Demand for metal pipe and tube is down—and dropping
The outlook shows a tough environment ahead for suppliers. That's because market analysts see no demand improvement in 2009, and only very little in 2010. So, prices continue to slide down.
By Tom Stundza -- Purchasing, 4/9/2009 2:00:00 AM
Steel and nonferrous pipe and tube markets have been deteriorating for the past two years and demand in 2009 will continue the downward trend. Reason: There has been strong correlation between tubular products purchasing and such faltering economic dynamics as residential and non-residential construction, natural gas exploration, agricultural spending, consumer goods manufacture and highway spending.
Currently, even steel tube suppliers expect decreased buying from all these end-use areas in 2009—and maybe longer. Also, the government's infrastructure redevelopment projects aren't expected to boost steel tubing demand for many months to come. Nonferrous tubing businesses also are pessimistic about shipments this year and next because sales of their copper and aluminum tubulars are linked to transportation products and the construction of new and reconditioning of existing homes, office buildings, factories, hotels, hospitals and various public structures.
Economists and tube mill executives earlier had expected to see improving market conditions in the second half of the year, but that was before recent reports extending the collapse in industrial production activity, still-slow residential and commercial construction and a general lack of expansion in other segments of the gross domestic product. So, steel, aluminum and copper tubing continue to struggle under the weight of inventories, and selling prices are staying down in end-use and distribution markets.
"Over the course of 2008, we saw rapid growth in our energy pipe business," says Brian W. Dunham, president and CEO of Northwest Pipe Co. in Portland, Ore. "In addition to volume growth we saw significant increases in selling prices that accompanied rising steel costs and the shift to products with higher growth margins within our historical product mix. We do not expect this combination of factors to repeat in 2009."
He tells analysts in a conference call that "the economic environment has changed significantly," citing the impact on business from the recession, the financial crisis, the changing cost of steel and the uncertain impact of the economic stimulus plan. Buyers report broad-based declines among the many customer industries that use steel, stainless steel and aluminum tubing from Virginia (Tony Watt, director of purchasing at Steel Services in Richmond) to Texas (Anne Anderson, materials manager at amplifier manufacturer Atlas Sound in Ennis) to Utah (Bill Anderson, purchasing manager at processing distributor B&K Steel & Supply in West Haven).
Market mavens also have been expecting the soft market for carbon steel pipe to decline—up to 10% for seamless tubing and up to 15% for electric-resistance welded tubing—in the first half. Indeed, with the costs for steel and others metals dropping, buyers report that market prices have dropped for steel tubulars from New York (Wes Bailey, director of the supply chain at compressor maker Crosman Corp. in East Bloomfield) to Missouri (Tom Miofsky, vice president at metal tubing fabricator Bohn and Dawson in St. Louis) to Minnesota (Steve Hagen, COO at rigging maker Stage Equipment Company of America in Champlin).
Analyst John Anton at IHS Global Insight's Washington office says that, "for the first time in many decades, the U.S. can meet its own needs with few imports—but only because demand is so weak." Steel pipe and tube use dropped 7% in 2007 and 6% in 2008. Aluminum extrusion shipments, which includes pipe and tube, dropped 13% to less than 3.5 billion lb last year. New orders bookings in January, the latest available data, were down 36% from a year earlier, the Aluminum Association reports. Copper and brass tubulars were flat at 12.4 billion lb in 2008 versus 2007.
Early forecasts from tubular market analysts had suggested a 5–10% rebound in use this year but their projections recently have been revised to a 10–15% decline. For example, the new projections for 2009 use of industrial-grade mechanical, structural and pressure steel tubulars is down to 7.7 million net tons, the lowest single-year consumption volume since the 7.6 million tons used in 1993.
Inventory building is a no-no
Neither end-use firms in manufacturing nor construction companies want to buy tubulars for stockpile so the inventory function is handled by service centers. When demand is high or steady and expected to grow, service centers build inventory. That happened in 2006 but the service centers cut stocks by 6% in 2007 and another 10% in 2008. That's because industrial tubular shipments by service centers fell off a two-year plateau of 3.65 million (2006 and 2007) to 3.44 million tons in 2008.
Also, as the recession hit late in the second half of last year, the decline in natural gas drilling activity and the decline in order activity for energy products triggered a 4% decline in total use of oil country tubular goods and line pipe to 7.9 million tons. Tubular suppliers continue to expect to see a somewhat oversized increase in demand later when inventories need to be restocked at the same time user demand increases. However, even the most optimistic mill or service center executives have no idea when that may occur.
Demand for energy tubular products is very low since more and more data is suggesting that energy demand in the U.S. will continue to fall. Crude oil last month had fallen about $100/barrel from mid-July highs of almost $150. The price has been dragged down by the slumping demand and other global economic woes. The International Energy Agency has lowered its forecast for global consumption this year. So, even though the Organization of Petroleum Exporting Countries has cut production, that hasn't supported higher prices. This would be enough of a drop to keep near-term oil prices languishing in the $40–$50/barrel range.
Looking at prices in January, marketing personnel at distribution firm McJunkin Red Man in Tulsa, Okla. told customers in a report that they anticipated market prices would soften during the first half of 2009 due to the decrease in demand as well as the reduction in raw material input prices—"but not give back all of the increases from 2008." Now, however, other market mavens believe steep slippage in market prices is possible—especially since steel, copper and aluminum substrate costs have been declining more than had been expected earlier.
Today substrate metal prices are selling for approximately half their cost at the summer peak of 2008. Historically, selling prices for tubulars have adjusted to changes in steel, copper and aluminum billet and sheet costs. In 2008, steel mechanical tubing prices climbed to a monthly peak of $1,200/ton in a year in which the average price was $995. However, buyers report that the 2009 market price has turned south and could fall for the year back to the 2007 average of $850. That's a big issue for service centers who bought metal tubulars back when prices were high and now are stuck with overpriced stocks.
Prices for stainless steel products also have decreased over the past six months and most analysts anticipate the first six months of 2009 will bring additional softening to the stainless market. Stainless steel welded pipe has experienced the largest percentage decline (37%) since last summer. This is due to a lack of demand as well as the declining costs of raw materials required to make stainless. Nickel, which accounts for most of the alloying costs in stainless steel, has declined 55% in price over the past six months. So, stainless steel's alloy surcharges have declined roughly 70% since their highs reached in May 2008.
Push from stimulus plan is uncertain
Various metals industry executives believe the Obama administration's $787 billion economic stimulus plan could provide some eventually marginal benefits to the tubular products group. There are dollars in the plan for construction and highway spending that could filter down into structural pipe and tube products and tubular-based traffic signpost business.
Some suppliers are looking at the stimulus package to boost transmission tubing, especially water tubulars. The funding includes $6.4 billion in spending on water infrastructure to be administrated by the U.S. Environmental Protection Agency. Of this total, $4 billion is targeted to core projects under the Clean Water Act and $2 billion is targeted towards projects under the Safe Drinking Water Act. In addition, $1.375 billion has been appropriated for rural water programs, $200 million for U.S. Army Corps of Engineers water-related projects and $1 billion for the U.S. Bureau of Reclamation projects.
However, Dunham, president and CEO of Northwest Pipe, believes "the real boost for the tubular steel business will come as the natural gas exploration market improves." Natural gas exploration has virtually stopped at present but energy analysts say this country's reliance on that product will not end. That's why mills expect long-term improvement in demand for the American Petroleum Institute-certified products. But again, even executives such as Dunham admit, there's no clear indication of when the pickup will begin.
North American energy transportation companies have plans for 35,217 miles of crude oil and natural gas pipelines, according to the U.S. Energy Information Administration, but proposed construction far exceeds available funding. The largest single proposal is the $12.5 billion Mackenzie Valley Pipeline that would ship natural gas from Canada's Arctic. The pipeline, slated to tap massive gas fields under the Mackenzie River's arctic delta, was originally expected to be complete by 2011.
As proposed, this pipeline would ship up to 1.9 billion cubic feet/day of natural gas for 50 miles along the Mackenzie River Valley to Alberta, where it would link with lines serving Canadian and U.S. markets. However, a U.S.-Canadian Joint Review Panel now won't release its report until December 2009, months later than planned by the Mackenzie Delta Production Group. That sponsoring consortia is comprised of Imperial Oil Resources, Royal Dutch Shell, ExxonMobil, ConocoPhillips and the Mackenzie Valley Aboriginal Pipeline Group.
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