The past 26 months in the oil patch have run our industry through the mill, so the glimmer of light we see at the end of the tunnel sets the tone for a decidedly happier new year. Each January (and every quarter) we go to great lengths to determine if the ‘yard’ is half full or half empty. Our analysis is based on our exclusive quarterly inventory yard survey, designed to gauge demand for OCTG in the U.S. The results of our survey are measured by the yard, specifically: truck terminals, mills, processors and inspection yards across the lower 48 and by all indications this quarter’s outcome puts OCTG on firmer footing.
In Q4 inventories of “prime” U.S. OCTG decreased by a healthy percentage. Tonnage declines were reported in every product segment in Q4 in keeping with surging activity across the tri-state region. Interestingly, many of the more significant changes noted correlated with our recent distributor survey pinpointing areas of supply tightness. Our separate survey of select OCTG distributors reinforced this collective’s growing confidence even as they strategically hedge against rising material costs. Another positive sign seen again this quarter is the uptick in threaded and coupled tonnages (versus plain end) as a percent of tri-state inventory tonnages.
So far so good, so let’s continue with the encouraging 2017 E&P spends. According to Evercore ISI, North American capex should rally ~35% with the U.S. spearheading the recovery and Canada trailing with a modest 10% upswing. It’s important to issue the caveat that only a small percentage of operators have announced their budgets. The bulk of their outlooks are expected during their 4Q16 earnings calls. The new administration’s anticipated policies (regulatory reform, infrastructure spend & protectionism among them) are likewise considered bullish for OCTG.
While numerous catalysts hover, we would be remiss if we didn’t give equal time to potential pitfalls. Just because we can see the forest for the trees doesn’t mean we’re out of the woods. 2017 could bring any number of political or economic black swans including the possibility that OPEC might reverse course. Any of these scenarios can trickle down to OCTG and are reminders that it remains prudent to keep a short supply chain in times of uncertainty.
After two years of relentless cost-cutting there’s also the looming probability of added OFS cost increases. On that note, we’re ever mindful of the heightened resilience of raw material costs and how they’re impacting the tubular market. U.S. scrap prices have risen 46% since September 2016, +50% Y/Y. During this same period hot rolled coil costs increased 23%, +58% Y/Y. It’s almost as if coil is suddenly “the new black.” With its numerous uses and applications many of which are in high demand, the energy market is a shrinking piece of the pie. Trade cases against HRC have been successful in diminishing imports and tightening domestic versus international spreads: a welcome relief for domestic manufacturers who are seeking to recoup margins. These raw material costs, which are being passed onto OCTG mills that are increasingly limited to domestic suppliers, began showing up in our pricing surveys last month and have continued into January.
OCTG prices are also being buoyed by supply tightness that is showing up in most every region throughout the prevailing shale plays. This dearth is expected to continue through 1Q17 as domestic suppliers scramble to meet emerging demand and until imports reach our shores.
This leads us back to OCTG inventory where we’ve been tracking stalled (defined as no current demand and/or items unused for more than a year) and obsolete tubular goods. We first reported on our inventory tonnage analysis in June of 2016 and updated it in October for Q3. Complete details about this situation, OCTG supply tightness and our inventory results are provided in this month’s OCTG Situation Report. Continuing in a positive vein, months of supply for the action-packed fourth quarter showed a marked improvement and a metric not seen since early 2015. Thus, by our analytics we see the ‘yard’ as half full – suggesting that inventories are stacked in our favor, at least through 1H17.