The quote, “Prediction is very hard, especially about the future” captures the essence of the responses we received to our request for domestic OCTG mills supply forecasts in a year where uncertainty seems to be the only certainty. Thus, we braved this muddy matter with the hope of rising above the perils of prediction.
Our U.S. OCTG Mill Supply Forecast comes with the following set of assumptions for 2017: a) WTI averages $50 – $60/BBL; averages over or under this range will necessitate adjustments to the supply forecast and b) South Korea receives only a token increase in duties in the first OCTG anti-dumping (AD) administrative review scheduled for March 30 (with the possibility of an extension to April 12). We expand on this subject later in our editorial.
Our forecast reveals both domestic and foreign mills have the pedal to the metal potentially unleashing 112% more OCTG into the market in 2017 than 2016. The production of domestic seamless OCTG is expected to outpace that of welded, a trend that began in 2016 as the downturn lingered, HRC costs spiraled upward and mills struggled to stay busy. As the market continues to improve, the delta between ERW and seamless costs will widen making welded OCTG competitive for some of the more efficient mills and ERW’s market share will revert to more traditional levels. While seamless OCTG also occupies a greater piece of the import pie, we’ve increased the percent of welded imports Y/Y in the belief that South Korea will hike their shipments to levels closer to that of 2015 if the administrative review is decided in their favor.
Insofar as the final duties in the South Korean AD case are concerned, we’ve vetted every possible scenario only to arrive at an impasse. There’s the possibility that Trump’s team of protectionists including steel advocate, Secretary of Commerce, Wilbur Ross, could rule in favor of a more aggressive stance against South Korea. There’s also the case for the knock-on effect of the tariffs the Department of Commerce assigned to Korean steel producers in the HRC case, which exercises new powers granted under the Trade Preferences Extension Act of 2015 making it easier for industries to demonstrate injury. In this way, Korean OCTG producers are at greater risk for allegedly relying on Korean-produced HRC as well as dumped Chinese HRC to manufacture OCTG at export prices that arguably constitute dumping. Coupling this with the news that the Trump team is exploring alternatives to taking trade disputes to the World Trade Organization makes this case a “slam dunk” for some speculators.
But before anyone drops the mic and pops the cork there’s another side to the story and one that merits serious consideration especially as it applies to our relationship with our ally South Korea: geopolitical unrest. The fragile state of political affairs in both North and South Korea could outweigh the domestic steel industry interests in the near term, resulting in a nominal increase in duties for this first review. While there are strong arguments for either outcome, the recent announcement from U.S. Secretary of State Rex Tillerson that “the threat of North Korea is imminent,” puts us in the latter camp until further notice.
Meanwhile, this fickle situation is having a decided impact on the state of U.S. OCTG. To say that OCTG is in a “tight spot” is to put it mildly. Mills are under the gun to produce, expected to ramp up from near zero to sixty. Distributors are leaving no stone unturned in their search to find high demand products or offer substitutes. Korean importers and producers are in limbo, unsure whether to ship out or abandon ship. Operators are left feeling the heat as OCTG pricing stages a brisk recovery with mill price increase announcements coming fast and furious. If drilling activity continues unfettered, mills are expected to catch up with demand sometime in August. The question is: can this level of activity be sustained throughout the year? We all know when pipe isn’t moving downhole things go downhill and no one is eager for those days to return.
With OPEC determining a course for their May meeting, oil markets getting spooked and the specter of cost inflation looming, the tubular market hangs in the balance suggesting another test of our industry’s ‘metal’ may be on the horizon. So, what’s a pipe ninja to do? Unpredictable times call for unconventional wisdom: a reminder that reality is rarely ‘oil’ or nothing.
Photo Courtesy voestalpine Tubulars