“It is a capital mistake to theorize before one has data,” ~Sherlock Holmes. Holmes clearly understood that having data to back up one’s conclusions is paramount and our quarterly OCTG inventory yard survey is further proof of this fact. This investigation and analysis is the only one of its kind in the world and serves as a bellwether of OCTG health for every segment of the supply chain.
Herewith we present a piece of the puzzle that leads to our determinations. Our exclusive yard survey of the U.S. supply chain revealed that U.S. inventories of “prime” OCTG contracted 2% in the most recent quarter (period ending 9/30/16). The only possible mystery observed Q/Q is the slower velocity of inventory draws. This in part stems from new and strategic inventory builds in anticipation of higher sales volumes and activity. Our separate survey of select OCTG distributors in the lower 48 registered an inventory rally in Q3 versus a slide in inventories in Q2, foretelling a hint of growing confidence in this group.
Another indication of better days ahead gleaned from our survey is a gain made in threaded inventories this quarter. Digging deeper we discovered tonnage declines in every product segment except tubing in Q3. Moreover, a lower level of inventory destocking was detected in the seamless segment. Clues to these changes can be found in our Report this month.
Our mill sources are seeing some momentum for Q4 but it is being tempered by the usual suspects of late: pricing pressure from imports, stubborn inventory liquidation and, in the case of welded mills, the pain inflicted by seamless producers content to trade margins for market share. For now the steady rise in U.S. HRC (hot rolled coil) pricing has abated and a bottom seems to be in sight within the next couple of months. This should offer a modicum of relief for some. U.S. scrap has trended lower too and has likely reached a floor, but not enough to cover the current OCTG price decline.
The operative word for recovery remains demand. “Elementary!” we suspect most would say, but all roads continue to lead to this conclusion. OCTG pricing, meanwhile, continues bumping along the bottom as we slog through the seasonally slow fourth quarter. Be that as it may, there are a few signs of recovery in the pipeline that simply can’t be ignored: improving crude & nat gas prices, an uptick in U.S. permits, rig count momentum, and increased E&P Capex forecast for 2017. And with that we can say case closed…until next quarter.