RESEARCH: Welded energy pipe producers face higher costs amid weak demand

Across the regions, producers of welded linepipe and oil-country tubular goods (OCTG) saw their margins shrink with substrate costs increasing in the third quarter of 2020.

Many have been attempting to protect margins with higher prices, with varying degrees of success. Europe-origin commodity-grade steel hot-rolled coil and plate showed price gains in September, with the HRC increases more successful than those for plate.

With the supply crunch in HRC slipping, and plate prices likely to be higher in the fourth quarter, the plate premium was expected to widen once more to the 2020 average. Similarly, for X65 plate and coil in Europe, non-sour coil prices showed gains while prices for sour and non-sour plate were unchanged in euro terms.

Asian X65 plate prices also showed gains in September, as did linepipe prices, except for Chinese export prices, which remained unchanged on reduced offers.

The Chinese domestic welded pipe market has kept up a strong momentum for nearly six months, offsetting the weak export market, but overall welded pipe demand was starting to fall with the slowing of the domestic infrastructure push.

Nevertheless, the demand outlook for large-diameter linepipe for 2020 was for positive year-on-year growth, a stark reversal from other regional markets.

Demand still in question
In comparison to China, North American linepipe consumption was expected to show an annual drop of nearly 870,000 tonnes this year from 2019, mainly as a result of delayed or cancelled projects in the United States.

Both crude oil and natural gas projects, to feed liquefied natural gas (LNG) export facilities, were affected. We contend that many cancelled or delayed projects will not be revived.

Fastmarkets estimates that about 12,400km in pipeline projects – adding up to an estimated 2.8 million tonnes of new linepipe supply – have been cancelled or are in doubt since the energy downturn, related to the global pandemic, and this number increases monthly.

We do note, however, that even though demand is dropping in the US due to reduced project activity, the country’s domestic producers have the market largely to themselves due to low imports. This resulted from actions on anti-dumping, countervailing duty and Section 232 tariffs.

Meanwhile, we are skeptical that the upward trend in Middle East linepipe prices will continue through the fourth quarter of this year. Demand remained sluggish from delayed projects and lead times were short for suppliers. Pipe producers will look to maintain or grow their margins, however, so we could see further price appreciation to keep up with costs.

But even there, HRC and plate prices were forecast to weaken on lower iron ore prices and a seasonal drop in demand.

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