OCTG August Update: Walking A Tightrope
Tight is defined as “difficult to deal with or manage.” Of course, tight is also, “slightly drunk,” but when used in relation to the current market for OCTG, the former is especially true. The latter perhaps for those that are currently sidelined with only slim pickings. If you’re thinking this introduction might offer a hint into what follows for this month’s blog post, you’d do well to hold on tight.
First, a sound bite about how we arrived at this atypical cyclical upturn. Start with a pandemic. Bring to boil. Observe market grind to a halt. Reduce inventories. Toss in unexpected robust rebound across steel industry. Fire up idled mills. Whip up appetite for demand. Mix with pricing pressure. Batter welded producers. Scramble for supply. And voila you’ve got a taste of OCTG in August 2021.
This brings us to the topic du jour: “are we really in a tight market?” The answer is a resounding YES. The last three Reports have each gone into detail about a segment of this tightness; this month we’re putting an exclamation point on it.
It’s no secret that OCTG feedstock (hot rolled coil/scrap) increases are contributing to higher costs of OCTG. We broke this situation down in our May market intel. In fact, the record high HRC costs have pretty much put a lid on the manufacturing of welded goods that are priced in negative margins at present. Thus, those in need of securing OCTG in the short term have only one good domestic option and that is seamless materials. And here’s where reality bites: L48 seamless mills can’t hire and train fast enough to supply the demand. They’re simply maxed out at the existing staffing levels.
In the past, there was always a sufficient supply of imports to satisfy demand that wasn’t desired or needed from the domestic producers. Not so in 2021. This aspect of supply was examined in depth in our June editorial, so we won’t rehash it here except to say it, too, is contributing to the tightness. All this is happening at a time where demand is slowly gaining traction and the typical fourth quarter budget exhaustion is far less likely this year.
We all know the market will correct just as in the old saying, “the cure for high prices is high prices”: the question is when? Our analysis into this topic can be found in this month’s OCTG Situation Report.
So, what could challenge the status quo? As is always the case in the oil patch, there are a few wild cards. These X factors are also considered in detail in our August market intel.
In our July Report we discussed the results of our exclusive 2Q21 OCTG Inventory Yard Survey and its bearing on market tightness as well. While we expect seamless producers will begin to build suitable inventories over the next two quarters, we don’t envision an appreciable uptick in tonnages from the rest of the supply chain. This outcome, if it pans out as we project, may turn out to be grist for the mill. Prudent buying makes it less likely we’ll repeat another vicious oversupply cycle at least in the next year or so, which should serve everyone well.
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Photo Courtesy Devon Energy