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Global OCTG recovery

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For much of 2017, the headline story in the OCTG markets was the recovery of the US market, but how has the rest of the world faired and where are the global markets moving in 2018? James Ley, Metal Bulletin Research Tube & Pipe Group principal consultant, provides the answers

While the United States is the largest OCTG market in the world, accounting for 35% of global demand in 2017, there are three other OCTG markets of significant scale that consume more than 1.5 million tpy of OCTG each. China accounted for 25% of demand, followed by Russia at 15% and the Middle East at 9% (see chart).

Russian market grows
Although the US OCTG market was affected significantly by the decline in the oil price and drilling activity since October 2014, the performance of the Russian OCTG market took a completely different trajectory. The years 2016 and 2017 were boom ones for OCTG demand in Russia.  Indeed, with a 10% year-on-year growth in 2017, the Russian OCTG market has not seen any significant decline in the last few years. Demand for OCTG here had been fuelled by low inventories of casing and tubing at oil companies, coupled with an unstable rouble that meant oil companies would rapidly buy rather than plan long-term.

Into 2018, the Russian OCTG market’s growth is slowing, but it is still forecast to post a 2-3% increase this year as drilling remains strong.  The strength of the Russian market has largely been to the benefit of local producers who dominate the supply of OCTG into it: TMK and Chelpipe in the seamless market and increasingly OMK in the ERW markets. Imports, when they do enter, are coming from neighbouring CIS countries predominately, with China having little activity following dumping duties applied in recent years.

China continues recovery
Perhaps the most significant impact on prices in the global OCTG markets in the last year has not just been the recovery of the US market, but also improvements in the domestic Chinese market. China, like the USA, saw a sharp fall in OCTG demand. Indeed, the decline in the Chinese OCTG market actually happened at the start of 2014 – before the fall in the oil price (at the end of 2014) that caused much of the global correction. The anti-graft drive championed by President Xi Jinping snared a number of senior officials at CNPC, the country’s largest National Oil Company (NOC).

There was little movement in domestic tendering activity through 2015-16. With such massive domestic capacity for seamless pipe making, Chinese seamless OCTG exports continued to cause pricing issues for mills in many other regions in the world, including India, Russia and Europe, with a raft of dumping duties being introduced in recent years to mitigate this.

But since the second half of 2017, Metal Bulletin Research has noticed a turn-around in the domestic fortunes of the Chinese OCTG market itself. CNPC is back to tendering twice a year for OCTG requirements and has been joined by China National Offshore Oil Corporation (CNOOC), with Sinopec also expected to increase its tendering activity in 2018.  While the pick-up domestically is not enough to absorb all of the seamless OCTG capacity in China, it has certainly helped to bump up the utilisation rates of the leading Tier 1 mills in the country, such as TPCO, Baosteel and Hengyang. The result of this has been to tighten supply, which has been coupled with improvements in the domestic Chinese steel market and has helped to lift Chinese OCTG price offers into the international market, in quick acceleration since Q4 2017.

Middle East market stable
While not seeing quite such rapid growth, the fourth largest OCTG market in the world – the Middle East – has also performed strongly through the low oil price environment, as leading NOCs such as Saudi Aramco, Abu Dhabi National Oil Company (ADNOC) and Kuwait Oil Company (KOC) pushed ahead with extensive drilling programs as part of their countries’ long-term economic plans. Major tenders are expected in 2018, notably from the UAE, which will keep the Middle East markets in the global spotlight.

Another trend seen in the downturn in the market was that NOC-controlled drilling markets tended to perform better than International Oil Company (IOC) controlled markets. Mindful of their shareholders, IOCs were quick to pull in capital spending programs as their margins were hit. NOCs, on the other hand, in many regions appeared more robust and less likely to waiver off their long-term drilling plans.

An example of this was clearly illustrated in the Middle East. The Iraq market, one of the few IOC- controlled Middle East markets, actually saw OCTG demand tumble by some 50% year-on-year into 2016. But here now the market is quickly recovering – OCTG demand picked up sharply in 2017, although it was still down from the 2014 high. Nonetheless, this is a positive sign that leading IOCs are becoming more confident about the outlook.

Offshore markets start their recovery
Further positive signs that IOCs are becoming more confident of the long-term fundamentals can be seen on the offshore markets. For example, the UK offshore oil market has exploded into 2018 with planned drilling in the North Sea. Metal Bulletin Research understands that there is expectation now that 11 -13 offshore fields could be sanctioned in the UK in 2018 – that compares to just four new fields being given the go-ahead during the past two years.  These four fields accounted for around 123 million boe of reserves, with the potential 13 projects this year accounting for around 550 million boe.

Perhaps one of the most encouraging signs in the UK market, also adding to a more confident outlook for IOCs, is that the oil companies have managed to significantly decrease the break-even oil prices on the back of improved internal efficiencies coupled with reducing supply costs. For example, Shell, which has sanctioned the go-ahead for its first new project in the UK in six years, the Penguin field, have done so at a break-even cost of just $40/barrel, this would have been unheard of five years back in this part of the world.

Improving activity in offshore drilling in the UK sits alongside a strong Norwegian market, which has seen consistent stable demand from Statoil, with rising demand also coming from newer players here such as AkerBP. MBR is also hearing of an expected pick-up in tendering from some of the offshore Asian markets, such as Malaysia and Vietnam, later in the year, along with West Africa. 

While the outlook in terms of demand for OCTG globally appears strong, for the offshore markets to see a serious pick-up in activity there will need to be a prolonged period of decent oil prices, and volatility is still at play here in the market at the time of writing.
 
Current forecasts used by Metal Bulletin Research for oil prices suggest that Brent Crude will remain above $60/barrel for 2018 on average. This will no doubt help to sustain much of the global OCTG recovery if it is delivered. If the oil price was to move closer to $80/barrel, the bulk of offshore projects would be sanctioned to progress and development would likely take place in extremely challenging environments such as the Russian Arctic. The heady days of 2013-14 when oil prices were well over $100/barrel still seem some way off, but improved drilling efficiency with IOC/NOC does help to counterbalance this a little though.

By: James Ley


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