OCTG 2H21: Much Ado About ‘Something’
The heat is on in the US and oil patch participants are, likewise, pretty fired up this month. In fact, after spending the past few weeks ‘taking the temperature’ of folks throughout the OCTG supply chain it could be said that full ‘June’ fever has gripped the market. In post-pandemic 2021 these heated conversations can be rightly interpreted as much ado about something for a positive change.
There was no shortage of ‘hot’ topics discussed during our business climate confabs. Thus, we begin to unroll the sum and substance of our powwows. We’ll kick this off by addressing the pricing situation since it encompasses practically every other segment of the market. We commenced our calls forecasting an exit price for OCTG in 2021 and supported it by analyzing a host of critical cost drivers.
Let's start with raw materials; hot rolled coil and scrap, about which we wrote extensively in our May Report. While there is much speculation that HRC will correct in Q4 we have to filter the impact of that possibility down to the tubular market, which is to say that relief for welded producers is still a ways off. We discuss this point in depth in our June market intel. By contrast, seamless producers are currently enjoying what could be termed a pipe ‘dream’: increasing market share as quickly as they can ramp up capacity. They, too, are dealing with increases in feedstock prices, only nowhere to the degree of their counterparts. Then there’s the issue of imported goods. Simply put, imports can’t be counted on to stem the tightness in the market, at least for the remainder of 2021. No one is buying speculative inventories and similar to domestic goods, import prices are escalating.
And, of course, we can’t forget inventory. We host our exclusive OCTG Inventory Yard Survey next month in July at which point we’ll determine the precise direction for Q2 inventories, but if our channel checks bear out inventories will take a fourth consecutive retreat. Looking further down the pipeline through Q4, we see little likelihood of an inventory build. This is yet another reason to be mindful of inventories as this part of the equation bolsters prices, too. Of course, in order to sustain prices, you need a stable and/or growing rig count and that’s expected to continue crawling upward with oil and nat gas commodity prices underpinning the gains. This, too, leads to the opportunity for demand-pull inflation.
All of this is occurring at a time when E&P companies are suggesting that CAPEX for 2022 could increase, suggesting operators will be planting more pipe than they have in the past couple of years. But don’t expect upstream players to throw caution to the wind this time around. That ship has sailed. Bottom line: this is not a market for the faint of heart. If you can’t stand the heat, get out of the oil patch because the situation in OCTG is piping hot.
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Photo Courtesy ConocoPhillips Company