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OCTG market outlook for oil country tubular goods demands

oil country tubular goods supplyHenan Anson Steel Co., Ltd is painfully aware of the effect the global oil price decline has had on drilling activity in 2015. Increased rig productivity aside, demand for oil country tubular goods has suffered largely the same fate as demand for drilling rigs and services.

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.

Oil country tubular goods supply

OCTG manufactures 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.

OCTG market supply

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 shipment 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.

Oil country tubular goods pricing

OCTG prices historically move with steel prices. Prices already have fallen 20-30 percent. Hot rolled (HR) steel prices have declined by a similar amount. 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.

oil country tubular goods pricingThere 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 OCTG market sectors, will continue trying to make the best of a bad situation, as it has done many times in the past.

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