US OCTG market faces slow recovery in 2021

The slow recovery in the US oil and gas industry continues to crimp demand for oil country tubular goods (OCTG) and other steel pipe products used to produce and transport crude oil and natural gas products.

The energy tubular industry has found itself squeezed by twin issues — oil prices and drilling activity have been depressed since the onset of Covid-19 in the US began weighing on demand, while soaring finished steel prices have pressured margins for OCTG and pipe distributors.

Shipments of OCTG products in the US fell by 49pc in 2020 to 957,000 short tons (st) compared to the 1.87mn st shipped in 2019, according to data from the American Iron and Steel Institute (AISI). Line pipe shipments dropped by 50pc in 2020 to 322,000st compared to 649,000st in 2019.

The active oil and gas drilling rig count in the US was 402 for the week ending March 12, down by 49pc from the 792 that were active a year ago, according to data from oilfield service company Baker Hughes.

While energy industry activity has slowed, some pipe companies have had additional problems securing supply as a result of being an "inconsistent buyer" in the steel market, according to George Thompson, vice president of commercial at distributor Dura-Bond Industries. High demand from the automotive and appliance industries have taken priority for steelmakers in recent months as energy demand has remained low.

"We buy back-to-back based upon where our order book is going," Thompson said. "Consequently we end up being more or less of a flywheel-type customer for the mills, and there is no room for flywheel customers right now. We are sitting at the bottom of the stack waiting for something to drip down."

Of Dura-Bond's four steel coil suppliers, he said only one is currently willing to quote or supply him with steel. Thompson's customers are "scrounging around" for what they can find, looking for a few thousand feet of pipe compared to the tens of thousands of feet needed for many energy pipe projects.

Along with supply issues, steel prices have nearly tripled in the last seven months, with the Argus US hot-rolled coil (HRC) Midwest spot assessment up to $1,286.50/st ex-works Midwest on 16 March from a low of $450/st on 11 August. HRC is a key component used in the production of some energy-related pipe products.

As flat-rolled steel prices have increased, it has been hard for the pipe industry to pass on those costs.

"Generally 70pc of the cost of that piece of pipe is steel," said Jack McCarthy, a senior vice president at MRC Global, a pipe, valve and fitting company focused on the energy and industrial industries. "But because the pipe mills have not been able to pass along all the increases, some of them are telling me now that 80-85pc of their input cost is the steel."

The sector also views the new administration of President Joe Biden as a headwind. One of Biden's first actions was halting the construction of the Keystone XL pipeline by rescinding the cross-border permit required for the long-delayed pipeline project. The pipe for that project had been long-ago manufactured, but the move served as a signal to the sector.

"I do not think Biden is good for the oil industry, period," said Dilip Bhargava, chief executive of Houston-based SDB Steel and Pipe.

There may be other options for pipe manufacturers. On 17 March, the US House of Representatives introduced the Storing CO2 and Lowering Emissions Act (SCALE Act) to support infrastructure development for CO2 capture and sequestration, which would include pipeline infrastructure.

By Rye Druzin and Elena Vasilyeva