Fueling a favorable future

Wednesday, 23 May 2012 23:47:25 (GMT+3)   |  

David Seeger, President of JMC Steel Group, highlights why he thinks the future is bright for the US energy pipe market.

David Seeger began his career in 1979 with UNR-Leavitt in the Sales & Marketing group, then moved to Welded Tube Company of America as Vice President and General Manager, ultimately serving as President of Atlas Tube. Most recently, David was appointed President of the newly-formed JMC Steel Group where he now oversees both the Wheatland Tube and Atlas Tube divisions. JMC Steel is a $2.0B company and is the largest independent tubing manufacturer in North America.

With US' natural gas rig count on the decline and natural gas prices reaching new lows, some drillers are converting to gas liquids or oil drilling instead--where activity is stronger. There is also concern that if natural gas prices get too low, it will no longer make financial sense to keep operating. How concerned is JMC about the recent drops? Do you foresee natural gas prices (and in turn, rig counts) rebounding in the near future, or is there still room for continued declines?

DS: In the near term, we are not concerned that the rig count has fallen slightly as drilling companies are pushing to reallocate resources from dry gas into gas liquids and oil drilling. The rig count is pretty stable, between 1,900 and 2,000 rigs, and looks to remain at these levels into 2013.

In the longer term, as infrastructure is modified to take advantage of the inexpensive and bountiful natural gas reserves our country has (conversion of power plants, trucks and autos, export opportunities), we think prices will move upward and drilling for natural gas will increase. The long term outlook is very favorable.

Looking further into the future, do you think natural gas will ever come close to displacing more traditional sources of energy in the US, such as coal?

DS: According to the US Energy Information Administration, natural gas is currently the second largest sector of fuel for providing energy in the US, with demand for natural gas accounting for 25 percent versus coal as number three at 21 percent. We see the demand for natural gas as an energy source continuing to grow versus alternatives other than petroleum, primarily due to cost. Typical operating costs for power plants using different fuel types are approximately: natural gas$57/MWhr; Coal$63/MWhr; and Nuclear$117/MWhr.

Even though demand for HSS has improved so far this year, spot prices aren't able to stand on their own without the support of raw material costs, making the HSS spot market almost as volatile as the flat rolled market. Do you think this trend will continue, or do you believe demand will improve enough this year that HSS mills won't have to instantaneously react to every flat rolled pricing move?

DS: The reason that HSS pricing moves so quickly with respect to the coil market is the very high percentage it represents of the overall cost of HSS product. There is usually a 30-day lag with HSS pricing on the way up but unfortunately it seems to move down in a much shorter period, almost instantaneously as you mention.

This requires us to be extremely efficient in managing our inventory and why we have invested so heavily in quick-change mills and work very closely with both our customers and suppliers to reduce our inventory exposure as much as possible. We view this as one of our core strengths at JMC and it was developed for this very reason as we would expect the trend to continue.

Over the past year, a number of US pipe mills announced plans to focus on more premium products. Many perceive this to be a reaction to growing import competition for commodity OCTG products, while others attribute the trend to increasing US domestic competition after so many OCTG product line expansions cropped up in the past couple years. Which do you think is a more influential factor?

DS: We don't see the US mills' focus on premium product for the OCTG industry as being driven by either foreign or domestic competition but rather from the demands of the US customer base. In 2011, 57 percent of all drilling activity was in horizontal wells, up dramatically over the last several years. These well types require much higher performance from the pipe than can be obtained using commodity grade OCTG, thus driving the demand for premium connections and higher grades of OCTG products.

That being said, the commodity grade OCTG market has had a significant increase in supply from both the two areas you mention and will require some time to determine its long term impact.

In October 2011, JMC, along with Allied Tube & Conduit and US Steel filed anti-dumping and countervailing duty petitions against circular-welded standard pipe from India, Oman, the UAE and Vietnam, which dramatically slowed US buyers' and traders' willingness to book with those mills currently under investigation. But while some speculated that the case against a few of the US' top import standard pipe sources would force some to turn to more domestic product, typical importers just switched to importing from other countries (Turkey, Korea, Philippines, etc.) because prices are often substantially cheaper. How much of a role do you think standard pipe imports will continue to play in the US market? How would you gauge the importance of the case overall, especially in today's political environment?

DS: I think standard pipe imports have and will continue to play an important role in the US market. The speculation that importers will just switch to importing from other countries is accurate. Of course that is what they will do and I have no issue with that. I just hope they choose countries that abide by international and US trade laws, otherwise we will continue to go after them.

Somehow, in the national discourse on this subject, some people choose not to recognize the distinction between free trade and illegal and unfair trade. These trade laws exist for a reason and without enforcement of them our country's manufacturing base does not stand a chance to survive. To some people, if a country wants to cheat or avoid our laws, that's "okay"--that's "free trade." I don't define it that way.

In December 2011, The US Federal Circuit Court of Appeals ruled that countervailing duties do not apply to imports from non-market economies, such as China. Many Chinese exports of steel products include products JMC produces: OCTG; light-walled pipe and tube; circular welded line pipe; and pressure pipe. Although many of these products are also subject to anti-dumping duties, do you believe Chinese pipe imports could again start flowing into US ports? How much of a concern is the court's ruling to JMC?

DS: We are very troubled by this ruling and are pursuing both a judicial and legislative resolution to it. While the anti-dumping duties still remain a barrier, the loss of the CVDs lowers the overall barrier and very well may initiate certain tubular imports to begin flowing again.

As of March 6, the House just passed the GPX Bill which the Senate passed the previous day that will reinstate the countervailing duties. We expect the President to sign it into law very shortly.

During the NASPD Annual convention in February, trade attorney Lewis Leibowitz discussed the overall importance of imports in the US, noting that 40 percent of US imports are intermediate goods and therefore the US would not be able to export many of its finished products if it were not for imports. Do you agree with his comments?

DS: As I said, I have no grudge against fairly traded imports; they are an important part of the economic fabric of our economy. However, I would not be a bit surprised if a large percentage of these "intermediate goods" are not products that could be produced here and be readily available if US producers were able to compete on a level playing field (no currency manipulation, no subsidies, similar environmental standards, etc.). There are too many instances where the domestic industry has been decimated by unfairly traded imports to the point where you can no longer buy these products domestically.

Leibowitz also commented that "if less OCTG is coming in, there will be less drilling activity because it will cost more to build a well." If imports were not in the picture, how do you think this would affect the oil drilling industry in the US?

DS: Did he really say that with a straight face? If that were true, you would expect to see drilling activity go up and down when the price of steel fluctuates since it is the majority cost component of OCTG. The cost difference between foreign and domestic OCTG is less than 2 percent of the cost of a well. If the import price moved up to the domestic price tomorrow, there would not be one less rig drilling for oil or gas than there is today. The price of oil determines the active rig count, not the price of OCTG.

The company that is now known as the JMC Steel Group was formed through years of mergers and acquisitions, most notably with the acquisition of Lakeside Steel in January. Are there any future plans on the merger and/or acquisition front? Is there a specific product line that JMC sees growing demand warranting an expansion in the next couple years?

DS: One of the upsides of the Zekelman family purchasing the majority share of JMC is a strong appetite for growth through acquisition. JMC is an experienced acquirer and, more importantly, a successful integrator. Acquisitions have increased our scale, scope and product offerings and we absolutely plan to continue down that path.

The Lakeside Steel acquisition certainly expanded our presence in the energy sector and gives us a better overall balance but we would be interested in any business that would enhance the JMC portfolio.

Prior to JMC's acquisition of Lakeside Steel, Lakeside was in the midst of expanding its operations in Alabama and Houston. Will JMC continue the current expansions as Lakeside originally indicated or are there plans to change/relocate those facilities to better absorb the company under the JMC umbrella?

DS: The basic blueprint that Lakeside laid out in terms of expansion remains intact and, in fact, we are committed to accelerating those plans. There are certain areas where we can enhance those plans by utilizing JMC equipment and capacity but they are more in terms of complimenting that plan and realizing synergies that the two companies together now enjoy.

According to some estimates, as much as 10,000 megawatts of PV solar panels are anticipated to be installed by 2015, but a major obstacle for solar panel installations is funding, and it can be difficult to get a project off the ground without help from state subsidies or tax-incentive programs. How much of a hindrance has the lack of funding been for the projects JMC is involved with? Do you think this will continue to be an impediment or do you see some loosening of funds in the next couple years?

DS: While this sector has made great strides in becoming self-sufficient in terms of generating a sustainable profit to investors, it is still very early in the game and requires governmental assistance in terms of getting the infrastructure in place. All of our energy sectors (oil, coal, nuclear, wind) have required assistance to get up and running and solar power is no different.

Solar projects have doubled this past year over 2010 projects and are expected to double again in 2012 but will continue to need assistance as the industry matures. However, the availability of funding is not certain at this time. President Obama's 2013 budget includes several requests in support of the solar industry, one of which is the extension of the Treasury 1603 Program which reimburses companies for up to 30 percent of the cost of renewable energy installations. The extension of this program is not certain and could have a major impact on the growth of solar projects going forward.

What is JMC's position on the recent announcement that the Keystone XL pipeline project will not likely be approved, at least along its currently proposed route through "environmentally sensitive" areas?

DS: JMC has no official position on the Keystone project, but I personally find it very disappointing that our leaders can't seem to come together to advance significant and important projects such as this. I realize the very important role that the environmental considerations play in a project of this magnitude but this has been years in the making and I would expect that an equitable resolution could have been achieved by now. Politics seems to have once again reared its head in curtailing any meaningful progress and underlines the need for a National Energy Policy that can provide the framework for moving the country forward in this critical arena.

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