Forecasts and market analysis based on price assessments from Fastmarkets MB and Fastmarkets AMM

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March 2014 | Seamless Steel Tube & Pipe

Inventory overhang prevents OCTG price increases: Americas Market Analysis

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Market Outlook

US J/K55 casing pricesMBR downgraded its 2014 price forecast to account for sustained import competition as well as the inclusion of new OCTG capacity in North America. While we expect OCTG demand to climb in tandem with increased drilling rates over the coming years, as a result of rising energy consumption as well as expected LNG exports, the market is still dealing with an overhang of high distributor inventories that were built up in expectation of a successful filing. Estimated to be as high as five to six months on hand, much of this tonnage will need to be worked through the market before prices are able to climb. That said, with competitive material remaining on offer with no threat of duties, bringing the market into balance will be made more difficult and may take all year. ERW material will be especially under pressure during this time as the majority of imports as well as new capacity entering the market now is welded. Seamless OCTG pricing will likely struggle to register gains through much of the rest of the year, although there is some potential for slight fourth-quarter increases in relation to a decline in inventories and a buoyant scrap market. Stronger increases, however, are not expected until 2015.
OCTG prices continue to struggle...
Prices in the seamless OCTG market continue to struggle under the weight of competitive import offers and an overhang in inventories. MBR understands that domestic producers are having trouble maintaining a margin over imported tonnage of more than $100/ton. Imported API 5CT L80 casing is priced around $1,500-1,550/ton ex rack Houston, with P110 casing around $1,600/ton. With this information, combined with further information from industry sources, MBR has downgraded our pricing for domestic API 5 5CT P110 casing. As a result, the premium of P110 over the lower OCTG grades has narrowed from conventional price gaps. Domestic seamless API 5CT J/K55 casing is around $1,360/ton with P110 around $1,700/ton. inventory levels are high
Distributors and end users are holding ample material at the moment and have their choice of material to bring into the yards. MBR understands that tonnage was built up late last year in anticipation of high duties on imported material from the nine countries named in the trade filing. The inventories were meant to smooth supply as material without a duty would be procured in order to replace the tonnage under a duty. With the preliminary duties on the lion-share of imported pipe placed low, imports have continued to arrive and inventories have yet to be worked through the market and brought to more comfortable levels. We have been told that inventories at distributors are running over five months on hand. Market participants tell us that a comfortable level – in relation to prevailing shipments and demand – would be around four months on hand. A too short supply would be signaled at approaching three months on hand. We expect that it will take four to six months to work the excess through the market, if inventories do not make another surge.

A surge in either ERW or seamless OCTG will affect seamless OCTG pricing at this point. Indeed, MBR has been told that seamless API material is having trouble distinguishing itself from ERW API OCTG in sales to many end-users which is also dragging down the price for seamless tonnage. When the availability of ERW material is brought into the fray of the API market, seamless prices struggle further to maintain footing. For now, the premium of seamless over ERW is just around $50/ton. With the narrow gap between ERW and seamless, it would be expected that seamless, with a relatively cheaper price, would gain sales, but it seems that in the API grades for onshore drilling in the USA, seamless and ERW compete on nearly an equal footing.

US imports of seamless casing and tubing (‘000 tonnes)

US imports of seamless OCTG under investigation

No help from trade filing yet
Delegates at the 7th Annual AMM Tube and Pipe Conference in Houston in early March expressed disappointment at the February preliminary duty determination on imported OCTG from nine countries as the results did not come in favor of US producers. The US Department of Commerce International Trade Administration (US ITA) found that imports from South Korea – the country with the highest import share – were not sold below the cost of steel and, therefore, received no duties in the preliminary duty determination. The following are the preliminary duties for the nine countries investigated: India – 0 to 55.29%; South Korea – 0%; Philippines – 8.9%; Saudi Arabia – 2.92%; Taiwan – 2.65%; Thailand – 118.32%; Turkey – 0 to 4.87%; Ukraine – 5.31%; Vietnam – 9.57 to 111.47%.

In the case of the critical circumstances complaint, negative critical circumstances were determined for exporters from South Korea, Philippines, Turkey and Ukraine. In those cases, no retroactive duties will be imposed. Critical circumstances were found for exports from Jindal SAW in India, but for no other Indian exporter. In Vietnam, critical circumstances were found for all entities except SeAH Steel VINA Corporation. Critical circumstances complaints were not filed against Saudi Arabia, Taiwan, and Thailand.

Following the preliminary duty determination, all companies with duties will now be required to submit cash deposits based on the rates listed above for all OCTG tonnage entering the country. These will be required until final duty determinations are completed in early July 2014.

In the case of seamless OCTG, the producers under investigation for seamless imports, India, Ukraine, Vietnam for example, received some of the highest duties from the ITA. We are likely to note a falling number of offers from these countries and eventually a decline in import tonnage. Nevertheless, the level of seamless OCTG imports from countries named in the complaint is a small portion of total seamless OCTG imports. Indeed, seamless casing and tubing imports from the nine countries under investigation represented less than one fifth of total seamless OCTG imports over the past five years. In 2011, the share of these imports to the total reached a peak at 21.8%. As a result, MBR believes that the duties placed on this tonnage will not have a significant effect on seamless OCTG pricing in the near term. Indeed, the low duties on ERW OCTG from South Korea will likely have a greater effect on the overall OCTG market.

Now, market participants are looking to help from the final preliminary ruling which is expected in early July. The February determinations were preliminary and now the findings are undergoing a verification process for the final duties. We understand that for the ERW OCTG imports from South Korea, the price of HR coil sold to tubing producers will now be examined and could affect the duty outcome. South Korean OCTG exporters contend that they are not dumping as their costs are low as a result of competitive HR coil pricing from domestic producers such as Posco. These sales will now be under scrutiny.

Moreover, there is precedent in previous ITA duty determinations that the final duties can be significantly higher than the preliminary levels. In the case of Chinese OCTG imports in 2009, the preliminary anti-dumping (AD) duties were set from 0% for Changbao to 32% for TPCO and up to 99% for all other companies with countervailing (CVD) duties set at 10-31%. In the final determination in September 2010, AD duties were set at 49-99% and CVD duties were set at 13.66-53.65%, essentially eliminating them from the US market. The suggestion is that a similar revision could take place with South Korean ERW imports, although the zero initial AD duty and no CVD duty is a much steeper climb to eliminating these imports than it was for Chinese material. 

Click here to view MBR's Apparent consumption of seamless pipes in key American countries by product ('000 tonne)

Tejas Tubular planning seamless mill...
The results of the final duty determination will affect the viability of new mill projects in the USA which were planned under the assumption of replacing imported material. MBR has identified about 1M tpy of rated OCTG capacity announced for the US market that may not come to fruition if the duties on the imports in question are not significantly increased. Much of this material is ERW, although we have considered the planned seamless TPCO mill in this calculation as the company recently amended the start-up date of the plant from 2015 to 2016. (Please see the capacity table below)

Meanwhile, Tejas Tubular is going ahead with a 150ktpy OCTG facility in Norfolk, Nebraska. MBR originally assumed the plant was ERW given the $152m cost of construction, which is low for a seamless plant. We question if the equipment may be purchased from a closed or idled mill. Nevertheless, construction is scheduled to begin this year on the 350,000 sq. ft. plant which will produce casing, drill pipe and linepipe. The project is receiving $5m in state and local grants and expects to apply for further business development incentives which are intended to promote job growth.

...suggesting a potentially tighter billet supply
Tejas has a strategic partnership with Nucor to supply steel billet to the plant from Nucor’s Nebraska SBQ mill. This material is available as the Nucor mill is no longer supplying billet to US Steel’s Lorain, OH seamless plant. US Steel recently completed a contract for the supply of round billet, to make up for a steel capacity shortfall in the company, with Republic Steel, as their new EAF capacity can supply their SBQ mill and any outside billet demand.

Moreover, MBR understands that Benteler has also signed a billet supply agreement with Nucor for its 300 ktpy seamless OCTG mill. Start-up of the rolling mill is scheduled for 2015 with installation of the EAF in 2019-20, depending on market conditions. In the meantime, billet will be supplied by Nucor. Between Tejas and Benteler, there is 450,000 tpy of potential billet demand for 2016, with another 700,000 tpy of demand coming on over the following year from Tenaris Bay City and PTC in Kentucky. The 500,000 tpy TPCO plant has plans for an EAF although it may bring in purchased billet ahead of the commissioning of the furnace. Much of the available billet comes from SBQ producers which are facing a market that has experienced strong capacity growth in recent years from expansion projects by Nucor, SDI, Timken and Republic Steel.

With the addition of the new seamless mills starting up in coming years, any excess capacity at SBQ mills will be quickly absorbed. According to available trade statistics, round billet imports have been minimal. For now, the SBQ market is not as tight as before the expansion projects started so there is excess steel capacity. But, given a pick-up in SBQ demand, we could witness a very tight market for round billet and an increase in imports as well.

Meanwhile, energy companies deal with rising costs...
While we note that energy prices have been upheld, especially natural gas as a result of rising demand for industrial uses as well as heating, a number of energy companies have told us their concern over increasing costs. In early March, Exxon Mobil announced that the company expects to reduce capital spending 6.4% in 2014 from the 2013 peak in spending. From 2015 to 2017, the company is forecasted to average $37bn/year in spending, down from $42.5bn in 2013 and $39.8bn in 2014. Chevron also expects a decline in 2014 capital expenditures from the $40bn 2013 level. The company stated that the cost of producing oil was up 10.6% last year and up 56% from 2010.

...affecting their purchasing decisions
The rising costs for oil companies are causing a shift in their casing and tubing purchases. For both onshore and shallow water applications, we are hearing of a substitution from higher grades to lower grades and for ERW rather than seamless to cut costs. This has affected suppliers of proprietary grades such as 13CR which have seen demand shift to API 5CT L80 for sour service. Japanese suppliers have been especially affected. (Please see the Asia section)

US scrap prices, shredded vs. busheling ($/l.ton)

US round billet imports (tonnes)