The US pipe market is , as one trader described it, "pretty ugly" these days.
While pipe had been one of the hotter products in the first part of the year, particularly for energy-related applications, with the fallout of the financial crisis and oil prices falling tremendously, the pipe market has taken a sharp U-turn.
"Everybody's trying to walk away from pipe orders," one Gulf area trader said. "People have been caught with a lot of inventory."
Part of the problem is that while the market was going up, a lot of orders were placed, and lead times were long. This caused a delayed but severe impact on the market when massive amounts of material started to arrive but demand had all but disappeared. The large amount of OCTG imports from China, while not posing a problem just a few months ago when demand was voracious, are now a serious concern. Traders are now facing a lot of cancellation requests and unsold tonnage.
While import totals for most steel products went down in November, OCTG imports continued to rise, as License Data from the US DOC show. OCTG imports rose from 471,961 mt in October to 519,800 mt in November. The vast majority of this tonnage (337,676 mt) came from China. The next largest import OCTG sources in November were South Korea (41,838 mt), Germany (25,431 mt) and Russia (18,950 mt).
Demand for standard pipe used in lower pressure applications like water transmission and natural gas transmission has also weakened considerably with the slumping economy and credit crunch taking a heavy toll on commercial construction.
Furthermore, prices for flat rolled, the raw material for welded pipe, have plummeted in recent months, putting downward pressure on pipe prices. Domestic mills are doing the best they can to stop the bleeding by cutting production and even jobs, as necessary, but even with those measures they are having to quietly lower their prices.
Import prices for ERW A53 pipe have weakened to the very low $40s cwt. (high $800s/mt or low $800s/nt), with offers from the Middle East and Turkey being the most aggressive, while domestic offers are in the low-to-mid $50s cwt. (low $1,100s/mt or low $1,000s/nt) ex-mill.
Even on the seamless side of the market, which was once red-hot, prices have weakened considerably. Only this past July, US Steel hiked prices by an amazing $800/nt ($882/mt or $40 cwt.) in just one month; now all of the gains pipe prices made in the first part of the year have been lost, and then some. Only a few days ago, US Steel rescinded a previously announced $200/nt ($220/mt or $10 cwt.) October increase for seamless pipe.
Needless to say, oil prices have dropped tremendously since peaking this summer, with the crude oil price now at under $50/barrel, reflecting a decrease of over $100/barrel from its apex. For this reason, as well as the impact of the credit crunch, the US rig count is down, which has heavily affected the demand for OCTG and line pipe. Still, drilling activity hasn't collapsed, and oil demand, while it has weakened, has not evaporated entirely.
A report released Thursday by the International Energy Agency, an energy advisor for industrialized nations, stated regarding oil prices, "It is premature to automatically assume a protracted down cycle." Still, the report went on to say that oil demand in North America declined by 8.3 percent in October compared to the same month of 2007, with most of the slowdown coming from the US, where the drop was 9.4 percent. The current US rotary rig count is 1,790 rotary rigs still working, compared to 1,852 during the same period of last year.
Going forward, all facets of the US steel pipe sector, energy or otherwise, face some pretty serious challenges, as the quick, sharp drop in demand has created excess inventories. However, the industry has dealt with this problem before, and has recovered once the inventory de-stocking phase ended. Also, raw materials for welded pipe seem to be bottoming out, which should give somewhat of a boost to pipe eventually. For now, the pricing trend still remains down.