Viewpoint: Weak oil and gas pressures WC scrap

A stunted recovery in the oil and gas sector is expected to undercut any rise in tungsten carbide (WC) prices in early 2021, even as other sectors have already returned to prior-year levels.

Tungsten carbide scrap prices have gradually recovered from lows reached in the middle of the year amid the crude crash and Covid-19 recession, but increases have mostly been the result of tight availability and stronger inter-trade demand, not interest from consumers.

In 2020, tungsten scrap prices for inserts and rounds fob US processor hit $4.68/lb on 29 May, the lowest level for either grade since mid-2009.

Supply tightness and stronger inter-trade demand lifted prices back with only slight support from consumer demand in November, when prices were assessed at $6.20-7.10/lb.

Despite the recovery of the tungsten carbide and carbide feedstock markets from historic lows in recent months as availability tightens, overall demand remains mostly weak.

Many of the industries that utilize tungsten carbide were hit hard by the Covid-19 pandemic and ensuing recession, but the automotive and mining sectors have since largely recovered to at or near previous year levels, respectively.

The recovery in the automotive market was very sharp, with production of motor vehicles and parts already at the exact same level in November compared to the prior year period, according to Federal Reserve data. Additionally, production levels in the mining and quarrying sector minus gas and oil extraction were only about 2.5 percentage points lower in November from the previous year period, according to St Louis Federal Reserve data.

The recovery of those sectors is largely believed to be baked into the market for tungsten carbide scrap, but market participants are mixed on which other sectors would need to recover in order to provide further increases in prices.

For one, the oil and gas market has weighed heavily on tungsten carbide demand. Oil and gas well drilling dropped to the lowest level in August since 1972, according to data from the St Louis Federal Reserve. Although production rose slowly in subsequent months, November production was still at a level never seen prior to 2020. Rig counts had fallen by 58pc to 338 on 11 December, according to Baker Hughes.

Stronger demand from the oil and gas industry for drill bits and wear parts would be a boon to end products that contain tungsten, which typically lifts tungsten prices in general and the intrinsic value of other products like inserts and rounds.

In the aerospace sector, production of aerospace parts and products declined drastically in 2020, production rates in November were at the lowest level since June 2011. At that same time, carbide inserts prices stood at $14/lb, just $0.38/lb under its highest level since at least mid-2011. Sources instead attributed the strength to higher US rig counts, which averaged 1,862 in June 2011.

The machine shop sector is a bit more difficult to track for many in the market given the number of machine shops in the US. Tungsten scrap's peaks and valleys typically occur in the middle of a ramping up or ramping down trend in machine shop output.

While a ramp up in production might be a windfall for carbide scrap prices, a sustained increase in production eventually causes a greater build up of scrap through generation, eventually weighing on prices.

Thereby, supply side concerns are projected to dictate the direction of prices until oil and gas rig counts move higher. Market participants were not confident of such a ramp up in early 2021, even while the aerospace, automotive and machining industries provide some modest support to buying levels.

By Nicholas Bell