Every June we take the temperature of the oil patch and judging by the tone of our many conversations this month we'd say, without exception, full 'June' fever has taken hold in the form of the Section 232 (aka Section ‘Catch-22’) investigation. While the probe is occupying more bandwidth than we have space, we’re going to try and break down the parts most likely to affect OCTG into bite-sized pieces. There are two reasons why OCTG is expected to be impacted by the 232: 1) OCTG imports currently account for 60% of the market YTD despite multiple expensive and time-consuming new trade cases and 2) OCTG is at “the top of the food chain” when ranking steel products in terms of profitability. That said, with the scope yet to be defined it’s too early to make predictions.
First some context: the 232 initiated on April 20, 2017 is a rare investigation into national security (broadly defined as economic and energy security) implications of steel imports. A 270-day timeline (or January 14, 2018) to deliver findings and recommendations to the president is allowed by law but this study has been hyper-expedited and while follow-up briefings were scheduled for last week they were cancelled due to lack of consensus on the approach. If the Commerce Department finds that imports threaten to impair the national security, the president has up to 90 days to determine whether to use his statutory authority to “adjust imports” and another 15 days to implement his course of action though many expect an earlier announcement. The authority of the president is broad, but it is not unlimited. No president before Trump has determined that retroactive import restriction must be taken to protect national security so imposing relief on imports that have already entered the country seems unlikely. Thus the worst case, from an import perspective, is that ships that are more than 15 days from US shores when the decision is made may be affected. Of course this assumes congress concurs with his decision and it won’t encounter legal challenges, or unilateral retaliations by aggrieved trading partners or even market turmoil—all decided possibilities.
While various remedies are available, there are three more likely recommendations that the Commerce Department could make: 1) imposing tariffs above and beyond the countervailing duty (CVD) and antidumping (AD) ones already in place, 2) imposing quotas or 3) a hybrid of sorts, a “tariff-rate quota.” The tariff-rate quota option includes quotas on specific products from specific countries with new tariffs for imports above those levels. Secretary Ross has suggested this option would help mitigate price risk for steel consumers. Considering the ramifications of any outcome, interests of both steelmakers and steel consumers need to be throughly considered.
Domestic mills tend to favor tariffs or tariff-rate quotas (to equalize the values/selling prices between domestics and imports) whereas E&Ps are inclined to prefer quotas. Since there is no perfect answer and no clear cut winner in these cases, the “tariff-rate quota” may be the best choice. For operators in the oil patch, the #1 concern is that favor shown toward domestic producers will force prices higher. Simply put, there will have to be some give and take for all concerned and that is as it should be. The fact is, we’re all in this together and some form of an economically viable domestic OCTG industry is a critical part of the whole if E&Ps are to operate as well-oiled machines.
Section 232 also has the potential to send the cost differential between domestic and international HRC soaring. In this way the ruling needs to take into consideration not only steel imports but pipe imports, too. Likewise, it could trigger false hope among domestic OCTG suppliers that might expand supply only to have the ruling overturned without long-term market dynamics to support their operations. In any event, more severe import restrictions will force seamless and welded producers alike to buttress their operations in order to defray the costs of taking up for products that they have no financial incentive to produce. These issues will undoubtedly weigh on the market and the potential for some fallout in 2H17 exists. As we mark the halfway point of an otherwise gratifying year, the sobering Section 232 debate swirling in our midst reminds us that navigating through the first six months was half the battle.
Photo WPX Energy Courtesy © Jim Blecha, www.oilandgasphotographers.com