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  • Susan Murphy

OhCTG! The Problem with Pipe: Rolling with the Punches in 2H16

Photo Courtesy Chevron Corporation

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 has been heating 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. In many cases the cost of HRC exceeds the cost of the pipe, making the circumstances unusually distressing for mills welded to ERW. This extremely rare combination is what ERW producers are facing today. 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."

Photo Courtesy Chevron Corporation

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