Drilling rate boosts demand

By Staff -- Purchasing, 3/8/2001

What's happening: Having experienced a downturn in the second half of 1998 and through the better part of 1999, demand and prices increased for oil country tubular goods (OCTG) during most of 2000. OCTG refers to a group of carbon and alloy steel products-electric-resistance welded and seamless tubing, piping and casing-which have a single market. Drill pipe is used and may be reused to drill wells. Production casing forms the structural wall in oil and gas wells to provide support and prevent caving during drilling operations and is generally not removed after it has been installed in a well. Surface casing is used to protect water-bearing formations during the drilling of a well. Production tubing is placed within the casing and is used to convey oil and natural gas to the surface and may be replaced during the life of a producing well. The domestic oil country tubular goods market is affected by several factors, the most significant being the number of oil and natural gas wells being drilled. The level of drilling activity is largely a function of prices for oil and natural gas and the industry's future price expectations. After a cyclical low in 1992, when use dipped under a million tons, demand for oil country tubular goods rose almost continually and peaked at 2.4 million tons in 1997. Use slipped slightly during the next two years, but rebounded to 2.22 million tons in 2000 as increasing oil and natural gas prices led to a 400% increase in domestic drilling activity. The Baker Hughes count of active oil and natural gas rigs rose from 773 in operation at the end of 1999 to 1,075 at the end of 2000. However, while OCTG market prices rose 7% over the course of the year, they still were under the levels of the peak-use year in 1997. The late-2000 price for carbon electric-resistance-welded tubing of $887/ton compared with $726 a year earlier, according to information services company Pipe Logix in Santa Fe, N.M. Carbon seamless tubing was $1,022/ton compared with $707, electric-resistance-welded (ERW) carbon tubing was $885/ton compared with $560, and alloy ERW was $1,067/ton versus $915.

Why it's happening: The upward month-by-month move of OCTG product prices lost steam in the fourth quarter as supply exceeded monthly demand and market stocks rose by more than 400,000 tons. Some mill execs even worry that 2001 prices will decline because of a late-2000 increase in low-priced imports and higher 2001 inventory levels of carbon-grade OCTG products in the marketplace. Imports were only 13% of the market in 1999, but the surge in demand opened the flood gates for foreign-made OCTG , which increased by 277% last year and grabbed 27% of the market. Since 1995, the U.S. government has been imposing punitive dumping and countervailing duties on imports of various OCTG products from certain foreign countries in response to complaints filed by several U.S. steel companies. The U.S. government is currently conducting "sunset reviews" of the duties to determine whether they should be revoked. Domestic mills are lobbying against removal of these duties when the reviews are completed late this summer, citing fears of a marketplace glutted by low-priced imports. They note that new supply outpaced demand last year by more than 400,000 tons.

What to expect: Because of the overhang of new-supply excess from last year and further excessive supply this year, the OCTG market's inventories will be heavy-rising to some 1.6 million tons, up from 1.4 million tons at the end of 2000. That's because supply is expected to increase to 3.2 million tons from 2.7 million tons last year. Demand will be strongest from producers of natural gas, which is in short supply and selling at record-setting highs. Demand may not be quite as strong from companies drilling for crude oil, however, because the slowing economy may take some of the steam out of exploration projects. Still, total use will rise to 2.6 million tons, the mavens suggest, from last year's 2.2 million. More important, the jury still is out whether U.S. Steel's effort to boost OCTG market prices this quarter will be successful since buyers are aware that stocks are high and market prices for feedstock steel grades have crashed to 20-year lows.

What's up with OCTG