MB RESEARCH VIEW – OCTG: Market’s global value will hit $40bn by 2017

Metal Bulletin Research (MBR) estimates that the total value of the global oil country tubular goods (OCTG) market will be valued at $39.8bn by 2017. For 2011, our estimate was a total value of $31.6bn. This amounts to growth of about 26% in five years.

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Metal Bulletin Research (MBR) estimates that the total value of the global oil country tubular goods (OCTG) market will be valued at $39.8bn by 2017. For 2011, our estimate was a total value of $31.6bn. This amounts to growth of about 26% in five years.

The market for OCTG finishing will grow much faster than the value of OCTG green pipe. This is therefore where we expect to see the bulk of investment in the sector over the next five years.

Between March and August 2012, MBR undertook a detailed survey of the global OCTG finishing industry.

MBR identified and contacted major tube and pipe mills that produce OCTG, as well as companies that provide threading, premium connection and heat treatment services. The research was compiled, like all our research reports, using comprehensive research methodologies involving face-to-face or phone interviews with all the major tube and pipe companies globally.

Based on this rigorous survey, we have identified well over 300 companies that thread pipe to produce OCTG. These firms have a combined nominal threading capacity of almost 43m tpy.

Individual operations vary from workshops with a few lathes undertaking mainly repair, capable of processing a few thousand tonnes per year, to producer-affiliated facilities with multiple lines capable of processing in excess of 1m tpy of pipe.

Threaders that are non-affiliated to producers also play an important part in the overall supply chain. By our estimates, they account for over 30% of total capacity. In areas such as Africa and Latin America they are dominant, while they are losing their dominance in the Middle East. They are far less important in producer-dominated regions, such as the CIS and Asia.

Note to pie chart: While MBR has rated capacity based on threading API grades of J55 in standard thickness, the chart above shows realistic capacity rating assessed on a realistic range threaded on a threader-by-threader basis. 

Based on our detailed survey of operating rates, as reported to us by the individual companies, we believe the global industry operated at an average 80% of its capacity in 2011.

MBR estimates that global heat treatment capacity in 2011 was 24m tpy. Capacity (with the exception of North America) is dominated by integrated steel pipe manufacturers. This makes sense as heat treatment accounts for a high proportion of the added value of the OCTG industry. North America is the exception because over the past five years it has seen more and more heat-treatment upgrading of imports of low-priced material.

Market outlook to 2020
MBR estimates that global OCTG consumption was 15.8m tonnes in 2011. After rising rapidly in 2012, we believe that growth in consumption will slow down in the next five years. We forecast average annual growth of just less than 4% in 2013-2017. We expect the areas of fastest growth to be Latin America and Africa.

MBR believes that the increased development of offshore fields, along with a higher amount of directional and horizontal drilling as well as greater development of sour grades will result in a significant shift towards heat-treated demand over the next five years.

While non-heat-treated material accounted for over 50% of consumption in 2008, this figure will have dropped by 2017. The growth in both heat-treated and premium thread consumption will far outstrip total OCTG consumption going forward.

On the supply side, there will be strong increases in the world’s capacity for both threading and heat treatment. The majority of these expansions in the short term (2012-2014) are likely to be from the integrated plants being developed in North America (TPCO, V&M Star) and the Middle East (ArcelorMittal, JESCO).

We believe that the total proportion of heat treated materials will rise from an estimated 27% of tonnage in 2011 to 37% by 2017. As such, we believe that there will be a need for additional capacity going forward.

The majority of capacity expansion will be undertaken by OCTG tubular manufacturers, both directly via new tubular and finishing capacity or the development of arms-length threading units. This will be undertaken in Latin America, North America, the Middle East and the CIS. We expect the proportion of material threaded by independents to fall.

However, there will be opportunities for independents to grow in niche markets. We highlight East and West Africa, the Caspian in the CIS, Mexico, some shale locations in the USA and Canada, and smaller Southeast Asian markets.

Growth of premium connection brands
Another trend will be that the leading OCTG producers will increasingly be marketing multiple premium connection brands.

Premium connections provide an absolute seal on the connections between pipes. We suggest that the proportion of wells using premium connections will increase over time. This reflects the higher proportion of offshore drilling, because deep wells in difficult conditions make repairs expensive and time-consuming. It also reflects the heightened environmental concerns over oil spills.

There is also a geographic diversity. With little experience of premium connections, the CIS and China, for example, use premium connections for only a small proportion of their pipelines (although that proportion is growing).

Finally, the rising availability of premium connections is likely to increase their use. As well as high prices, premium connections encourage consumers to order for a project, thus facilitating higher sales as well as value in threading, couplings and delivery. Their use is therefore also being pushed by the industry as well as being pulled by buyers.

Tracking OCTG prices
The multitude of grade specifications, pipe dimensions, pipe type and finishing options as well as the pricing policy of different suppliers and the geographical location of consumers make tracking the OCTG price a difficult exercise.

MBR has been covering the steel tube and pipe industry for almost a decade on a monthly basis. Over that period, we have produced proprietary prices for OCTG products. These are typically based on plain-end 7” casing with EU, US and Japanese sold as threaded and coupled (T&C) reflecting standard industry practice. We provide historic and forecast prices on a regional basis.

Our analysis suggests that prices are related to costs plus mill profitability and in our opinion, this is a key factor for future green pipe costs. Based on current raw material prices, we produce a breakdown of the cost structure of a seamless mill to produce J55 green pipe. As is shown in the report, input raw materials account for up to 75% of the overall cost structure. However, the other costs are somewhat steadier (power, labour and so on), so as raw material prices fall, the proportion of total operating costs fall. Depending on location and operating efficiencies, these other costs account for around $150-250 per tonne.

Once green pipe has been made, the grade, material and end-use will determine what finishing steps are required. This makes absolute costing difficult to establish.

The thread cost will vary depending on the type, but commercial arms-length prices vary. The price will vary depending on commercial arrangement, market demand, and pipe diameter, thickness and length.

A shorter pipe length will require more threads per tonne, while thicker-wall pipe tends to require less threads per tonne. Higher grades can cost double this amount as the hardness of the pipe requires significantly more time and energy to cut the thread thus increasing the cost.

Non-API premium threads will be an additional cost. We detail the cost and price structures in the final study and out to 2020, tackling products along the value chain. We highlight the typical price premiums for 7” J55 casing as it is threaded and coupled by a third party relative to what the internal costs actually are for doing this.

With raw materials playing such a big part in the cost structure of green pipe, we summarise our views in providing MBR’s long-term outlook for raw materials for iron ore prices and hard coking coal. In the log term, scrap prices are likely to move down in line with the average $325 per tonne cif Turkey. Under this scenario, billet costs for seamless pipe will be $500 per tonne ex-works, with plain-end pipe at about $700 per tonne ex-works on a cash basis.

The value-chain will be increasingly skewed towards finishing

Based on a 2011 average price for plain-end pipe and a 2011 average price for threaded and coupled and heat-treated pipe, we estimate that the total value of the global OCTG market in 2011 was $31.6bn. We believe the OCTG market will be valued at $39.8bn by 2017. The market for OCTG finishing will grow much faster than the value of OCTG green pipe. This is therefore where we expect to see the bulk of investment in the sector over the next five years. However, it will not be in the commodity threading, but the high-value heat treatment and premium threading. This will primarily be of benefit to large producers rather than independents.

Metal Bulletin Research has published a new study, A Strategic Outlook for the OCTG Heat Treatment, Threading, Coupling and Premium Connection Sectors out to 2020, which examines the strategic growth opportunities for the OCTG industry and details current and future prospects for downstream investments out to 2020. For more information please call +44 (0) 20 7779 8000 or email marketing@metalbulletinresearch.com

Brian Levich, consultancy and special projects director, Metal Bulletin Research 
Roman Kucinskij, consultant, Metal Bulletin Research