Last week I attended a webinar on the OCTG and line pipe markets for the oil and gas industry. The talk, given by Preston Publishing covered domestic market consumption paces for both products, import market trends (quite fascinating actually), and price direction for both. We’ll start with the consumption patterns.
OCTG consumption, according to Paul Vivian and Rick Preckel, remain on track for a 4.1m-ton annual pace, similar to levels seen in 2005. According to Baker Hughes latest rig count from Friday May 7, at 1492 rigs, OCTG requirements equate to approximately 357,000 tons per month. From a number of month’s supply perspective, the industry had increased from a standard 6 months supply to a 14-15 month supply due to a flood of imports. Today, the industry appears back at a historical norm of 6 months supply, however imports appear ready to explode based on the number of import licenses (we’ll cover imports momentarily) recently applied for.
In terms of line pipe consumption, Vivian and Preckel see the industry at a 2.9m ton pace for 2010. Large OD products are running at a 2m-ton pace. Small OD products are running at a 1m-ton pace. Line pipe traditionally lags demand. Small diameter demand has not increased with the higher rig count. From a month’s supply perspective, inventory has shifted from 3-4 months supply to 6-8 months supply with still high import rates.
To understand these two markets, one must look at both straight rig count changes as well as shifts in rig count applications (e.g. rigs for natural gas drilling vs. oil drilling). Today Vivian and Preckel see a trend in moving rigs out of gas and into oil. Their rig forecast for 2010 is 1375. They expect a 250-300 rig drop for gas but some oil will replace some of that loss. Another trend impacting demand for OCTG and line pipe involves the drilling of wells but the completion of them moved to a later date when demand justifies bringing the capacity on-stream. Finally the type of pipe used for horizontal drilling (shale) with hydraulic fracking technologies changes the product mix. Vivian and Preckel see greater demand for alloy tubing as opposed to carbon tubing, along with more Schedule 80, more high collapse product P110 and larger ODs with heavier walls. The same applies for line pipe with a shift from 4 gathering lines to 6, 8 and now 10 and 12 API products.
Based on a forecast of declining rig count in the near future along with not all wells fully in service (and therefore slowing the gathering process and hence the consumption of line pipe) Vivian and Preckel expect prices to steady. However, they did not foresee the surge in imports.
Imported products have recently come primarily from Korea, Canada and Mexico. Another trend involves some imports coming from places not previously known to supply OCTG and line pipe such as Vietnam and Thailand. Perhaps surprisingly, despite the trade cases with China for both OCTG and line pipe, China still exports OCTG. But the top exporting countries for OCTG based on May licenses include India, Belarus, Russia and Canada. Traditionally, once a trade case makes its way to the ITC, imports tend to stop altogether but that has not been the case with China-produced OCTG. With US mills running at only a 70% capacity utilization rate (they ran near 100% in the first half of 2008), and the flood of imports expected to continue through June/July, Preston believes downward price pressure exists and we would concur.