American Oil and Gas Reporter - September 2015 - 101

BASE HR Band (OCTG-grade steel is
higher)
Carbon-Welded Casing

$2,500

Heat Treat-Welded Casing

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Strong OCTG demand
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ston Publishing Company in St. Louis.
He has 33 years of experience in the
pipe and tubing industry, working in
both distribution and manufacturing.
While in the distribution business, Vivian was involved in purchasing, inventory management, supply procurement, sales, and site selection. While
in manufacturing, his focus was on
business plan development, forecasting, international trade, and sales. Vivian holds a Ph.D. in economics with
an emphasis on statistics, and is a
graduate of the University of Wisconsin's graduate school of banking.

U.S. OCTG Prices versus Base Hot Rolled Steel Prices

n Fin

PAUL E. VIVIAN is a principal at Pre-

FIGURE 5

Asia

RICK W. PRECKEL is a principal at
Preston Publishing Company, a steel
pipe and tubulars market research and
consulting firm that publishes the
monthly "Preston Pipe & Tube Report," analyzing U.S. and Canadian
supply. With 25 years of experience in
the tubulars industry, Preckel's background includes all key functions of
running a business, including accounting, marketing, supply chain
management, information technology,
strategy and expansion. His former
roles included chief executive officer,
vice president of investor relations and
business development, vice president
of shared services, marketing manager, and controller. Preckel holds a B.S.
in business with an emphasis in accounting from the University of Missouri.

ment perspective, we expect shipments to
improve all in all over the balance of the
year, with all else being equal, as more inventory items are consumed.
OCTG prices historically move with
steel prices. Prices already have fallen 2030 percent. Hot rolled (HR) steel prices
have declined by a similar amount. Figure 5 shows the relative movement in
OCTG prices and HR steel base prices (actual OCTG steel prices are higher), identifying the drivers evident in various periods. Negative influences on price include
lower steel costs (lowest since the recession), weaker demand, inventory liquidations, increased competition, relatively
high import levels, and little benefit from
a recent OCTG trade case.
There are not any significant positive
price influencers except that domestic production is curtailed severely by temporary
shutdowns and shift reductions. This
should help move the price more quickly as demand improves. The biggest factor in price movement, however, may be
when steel prices begin to increase.
The ongoing period of adjustment
clouds the near- and midterm outlooks.
The oil price is trying to land somewhere, oil and gas companies are recapitalizing and reducing costs, projects are
being evaluated for profitability, new opportunities are emerging for natural gas,
etc. Once commodity prices settle in and
there is more clarity on possible rates of
return, drilling plans will emerge. Until
then, the OCTG sector, along with all other market sectors, will continue trying to
make the best of a bad situation, as it has
done many times in the past.
❒

Recession

Drilling
moderates
then recovers,
strong import
price pressure
prevents
margin
improvement

$500
$-

Steel industry consolidation, scrap cost increase

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4

OCTG Supply, Pricing
OCTG producers are hit hard in periods of falling demand. During periods of
growth, demand includes pipe being used
in wells and additions to inventory. When
activity declines, not only are fewer rigs
at work, but inventory also is liquidated
to adjust to lower demand. Domestic
manufacturers reacted quickly to reduced
tubular demand as the rig count began to

decline-from a monthly average of
367,000 tons in the fourth quarter of
2014 to a monthly average of less than
100,000 tons in April and May. Imported
product typically takes longer to adjust.
Imported OCTG averaged 335,000
tons/month in the fourth quarter of last
year, dropping to 167,000 tons in May.
The sector has only just begun to reduce industry inventory. Demand for
new pipe in faster-moving items continues, and grows each month, but we estimate that it will take until the spring of
2016 for overall inventory to come in line
with demand requirements.
An outcome of the increase in OCTG
demand since 2000 was first, consolidation and then, efforts to expand U.S. production capabilities. Many projects were
announced by existing producers, foreign
producers seeking to manufacture in the
lower-48, and newcomers alike. In fact,
about 3.9 million tons of capacity additions
were announced. To date, 1.6 million tons
of new capacity has come on line and another 2.3 million tons are either not yet
started, officially delayed, or unofficially delayed.
Overall, with today's product mix and
some line pipe in the mix, we estimate
available domestic OCTG capacity at
about 5.0 million tons. Operational capacity, considering temporary shutdowns
and shift reductions caused by market conditions, is much lower than that. Depending on the length of the down cycle,
these are the times of consolidation and the
idling of assets on a more permanent basis. We expect the cycle to be long
enough to cause some of that. From a ship-

U.S. $/short ton

we do not think that scenario is very likely next year. Interestingly, and evidential
of the adjustment period in which we find
ourselves, an EIA study of NYMEX
crude futures contracts suggests the price
of crude in late 2016 has a high likelihood
of being above $75/bbl. Unfortunately, it
also has an equally high likelihood of being below $55/bbl.
One thing is certain, if the industry is
able to attract money, meaning the rateof-return opportunities given the risks look
better than other opportunities, drilling will
increase.

Source: Preston Publishing Co.

SEPTEMBER 2015 101

American Oil and Gas Reporter - September 2015

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