provided in the recently passed tax reform bill, or proposals to expand offshore drilling, or to shrink national parklands or monuments, will have much of an impact in the short term. “These are far-off prospects for an OCTG market that is battling the ‘here and now’ challenges,” Minnich says.

While much of the recent, and ongoing, OCTG demand recovery has been attributed to the improvement in oil prices, Plummer says that there are also other factors at play, including that the US has been a swing producer within the context of OPEC production cuts and that there are greater volumes of OCTG being used per well with the increased use of Pad drilling. He says that Pad sites now account for about 70% of US drilling.

Import impacts
Leppold says that, given the rapid recovery of the market last year, the fact that OCTG imports surged last June actually had a stabilizing effect, given how tight the market had become. Now, however, domestic OCTG supply is being stepped up. For example, in November Tenaris started normal operations of its 600,000 short tpy seamless OCTG and line pipe mill at its new Bay City, Texas, plant and plans to continue to ramp up production there. This, Zanotti says, complements its existing domestic welded pipe production capacity. Minnich notes that Tianjin Pipe Co. (TPCO) is also planning to bring online the second phase of its Corpus Christi, Texas, seamless mill later this year.

Despite this, OCTG imports remain necessary, Jimmy Marrow, Sumitomo Corp of Americas’ OCTG vice-president says, noting that while US mill shipments are expected to be about 2.6 million tons in 2018, domestic demand is expected to be more than double that. Minnich says the outcome of the Section 232 assessment as well as the possibility of other trade action could help determine how tight OCTG supply will be this year, as well as what occurs on the demand side of the equations, including energy prices and drilling activity.

Rising raw material costs have pushed both OCTG and line pipe prices up. In February several domestic mills raised OCTG prices by $100-$125/ton and line pipe prices by $50/ton. This comes with US hot-rolled coil reaching a six-year high of $740/ton early in February and steel plate also being on the rise, reaching $800/ton for the first time in more than three years.

In contrast, the large-diameter line pipe market been “rather dull”, owing to the number of pipeline projects still waiting approvals, Leppold observes. But small-diameter line pipe (24 inches or smaller) is generally used for oil and natural gas gathering after drilling and tends to move with the OCTG market. Plummer says that last year small-diameter line pipe consumption increased 31%, although much of that increase was met by imports, which increased by 61%. US shipments were only up by 3%.

Leppold says that already this year the line pipe market appears to be better than it had been last year, with both a pickup in project work and more tenders, especially for natural gas pipelines – helped by the need to transport natural gas to LNG export facilities, increased demand for natural gas in Mexico, and transportation of natural gas from the Northeast shale plays. “There is just a need to get more jobs under construction,” she says. But she also explains that in many cases the pipe for larger, planned pipelines have already been produced.

By: Myra Pinkham

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