As we prepare for our publication’s annual ‘state of the industry’ address every February we often find clues in past years’ metrics and this year is no different. With questions looming about the Section 232, 2018 E&P budgets, L48 hydrocarbon production and oil at $60/bbl…will we find strength in numbers this year or are we looking at a catch-22?
The year-end OCTG stats found in our table on page 6 zero in on the trends that defined the OCTG market over the past three years. Although we deal with these stats daily, seeing them stacked side by side in a table is always enlightening. While there were numerous encouraging entries for 2017, continuing OCTG-intensity per rig among them, there are a couple of telling metrics that stand out as prognostic. One of the most alarming is imported OCTG’s market share, now at a level last seen in 2008 at the height of the Chinese pipe surge. While domestic OCTG shipments increased by 110% Y/Y, imported shipments ballooned by 197%. There’s simply no downplaying this matter. The other issue, albeit of less trepidation if oilfield activity remains strong, is the 2017 inventory build at +23%—the largest accumulation of OCTG stockpiles Y/Y since 2008. The inventory overhang contributed to the elevated yearend months of supply.
Clearly the domestic industry’s biggest threat is unbridled imports, which leads us to the minefield known as the Section 232 debate. For a thorough briefing on the 232 investigation, subscribers can review our August 2017 Report. Our commentary this month deals more specifically with the 11th hour Commerce Department recommendations that may or may not be heeded by the president who has great latitude in determining the policy outcome. The White House has until April 11 to announce its decision and then 15 days to implement the policies. The bottom line on the investigation was that Commerce determined, “the displacement of domestic steel by excessive imports is weakening our internal economy and therefore threatens to impair the national security as defined in Section 232.” Many remain skeptical about the “national security” invocation, others are concerned about retaliatory measures that will likely be taken by the countries impacted as well as unintended consequences that could trickle down to peripheral US industries.
Three options have been drafted by the Department of Commerce: 1) a blanket tariff of 24% on all steel imports from all countries, 2) a 53% duty on imports of steel from 12 countries (Brazil, China, Costa Rica, Egypt, India, Malaysia, S. Korea, Russia, S. Africa, Thailand, Turkey & Vietnam) with other countries able to export at 100% of 2017 levels (product specific), but face tariffs above that, and 3) no tariffs but a quota on all steel products from all countries equal to 63% of the countries’ 2017 exports to the US. While none are a panacea, the first “remedy” simply doesn’t have the teeth needed to stem the tide of current OCTG imports. The second option might be considered heavy-handed and more likely to incite retribution by the countries named. If it were applied to 2017 imported OCTG counts it could potentially reduce the count by slightly more than the third option (largely ERW material) but may not be worth the risk of retaliation. Doing the math on the 63% quota recommended in the third alternative would leave domestic suppliers to pick up the slack from the removal of imported tons, which is doable. Granted, this would likely create shortages on high demand items in the near term but some of the potential shortages could be met with existing, historically lofty, inventory supplies. Pricing would rise further as domestic mills rush to fill the gap but should settle down as the backlog is worked through. This also assumes that demand continues strong, despite these measures. However, a tubing problem still exists as domestic sources have contracted over the years. Perhaps a revised quota percentage could be negotiated if the exporters would agree to only ship certain sizes/ranges? That might be one solution.
With current HRC prices at a six-year high and recently announced mill price increases on the books, herein lies another concern that must be weighed when it comes to trade protection on “all steel products.” That is the additional cost to raw materials; its impact on OCTG pricing, and its trickle-down effect.
While traditional OCTG trade actions have mostly failed, no action is without risk. The danger in oppressive policy is upsetting the fragile trade balance that exists as well as hampering our country’s efforts toward energy independence, which should also be considered a matter of national security. If the actions taken by our president cause OFS costs to skyrocket, E&Ps will be hard-pressed to continue the robust activity that has helped OCTG stage a partial recovery from the recent downturn.
While there are any number of ways things could go in the year ahead, Warren Buffet sums up the best defense: “Predicting rain doesn’t count. Building arks does.”
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