Thinking outside the box
The National Association of Steel Pipe Distributors (NASPD) 2011 Annual Convention in Houston, Texas was met with a sell-out crowd of over 540 attendees from nearly 200 companies. The resounding theme throughout the event, held February 17-19, was that although 2011 is already shaping up to be stronger and more profitable than 2010, this year remains a hurdle for steelmakers, manufacturers, distributors and traders alike to overcome. A slowly recovering economic environment was among the major concerns of attendees, a topic touched on by speakers during the General Session.
Jeff Tillery, Managing Director of Tudor, Pickering, Holt, & Co., focused on the various oil and natural gas shale plays in the US and the oversupply of natural gas during his “Energy Update.” Tillery explained that the US needs approximately 150 fewer gas rigs (out of the 900 or so currently in operation) in order to “bring the gas market into balance,” as demand for the commodity remains mediocre.
On the oil side, performance in the industry is still slow and oil prices continue to be “all about the economy” but that the “oil story is good over the next 5-10 years because the supply side is challenged.” The oil rig count in the US is expected to grow over the next 12 months said Tillery, however US oil production has little impact on the global gas industry, constituting only a small portion of total world production. Still, oil rigs also continue to increase—rising from about 20 percent of all rigs (oil and gas) in 2008, to nearly half of overall activity today.
In his forecast for 2011, Tillery maintained that despite growth in some isolated areas, oil rig count will stay relatively flat through the balance of the year in the US, and horizontal drilling, which has grown exponentially over the past years, will continue to be the new norm—horizontal wells are approximately half the cost of vertical wells, although the latter provide a greater return ratio.
Following Jeff Tillery, Pipe Exchange Ltd. President Dolty Cheramie spoke on the status of the US oil and natural gas industry. Cheramie emphasized that in the US “we are drilling more for oil than we have in a long time,” but we are still producing more natural gas domestically then needed.
Cheramie agreed with Tillery that there is simply too much production of natural gas in the US today, and we are in a “natural gas bubble.” Currently, in terms of storage of natural gas, levels are 6.7 percent below where they were a year ago, and 6 percent below the five-year average, yet natural gas prices are not rising. Cheramie explained that usually when the trend is negative, it would mean prices should increase, but that is not the case. “We have all the gas we need and we can produce it very quickly” he said.
The “next big kick” for the natural gas industry will come from demand from the automotive sector, but that won’t really take effect for the next few years. And for now, Cheramie concluded, there is no short-term bright spot on the natural gas side.
On the oil rig side, Cheramie detailed that US drilling permits are declining, although we have been increasingly drilling for oil. Cheramie said that although oil rigs stand about 1,750 today (late February), we are using less line pipe when drilling for oil. And while the OCTG producers remain busy, line pipe is still a rather slow market. He praised mills, however, saying that mills are “doing a good job at controlling production” and are now “making more by producing less.”
ISRI: Seeking out advantages in the global scrap market
Backward integration, exports, global steel production and the Japan situation were hot topics of discussion at the ISRI Convention and Exposition, held April 5-9, 2011 in Los Angeles, California.
Expecting to see a bright future for the US domestic steel market, Randy Ehret, General Manager of Strategic Sourcing at The Timken Company, believed that consolidation in the scrap industry will continue and the top 10 scrap processing companies will continue to grow bigger in the coming years. Backward integration benefits the steel producers by assuring scrap supply, reducing input costs, gaining synergies, and attaining a competitive advantage. However, Ehret asked the audience to consider how much value domestic suppliers bring, and what other investment opportunities are available before acquiring scrap yards.
The United States is the world’s largest scrap exporter, followed by Germany, while Turkey is the world’s largest scrap importer followed by South Korea, stated by Patrick McCormick, President of World Steel Exchange Marketing LLC and Managing Partner of World Steel Dynamics. Nevertheless, this position can change. US scrap export volumes to China exceeded the amount exported to Turkey in 2009, the year when scrap prices were lower than world pig iron prices. McCormick pointed out that China’s 2009 scrap import surge was driven by large price gaps between regions. He expected that China would acquire more obsolete scrap tonnages in the future if much of the nation’s basic oxygen furnaces are replaced by electric arc furnaces.
Despite recent setbacks in the Middle East, North Africa and Japan, the outlook for global steel production growth remains very positive, McCormick said. And the Japan issue is going to impact scrap flow, benefiting the US export scrap market.
Scrap supply and demand are in balance in terms of global perspective, according to John Harris, Raw Materials Consultant of ArcelorMittal USA. However, he noted that the Middle East is a huge concern, due to high oil costs and political conflicts. Another issue is China, Harris said. The Chinese market produces a significant amount of steel tonnages at an ever-quickening pace. Additionally, Japan’s scrap availability to the Far East is a concern, as Japan exported a significant amount of scrap to South Korea and China in recent years