Rising global offshore LSAW demand to tighten pipe mill capacity into 2020

Manufacturers of longitudinal submerged arc welded (LSAW) linepipe have struggled over the past year with a lack of projects to drive their utilization rates. Prices of LSAW linepipe have therefore lacked momentum.

In recent months, though, the award of offshore linepipe projects in Australia, Saudi Arabia and Mozambique has helped to improve utilization rates at one of the leading Japanese suppliers.

But LSAW linepipe capacity still remains high at other LSAW export-focused mills in Japan, Europe and India that specialize in the supply of sour service offshore linepipes. But the awarding of offshore LSAW projects, which has picked up since the start of 2019, will remain strong until at least the fourth quarter of next year (see chart below).

Figure 1: Offshore LSAW linepipe tenders expected to be awarded in Q4 2019-Q4 2020 (Source: Fastmarkets)

Demand forecast to strengthen further into 2020
In Australia, three major offshore pipeline projects from Woodside and ConocoPhillips aim both to replace aging facilities and to add new LNG capacity in the country, which is ambitious about becoming an even stronger net energy exporter.

Elsewhere in Asia, CNOOC in China is developing its first self-operated Lingshui 17-2 deep water gas field in the South China Sea, which will involve the construction of an offshore pipeline that links existing transmission networks. CNOOC has issued international tenders for the project, which requires around 30,000 tonnes of LSAW linepipe.

But perhaps the largest tonnage of LSAW set to arrive in the offshore market will come from the Middle East. Qatar is of particular interest – Qatar Petroleum looks set to move forward with both the North Field Expansion and Sustainability projects. Both require hundreds of thousands of tonnes of LSAW linepipe for the country to maintain and ramp up its LNG production.

In total, we estimate the offshore projects shown in the chart, if all move ahead, will require around 1.6 million tonnes of LSAW linepipe.

How will the supply side of the LSAW market respond?
Total LSAW capacity in Japan is falling while demand is improving. Nippon will close its Kashima Works by October, shrinking its annual LSAW capacity to around 500,000 tonnes per year from 1 million tpy. But JFE, which also has an LSAW mill focused on exports, is likely to compete in many of these offshore projects.

There is also LSAW capacity in India and Europe – markets that specialize in the delivery of offshore LSAW linepipe. Utilization rates in Europe, in particular, remain low – one of the world’s largest LSAW producers is targeting these export projects and can increase rates to boost output.

So there is the capacity to deliver these projects identified in Figure 1. But it is important to note that the bulk of these offshore LSAW linepipe projects discussed are sour service.

LSAW mills are required to undertake additional hydrogen induced cracking (HIC) and sulfide stress cracking (SSC) testing to supply this linepipe, which typically adds at least 5-6 weeks to delivery times compared with a comparable non-sour LSAW pipeline.

Many of the pipeline projects identified in Figure 1 could also require additional hard spot testing for the pipe. Identifying hard spots is primarily undertaken at the plate-manufacturing stage and not at the the pipe-making stage.

Still, some clients might ask the pipe mills for additional ultrasonic NDT (UT) testing on plate arrival at the pipe mill etc., which could further increase delivery times. We therefore expect lead times to extend in several of the leading global Tier 1 LSAW mills this year and next.

It is perhaps a little optimistic at present to suggest there could be a surge in LSAW linepipe pricing into 2020 driven by demand alone, however. The tonnages associated with all of these offshore projects are not enough to fully book out export-focused LSAW mills, even when taking longer lead times on delivery into account.

From a supply side this article has focused on the Tier 1 export mills in Europe, Japan and India. There is also prominent LSAW capacity in China and Russia and growing local capacity in the Middle East.

While mills in Russia and China primarily focus on domestic markets, a slow Russian market – as is the case at present – could force large LSAW mills there to start to focus on these global offshore projects. Although there might be challenges to get end-user approvals etc. from customers for these newer entrants, this could still provide a headwind to higher prices.

By Edison Luo & James Ley

Please contact us at hello@fastmarkets.com to learn more about our Global Large-Diameter Linepipe Intelligence Service.