Surviving Post-Traumatic ‘232’ Disorder
As we barrel ahead toward summer in the oil patch there’s an intermittent up-stream of opportunities for various sectors of the supply chain that are in a position to capitalize on them. Be that as it May, suppliers of OCTG have reported suffering a little post-traumatic ‘232’ disorder.
In this regard, the market is having a “wait and see” moment as 11th-hour reprieves were handed to Canada, Mexico and the European Union, all of whom now have until June 1 to negotiate exemptions from the 25% US steel tariffs that are in effect for all other nations except South Korea. South Korea—the only country where agreements have been finalized—has accepted quotas in lieu of tariffs. We discussed this arrangement in detail in our April 2018 Report. Since that time, it has been determined that the South Korean quota is retroactive to January 1, 2018, that quotas are not transferrable among products and the US will block any imports from Korea that exceed the country’s quota ceiling: 30% of which can be imported in any given quarter. Imports above the quarterly threshold will be temporarily stored at numerous bonded warehouses across the US. Options after the total quota limit is reached include warehouse, foreign trade zone, exportation, or destruction. It should be noted that Korea is rapidly closing in on its OCTG quota threshold: as of Monday, May 21 there is only ~119K st left for importation for 2018.
Most recently the US agreed in principle to quota arrangements with Argentina, Brazil and Australia but details have not yet been published. The process promises to be protracted as more than 10,000 exclusion requests have been filed thus far and that is only the half of it. On May 17, it was announced that the EU is set to impose a 25% “rebalancing” trade tariff on $3.3bn of US goods June 20 with an additional $4.2bn worth of US goods seeing tariffs ranging from 10 - 50% on March 23, 2021 if they don’t receive an unconditional and permanent exemption from the tariffs. The EU has a greenlight to implement the tariffs unless the Council for Trade in Goods disapproves. The initial tariffs are said to hit a variety of US agricultural, tobacco, textile, steel and many other products. The second wave of tariffs will expand on that list. Beyond that development, US ally Japan has signaled its intent to pursue retaliation through the WTO in response to the tariffs equal to $450MM in affected trade, stating that their high-value steel and aluminum products have never “been a threat” to US national security. China and India have made similar arguments to the WTO as well. Whether or not the WTO can grant relief for countries intent on challenging the 232 remains to be seen. Moreover, the WTO dispute settlement system is tedious at best.
Meanwhile, back at the ranch, drilling continues to hum along propelled by OPEC’s efforts to curb output in addition to unstable geopolitical events. US operators, especially those unbound by hedges that prevent them from capturing the value of the rally, are having a field day gushing over the opportunity to make hay while the sun shines. Regardless of the current reality, due to the boom and bust nature of the business, apocalyptic admonitions go with the territory. Foremost among them is the concern that rising DUC (drilled but uncompleted well) counts—currently the highest since mid-2016 could be an unwanted disruption in a volatile oil market. However, the potentially destabilizing force of rapid deployment of DUCs or even an over-enthusiastic drilling response could easily be hampered by the lack of Permian takeaway capacity, transportation bottlenecks, and/or tight availability of frac crews/sand along with unmitigated cost inflation. Despite these challenges and pledges of capital austerity, five months into 2018, E&P C-suite sentiment is mostly, “Damn the torpedoes! Full speed ahead.” This, of course, is propitious for suppliers of OCTG who stand ready to keep things rolling.
All of this leads us to our consumption forecast update for 2018, provided in our May Report; which while in keeping with the fervor of current drilling activity is tempered by some of the challenges mentioned in our editorial above.
As we peer across the OCTG landscape most of the major market indicators remain encouraging. Once E&P spending surveys are updated next month and we present our 2H18 outlook, we’ll be able to confirm speculation that upstream spending is on the upswing. For now, it’s safe to say, all’s well that ends well come what May.
Photo Courtesy Southwestern Energy Corporation