OCTG Fall Color from 30,000 Feet: Pitfalls & Windfalls
The official start of fall comes later this week with the autumnal equinox on September 23, but by all measures the OCTG business got a head start on the ‘fall’ season this year. While prices and shipments started to drop before the leaves, at least we can confidently say the sky isn’t falling. So, what might break this fall? We’ll explore.
But first, adding fuel to the numerous fires, both literal and figuratively this year, we can’t ignore the recent news out of the Motor City where UAW workers launched a historic strike against all of the Big 3 automakers. While the UAW is driving a hard bargain, the steel industry at large has a lot riding on the outcome of the strike, which could trickle down to the OCTG market. Both hot rolled coil and steel scrap prices might be impacted depending on the length of the strike. In the case of HRC, shutdowns could lead to oversupply exerting downward pressure on prices, but, incidentally, the strike is occurring during mill outage season (no less than 20 mill outages are planned between now and November). The planned maintenance could help blunt extra supplies on the market from the drop in automotive production, limiting price fluctuations. Steel scrap pricing, on the other hand, isn’t likely to escape the fallout. The automotive sector is the largest generator of scrap, which when stalled will reduce the supply of scrap that is likely to result in higher scrap prices. Too soon to call either. Watch this space.
In our September market intel we examine the potential pitfalls and windfalls ahead for OCTG. First up we discuss the price slide from 4Q22 to now and second, the slump in OCTG domestic shipments. The drop in shipments didn’t come out of the blue, the writing on the ‘fall’ was anticipated many months ago and is expected to continue through Q3. Despite being one of only a couple OFS segments to offer copious concessions (steel and sand), we’re told that bottom feeders are out in force at present, betting their bottom dollars they can score some serious deals before demand picks up again and turns the ship (and shipments) around. Fortunately, one thing that hasn’t suffered a fall are crude prices—a windfall for the oil patch. With the Saudis, Russia, and OPEC pushing for $100/BBL oil there are some high-octane incentives for operators to add rigs. It will be interesting to see the appetite that exists for that possible pivot shortly. And while this is good for OCTG, it also means open season for pain at the pump with few levers left to counter fuel price inflation. Throw El Niño into the mix this winter and cue even greater food price volatility and energy disruptions.
So back to our original postulation: what might transpire to break the fall in OCTG prices and shipments? We suspect we’ll all know for sure when autumn leaves for the three ‘brrr’ months (Octobrrr, Novembrrr, and Decembrrr). We list a number of leading indicators based on our recent oil patch confabs in our September Report and what to expect once the muck is cleared as we move through Q4 into the new year.
And that folks is what amounts to fall ‘color’ from our vantage point. Bottom line: the tubulars business is going through a soft patch now, but once the cyclic slump is behind us, rest assured the OCTG market will once again fall into place.
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Photo Occidental Petroleum Corp. Courtesy © Jim Blecha Photography, Inc.