Oh-CTG! The Problem with Pipe: Rolling with the Punches in 2H16


Photo Courtesy Chevron Corporation

Susan Murphy | Publisher of The OCTG Situation Report

Susan Murphy | Publisher

Welcome ladies and gentlemen to the “heavyweight” main event of the month: the buzz over the bitter cost disparity between seamless and welded OCTG and the narrowing pricing delta between the two. In one corner we have seamless OCTG and its opponent, welded OCTG in the other. “Let’s get ready to rumble.” 

This fight heated up with the spectacular rally in U.S. hot rolled coil, a conversation we’ve highlighted in recent months. So let’s break the status quo down for closer examination. ERW manufacturers’ margins basically depend on two things: the cost of the raw materials – mostly steel to the tune of ~65-70% – and the price of oil. The unrelenting high cost of HRC coupled with the low oil price environment has been a one-two punch for welded mills and the current OCTG price/ton average only exacerbates these issues. While HRC costs are finally softening (down ~16% from mid-June peak), in many cases leading up to this time the cost of HRC exceeded the cost of the pipe making the circumstances unusually distressing for mills welded to ERW. This extremely rare combination is what ERW producers have been facing.

And just when you think things couldn’t get more precarious along comes the recent HRC trade case that dealt a blow to Korean coil suppliers, one of the more qualified sources for less expensive HRC materials. This pushes mills to scout other sources for their needs adding further pressure on ERW producer costs. All the while OCTG end-users are anxiously guarding their bottom lines favoring capex discipline over capex growth.

This brings us to another millstone for ERW producers: seamless competitors. The imminent capacity from two new seamless contenders in the domestic marketplace threatens to shake things up even further. At one time seamless mills were less interested in competing with welded mills, but the outcome of the downturn of 2014 changed all that. Every mill has come out swinging with a “take no prisoners” mind-set.

Clearly at this junction the mills that are capable of diversifying their product offerings are better prepared to slug it out. For integrated facilities, opportunities exist to produce a variety of steel products that can help bolster margins while the energy market bobs and weaves. Those in a position to strategically leverage global parities (where applicable) for various products also have an edge.

What’s a welded mill to do? From an academic point of view there are some options available but the fact remains that greater demand is the bottom line for every supplier. Barclays recently released preliminary Upstream Spending Survey suggests that 2017 North American capex budgets could increase ~20% fueling an uptick in “onshore” activity over the next year. It is interesting to note, however, that 75% of survey respondents expect well costs to decline even more over the next 12 months.

Despite the fact the challenges are steep, welded mills aren’t down for the count. It’s not as though every operator is basking in a seamless buyers market. Some still haven’t seen seamless costs come down low enough on their specific pipe requirements to motivate them to swap out their current ERW string designs.

So what’s ahead when it comes to seamless vs. welded OCTG? When activity levels are restored the offerings will presumably return to historical norms where welded OCTG is the more economic alternative. The difficulty lies in bridging the gap that will likely be created when the new seamless mills aggressively market their products: fitting the bill to fill the mill and keeping the ERW/seamless price differential uncommonly close for an extended period of time.

There’s certainly no shortage of action in the oil patch these days and it’s no place for the faint of heart. Those that are determine to go the distance would do well to keep their eyes on the prize and remember the words of Muhammad Ali who said:”It isn’t the mountains to climb that wear you out; it’s the pebble in your shoe.” 

About The OCTG Situation Report

Susan Murphy is the Publisher + Editor in Chief of The OCTG Situation Report, a leading authority focused on the North American Oil Country Tubular Goods market. Susan has worked alongside the founder of The OCTG Situation Report, Duane Murphy (and yes, there is a family connection!) for the past decade assisting in various aspects of producing the monthly publication and special projects including market research and development. It had long been suspected that Susan carried the 'OCTGene,' a fact that was confirmed when she took the reins in 2012. A native of Michigan and now practicing cowgirl, Susan employs her education from both the University of Michigan and Michigan State University bringing her expertise in the areas of research, marketing, branding and creative and technical writing to The Report. She has also enjoyed a successful business career as a lauded entrepreneur, running her own brand/marketing and advertising/design firms.
This entry was posted in ERW Pipe, Hot Rolled Coil, HRC, Inventory, OCTG, OCTG inventories, OCTG Inventory Survey, OCTG Mills, OCTG Pricing, OCTG Producers, OCTG Spot Prices, Oil & Gas Industry, Oil & Gas Pricing, Oil Country Tublular Goods, Oil Patch, Oil Prices, Oil Services & Equipment, Seamless Pipe and tagged , , , , , , , , , , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s