4Q17 OCTG Inventories: Not All Black & White
As we zoom past 2017 it’s time to bring focus to the current OCTG inventory situation. 4Q17 OCTG inventory results are best framed as a tale of two ‘quarters.’ There is simply no way to provide a clear snapshot of the outcome without looking back to the second quarter of 2017 and reminding our readers that we make any necessary adjustments to our inventory yard results once a year in January in order to accommodate new OCTG yards that come onboard. With that said, five new OCTG yards located in the “tri-state” (TX, OK, LA) area and outside the region were folded into our 3Q17 results and carried forward to Q4.
Before we get ahead of ourselves, it’s important to review the reason why we host this survey and what’s in it for readers. Our OCTG Inventory Yard Survey is the only one of its kind the world. Published every quarter, it is designed to assess the health of the industry by measuring demand for OCTG throughout the entire supply chain (truck terminals, mills, processors & inspections yards) across the lower 48. It’s impossible to accurately calculate this metric and all the data points that are derived from it (apparent consumption, months of supply) without this labor-intensive analysis.
Looking back to 2Q17 ending inventory and fast forwarding to 4Q17 our most recent survey of the US supply chain reveals that OCTG inventories rose by a low double-digit figure over the six-month period. If we were to simply zero in on the difference between Q3 and Q4 (after the above noted adjustment in tons was made) the results would suggest a mere increase in tonnages +<1% Q/Q. In view of the staggering volume of imports that landed on our shores in the second half of 2017, that conclusion would raise more questions than it answers. For perspective, it has been four years since we’ve witnessed this degree of inventory build. That accumulation coincided with the last major OCTG trade case that was filed in July of 2013.
With the bulk of increases posted in the mill/processor category as manufacturers ramped production in both Q3 and Q4, here’s how tri-state inventories stacked up at the year’s end. Welded stockpiles swelled each of the past three quarters. The bulk of the bulge in welded tons were recorded in Q3 at the height of the 2017 import surge. Carbon OCTG stocks also showed significant growth over the past six months. Not surprisingly, the jump in carbon tons came along with the acceleration in ERW materials in Q3. OCTG casing stocks have been advancing on inventories since 1Q17, with the greatest influx registered in Q3. Bottom line: had it not been for robust drilling activity that dominated most of 2017, the deluge of OCTG imports could have easily turned the tale of two quarters into the ‘battle of the bulge.’ Details about our exclusive survey can be found in the January OCTG Situation Report.
Meanwhile leading indicators suggest we’re looking at a mostly happy yet invariable new year with the exception of escalating imports that threaten to erode some of the recently restored oil patch ebullience. With the ‘oily’ grail of E&P spending—crude prices—trading in positive territory, Evercore ISI is predicting a 15% lift to US capex in 2018 with Canada trailing slightly behind at 9%. But there’s more. Since cash flow will be the leading determinant of spending, the higher hydrocarbon prices provide greater latitude to spend more and still remain within cash flow. The long-awaited Section 232 investigation recommendations were delivered this month and now requires a decision from the administration based on the report’s findings within 90 days. While details of the report have been withheld expectations are mixed. Most parties agree that without a +30% or higher tariff imports are likely to continue unabated, especially since more countries entered the fold ahead of anticipated tariffs. Such Draconian measures would shore up OCTG prices in late 1H18. Short of that, added domestic capacity and passive drilling activity will continue to pressure pricing. The only real opportunity for price improvements, without a meaningful but unforeseen boost in D&C activity, is higher input costs. Currently US HRC is trading at three-year highs aided by the increase in international prices. Demand from major steel-consuming end markets is steady and poised to rise further in 2018, which encourages HRC mills to set their sights on serving the most prolific customers—no longer the domain of tubular manufacturers.
All things considered, it is our candid view that the year in OCTG won’t be picture-perfect but there’s a good shot it will leave many smiling.
Photo Courtesy LB Foster Company