Purchasing awakens from lengthy slumber
But, the domestic steel pipe and tube market is expected to remain sluggish for a while
By Tom Stundza -- Purchasing, 3/4/2004 2:00:00 AM
Momentum toward recovery in industrial demand for steel pipe and tube is starting to materialize, say buyers noting the recent 20% lengthening in delivery leadtimes. Suppliers are hopeful that 2004 will reverse the market slide that began in 2000. "Business being booked early this year looks stronger than all of 2003," says the purchasing manager for a hydraulic products company, "but I would like to see several more months of business growth before I feel comfortable."
Back in 2000, steel mill and tubular distribution executives believed the industrial-grade pipe and tube market was touching bottom following an unexpected two-year slide in purchasing that had been preceded by six consecutive years of growth. The market insiders were wrong: Purchasing backed off againin double-digit fashionin 2001, then slipped even further in 2002, and barely improved in 2003.
Dennis Lasker, carbon and alloy tube group vice president for Plymouth Tube Co. in Warrenville, Ill., had been hoping that last year's market for mechanical steel tubing would show at least 4% consumption improvement over 2002. "Instead, overall demand was flat in 2003," he admits, blaming weak end-use conditions on a preoccupation with such geopolitical issues as the war in Iraq, new terror threats, the severe acute respiratory syndrome (sars) epidemic and a generally weak global economy.
Now, in early 2004, the swing in the business cycle already is driving industrial activity out of its doldrums. Short-term forcesranging from stronger U.S. and global demand to a declining dollar and unusually low interest ratesare enlivening tube manufacturing's outlook. Business demand for new equipment and inventories is set to power production at growth rates not seen since the late 1990s. The dollar's decline and stronger global growth are boosting exports. All of this should boost the outlook for tubular steels, but high sales prices triggered by exploding costs for raw materials will probably have a stifling effect on demand growth.
Producers call it skelp, the flat-rolled steel used to produce welded pipe and tubing in numerous types and grades. With production and feedstock costs rising and demand improving, steel companies have been passing double-digit price increases on to their skelp customers. Buyers at tube-making plants reported in early January that purchased steel sheet costs already had risen 17% since November.
And that hadn't yet accounted for large per-ton surcharges being levied by steelmakers, starting in mid-January, to offset suddenly skyrocketing scrap costs. "These cost increases, generally in the form of higher base prices and surcharges, are impacting our steel costs and will affect our sales prices in coming weeks," says Gregg Eisenberg, chief executive of Maverick Tube Corp. in St. Louis.
For example, pricing for fully finished mechanical tubing products collapsed to $380/ton by the third quarter of 2003 as year-on-year demand fell 10%. At a market forecast meeting last autumn, producers were projecting prices of $440 for the spring of 2004. But, with steel mill base-price hikes and surcharges, buyers already were reporting $465/ton for mechanical tubing in January. (Virtually all of the nation's five-dozen or so tube companies manufacture tube products that are fully completed or end-finished at their facilities. The end-finish process includes, as appropriate, upsetting, beveling, threading, pressure testing and application of couplings.
Better than 42% of mechanical and structural tubing buyers surveyed by Purchasingdata.com say prices are up and will continue to rise well into the springtime. One third of pressure tubing buyers, a weaker market, feel the same way.
Where tubulars are heading
Drawn-over-mandrel (DOM) mechanical tubing is a mature product that is cold drawn to exact outer and inner diameters for use mainly in hydraulic and fluid power applications. DOM has been having some hard times, particularly in the agricultural equipment and construction equipment markets. "There is no question we've seen some difficult years for America's manufacturing sector," says Rhys J. Best, chief executive of producer Lone Star Technologies in Dallas.
Demand for bellwether mechanical tubing "remained weak during 2003 as the general U.S. economy remained fundamentally soft and continued to be resistant to recovery," says Best. Meanwhile, sales deteriorated as the year progressed for the company's heat recovery tubular goods, or finned tubes, used in fuel economizers and in combined-cycle electrical power generation plants. But, this is a new year, and "recent improvements in the manufacturing economy are boosting 2004 demand for mechanical tubing and finned tubes," says Best.
In general, commercial and industrial construction activity, the energy market and industrial economic conditions all influence demand for tubular products. Delivery leadtimes for mechanical, pressure and structural steel tubing have been stuck right around three days since 2001. Inventories of steel tubing at Metal Service Center Institute firms have been stuck at an average 2.9 days of supply for five years now.
According to recent buyer surveys, industrial demand has shown signs of life early this year. "The overall picture here is consistent with a manufacturing sector that is building a head of steam in the face of strong final demand and a need to replenish inventories," said Joshua Shapiro, chief economist for global economic consulting firm MFR Inc., New York.
Pointing to a fourth quarter resurgence in sales," Lasker of Plymouth Tube now suggests a 5% increase in mechanical tube demand as heavy machinery and other industrial metalworking sectors continue to expand their recoveries and service centers and end-users rebuild inventories.
What steel tube producers really need to do is to invest in state-of-the-art equipment to develop niche products for nontraditional markets, according to global economist Delos R. Smith, a senior business analyst for the Conference Board in New York. He says that "even with the steel tube-consuming market coming out of a stall, tubular markets remain difficult."
So, the marketplace "is a whole new ball game [with] some very difficult and complicated supply circumstances that the tubemakers will have to face, caused by cost-conscious buyers and less-than-spectacular traditional sales sectors," Smith says. So, firms that don't plan for expanded sales opportunities will be in trouble.
The manufacturing economy continues to await recovery in nonresidential construction and an increase in corporate capital spending on machinery and heavy equipment. As one materials manager puts it: "Our company still isn't really seeing increased capital goods orders from customers. Most orders are either for spare parts or large component replacements."
The purchasing manager at a welded steel tube plant adds: "While business is increasing, we don't yet have a firm take on whether it's hedge buying because steel prices are rising or because these are actual orders for production."
Looking at the various products
Mechanical steel tubing is the industry's bellwether grade because it requires only minimal downstream processing such as stress relieving or annealing to meet particular customer specifications. Purchases of seamless and welded mechanical tube dropped annually from a cyclical peak of 4.93 million tons in 1998 to 3.29 million tons in 2003. That's the lowest annual buy in the 16 years Purchasing has been tracking steel tube-use tonnage. The outlook for this year is positive, though, with a minimum 5% rise to 3.45 million tons.
Electric-resistance welded (ERW) mechanical tubing is used to make hydro formed or stamped body assemblies, a variety of components for autos and trucks, and farm and construction equipment. Seamless mechanical tubing is also the raw material for hydraulic cylinders, auto and truck axles, the rolls used in printing, textiles and paper mills, plus bicycle and motorcycle frames. Mechanical tubing is used in flow lines for fluids and gases in pneumatic, hydraulic, process, medical, food processing and many other specialized applications. Fluid power equipment demand is expected to rise 5-6% this year.
Hollow structural sections (HSS) refer mostly to high-strength welded steel tubing used as elements in buildings and other structures and a variety of manufactured products. Seamless HSS also exists. Structural tubing products are used in construction, transportation, agricultural, materials handling and recreational applications. These tubulars are produced in round, square and rectangular shapes and a broad range of sizes.
Demand is erratic, though, since HSS goods are geared more toward unpredictable capital construction than more predictable residential construction. These structurals also are used in fabricating heavy equipment, agricultural implements, trailers, racking and storage systems, and even automotive tubing for exhaust systems, brake lines and bumpers.
The structural tubing market peaked at 2.74 million tons in 1999 and, after a four-year decline, bottomed out at an estimated 2.14 million tons in 2003. HSS tubing has been designed for use in highway rail, median barrier and bridge railingsthe 4% decline in 2003 highway and bridge construction work dampened HHS demand. The lack of contracts for new electric utility plants, healthcare facilities, courthouses, detention facilities and amusement-related projects also depressed sales.
The structural tubing end-use outlook for 2004 remains uncertain but market insiders such as Jim Baumann, national sales manager at Rath Manufacturing Co. in Janesville, Wis., are buoyed by consensus forecasts of a 2% pickup in public works projects after a 10% drop in 2003. Overall, they see HSS use rising at least 5% because of projected solid growth ahead for construction of offices and stores, hotels and warehouses, oil, gas and chemical process plants, transportation terminals, water supply systems, schools and, most important, manufacturing plants.
Standard pipe products are used in industrial applications such as steam, water, air and gas lines and plumbing and heating. Supported by solid, if unspectacular spending on maintenance repair and operations (MRO), purchasing totaled 2.16 million tons in 2002, a solid 12.5% jump from 1.92 million tons in 2001, and the highest tonnage in four years. However, use slipped slightly to 2.14 million tons in 2003. The MRO-dominated outlook for this year is a slow 2% pickup in purchasing.
Pressure tubing is a niche product used to convey water, steam, chemicals, oil, natural gas, and other liquids and gases in industrial piping systems. Purchasing is erratic and climbed to a 14-year high of 124,000 tons in 2002 and insiders suggest purchases were supported last year by heavy MRO spending. Buying slipped back to an estimated 92,000 tons in 2001 and the outlook for 2004 is flat to slight improvement.
Stainless steel pipe and tube buys last peaked back in 1997 at 257,000 tons. Annual usage has been sliding since and the dramatic dropoff in capital spending brought end use down to a nine-year low of 168,000 tons in 2003. "As 2004 begins, we are seeing improvement in market conditions," says Pat Hassey, chief executive of producer Allegheny Technology in Pittsburgh. All in all, he expects "overall business conditions for most of our major end markets to steadily improve in 2004" but the mavens still see a 5% gain to 176,000 tons.m
U.S. Industrial-grade steel pipe & tubing use
(annual, thousands of net tons)
| Mechanical tube | Structural tube | Pressure tube | Stainless pipe & tube | Structural pipe | Standard pipe | TOTAL | % chng | |
| * Forecast SOURCE: PURCHASING FROM INDUSTRY REPORTS |
||||||||
| 1988 | 4,016 | 1,176 | 131 | 188 | 576 | 1,958 | 8,045 | |
| 1989 | 3,820 | 1,140 | 104 | 177 | 498 | 2,105 | 7,844 | -2.5 |
| 1990 | 4,024 | 1,017 | 88 | 175 | 424 | 2,050 | 7,778 | -0.8 |
| 1991 | 3,904 | 1,171 | 61 | 167 | 376 | 1,769 | 7,448 | -4.2 |
| 1992 | 3,920 | 1,205 | 79 | 160 | 377 | 1,601 | 7,342 | -1.4 |
| 1993 | 4,068 | 1,300 | 87 | 155 | 315 | 1,702 | 7,627 | 3.9 |
| 1994 | 4,283 | 1,381 | 74 | 156 | 400 | 1,891 | 8,185 | 7.3 |
| 1995 | 4,356 | 1,506 | 85 | 206 | 405 | 2,052 | 8,610 | 5.2 |
| 1996 | 4,368 | 1,819 | 87 | 232 | 352 | 2,221 | 9,079 | 5.4 |
| 1997 | 4,857 | 2,132 | 78 | 257 | 222 | 2,163 | 9,709 | 6.9 |
| 1998 | 4,932 | 2,557 | 103 | 239 | 272 | 2,271 | 10,374 | 6.8 |
| 1999 | 4,439 | 2,743 | 72 | 229 | 256 | 1,999 | 9,738 | -6.1 |
| 1900 | 4,589 | 2,592 | 88 | 206 | 213 | 1,943 | 9,631 | -1.1 |
| 2001 | 3,841 | 2,362 | 92 | 192 | 180 | 1,919 | 8,586 | -10.9 |
| 2002 | 3,308 | 2,150 | 124 | 172 | 150 | 2,161 | 8,065 | -6.1 |
| 2003 | 3,291 | 2,137 | 94 | 168 | 237 | 2,163 | 8,090 | 0.3 |
| 2004* | 3,454 | 2,244 | 98 | 176 | 240 | 2,206 | 8,418 | 4.1 |
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