Standing their ground
Piotr Galitzine, Chairman of TMK IPSCO, speaks with SteelOrbis San Diego about concerns facing the US pipe market, in particular the many facets of the import threat.
Much of the optimism in the US domestic OCTG and line pipe markets is discussed in the long-term—projects that are expected to emerge between two and five years out. Is there anything you see in terms of the short term that could have a more immediate effect on market demand?
PG: It is true that the optimism in the line pipe market is in the long term. That is because the planning and permitting—intrastate, interstate and even internationally—can take up to five years.
For OCTG, the horizon is much shorter. In the last six years, the apparent demand—local production plus import minus export – has gone from five million tons to seven million tons. This has not been accompanied by the anticipated price increase because of unfair imports that are improbably priced, but the demand is there.
Are there any particular regions in the US where this long-term activity is most prevalent?
PG: If you draw lines from the current shale plays to the current refineries, you get a good idea where the long term activity is most likely. You would draw a line from the Bakken to the Texas/Louisiana refineries. For Marcellus, the line would go to the newly-licensed Gulf Coast liquefaction plants.
Does your company have specific plans to grab a greater market share of this existing short-term demand?
PG: We have increased our domestic market share significantly over the past two years. But as the market doesn’t support profitable manufacture of the more basic welded pipe providers due to the unfair imports, we are increasing our focus on high performance seamless OCTG and premium connections where there is little South Korean import and reasonable profit levels.
Many of the US’ underground gas and water lines are decades old and need to be replaced, but local and state government officials seem to be dragging their heels on those projects. Do you see that changing, and if so, what do you think will be the catalyst in getting things off the ground?
PG: This country operates more than 600,000 miles of oil and gas pipeline networks, and 55 percent of the pipe is more than 50 years old. Understandably, nobody wants to start the necessary investments any earlier than they have to, so regulators are taking an increasingly proactive role.
The Pipeline and Hazardous Materials Safety Administration (PHMSA) has increased their inspection staff by 50 percent over the past two years. Their initial focus will be on gas pipelines. First, they will no longer allow cast iron pipe. Second, they will require pressure testing on all lines. This will require changes in some lines to allow isolation and pigging (a pig is a device that is put into the pipeline to clean and access the condition of a pipeline from the inside—terminals are required to get the pig into and out of the pipeline, and shut-offs to isolate the section being pigged. In some case there may be valves or other devices that obstruct the pig, which have to be replaced. All of this requires time, permitting and money). Lines that can’t be measured will be de-rated. This means that operators will have strong incentives to address this issue. It will translate into a lot of new line pipe over time.
A lot of people were surprised when the preliminary dumping determinations were announced in the OCTG trade case. Korea had long maintained their margins would be low, but few, if anyone, saw them coming in at 0 percent. How do you see this impacting the domestic market in the immediate future?
PG: The trade case involves Korea and eight other countries, but Korea is the major concern. Korea shipped almost 900,000 tons into the US in 2012, a million tons in 2013. Korean pipe imports for the month of December 2013 were double those of December 2012. This impossibly low-priced pipe is creating havoc in the market, particularly in the welded segment, which accounts for the vast majority of product coming from the countries named in the trade suit.
There have been many cases where a zero determination at the preliminary stage has been followed by a significant tariff at the final decision. For example, five years ago the Chinese producer Tianjin Pipe Corporation (TPCO) received a 0 percent preliminary determination and 99 percent at the final. This is because the International Trade Commission (ITC) looks primarily at data from foreign producers at the preliminary stage, then includes data from the domestic suppliers in their final determination. We are looking forward to the final determination because, as you know, we have had to cut back on overtime and shift workers at several of our facilities from welded pipe production to other, more profitable work.
What is the “more profitable work”? Are there any segments of the pipe market that are not as affected by imports in which your company might increase involvement?
PG: Because there is presently less seamless pipe coming from the nine countries, the market for seamless, as well as for premium connections, currently sustains profitable manufacture by domestic suppliers.
It would seem that the bulk of the offshore producers named in the case will be able to continue shipping OCTG to the US in a business-as-usual fashion, and forecasts show an upward of 3 million tons of US domestic capacity will be coming online in the next several years. Do you think the US market is entering an era in which supply will soon far outpace demand?
PG: More than half the new capacity—two million tons—is for seamless pipe. Most of the Korean imports are welded pipe. The new seamless plants will target the burgeoning shale market, especially in 5.5 and 4.5 inch sizes. We think that, over time, the cheaper imports will be pushed aside, because seamless is the norm in horizontal wells. We do have customers using premium grade welded horizontally, but it is not yet a broad trend.
TMK IPSCO recently reduced production hours at several facilities due to the effect of import competition. Do you see this as a temporary situation? If so, what changes in the market would have to happen to restore production to previous levels?
PG: We think any determination above zero will help the domestic industry. We are currently squeezed between the cost of hot rolled coil—set by the steel companies—and the prices of lower grade, welded pipe, in effect set by the importers. Relief from the unfair trade will encourage additional production and employment. In the meantime, we are not just sitting on our hands. We are doing our best to take costs out of production.
Does your company use primarily US domestic HRC for pipe production, or any portion of import HRC? Has your company considered investing vertically to either partner up will a flats producer or acquire one outright for your supplies?
PG: All the HRC we presently use is domestic. We have focused on increasing our heat-treatment and our threading capacity over the past several years.
Last year, the Obama administration approved a $10 billion natural gas export facility in Texas, although that project is not expected to begin exporting for three more years. Another facility in Louisiana is expected to start exports in 2015. How do you see this impacting the domestic pipe and tube markets?
PG: At this moment, the US has 36 LNG export facilities planned and awaiting licensing. Licensing is pretty automatic for free-trade countries, but only five facilities have licenses to export to other countries. This is important because broader licensing gives the shippers flexibility to change destinations at the last minute, based on changing global prices. The five facilities represent about eight billion cubic feet per day. Licensing of an additional capacity of seven-eight billion cubic feet per day (BCFD) appears likely. That would represent about 15-20 percent of today’s production.
National Energy Research Associates (NERA) estimates a plateau of 8-10 BCFD in exports. This would create a $10-$12 billion export business without significant increases of domestic prices. NERA concluded that exports by 2020 would impact the Consumer Price Index by about 0.1 percent. It is important to note that these LNG plants will not be a primary driver of line pipe demand because most of the plants will be on the Gulf, (with the exception of one or two on the West coast and one on the East coast) meaning existing pipelines may need some modification. Where we see additional pipeline construction is from the Marcellus region to the Gulf for gas, and from the Bakken to the mid-continent and down to the Gulf as well.
The US House of Representatives is currently considering a bill that would require the Department of Energy to approve pending applications for 20 natural gas export facilities. If this is approved, how soon will it be before US pipe producers see an impact?
PG: Some legislators have been urging additional gas export in support of Ukraine, and to give Europe an alternative to Russian gas, but as the facilities take four to six years to build at a cost of cost $4-$10 billion, so this would not be a short-term solution.
About a year ago, TMK IPSCO opened a new threading facility in Canada in order to “expand oil and gas field services business in Canada.” What progress has been made on this front in the last year? Does the company have plans to expand further in Canada?
PG: Our new Edmonton facility has been enthusiastically received by our Canadian customers. Now we can thread not only our existing family of premium connections, but eventually some connections that we are developing specifically for SAGD use. Canada now represents about 10 percent of our North American business.
Aside from proximity to oil and gas reserves, what are other positive factors about expanding into Canada?
PG: Our customers, and as a result, ourselves, benefit from the proximity of our threading facilities to their production sites. That’s why we have threading in Brookfield, Ohio in the Marcellus, in Odessa, Texas, in the Permian Basin and now in Edmonton, close to both Canadian shale and the oil sands.
Recent energy reform in Mexico has had a positive effect on that country’s steel industry, particularly pipe and tube production. Do you foresee TMK IPSCO expanding south of the border as well?
PG: We have been supplying some independents as well as some midstream customers for some time, even before the current reforms were instituted. It is definitely a market with significant potential for us.
Is there a chance your company might set up facilities in Mexico?
PG: We are beginning to supply Mexico as well as other Latin American countries, but the need for facilities in Mexico will be determined by sales volumes, much the same as elsewhere.
What is your long-term outlook for the US pipe market?
PG: If I could summarize, the line pipe and OCTG markets look promising to us in the long run. More wells are driven in the US than anywhere else in the world—about 45,000 per year. In addition, there are 10-12,000 in Canada and the same in Latin America. Our clients no longer see drilling as an art—it has become a reproducible production process. That is driving quicker drilling, calling for higher strength pipe and connections. In addition, longer horizontal runs, higher pressures and more sour service all bode well for a technology-driven pipe and connection supplier like TMK IPSCO.