US energy pipe sector facing potential challenges under President-elect Biden’s administration

The oil country tubular goods (OCTG) and line pipe markets are suffering from oversupply and a shifting energy sector, and President-elect Joe Biden's administration could add to the industry's challenges, sources told Fastmarkets.

Below are three takeaways on how a Biden presidency could impact steel energy tubular products.

Covid-19 plus economic effect
The Biden administration’s goal of getting the economy back to pre-Covid levels is a temporary fix for the energy industry. Before the pandemic, there was an excess of oil and gas, and demand was not keeping up with supply.

“The Covid effect on the economy and energy demand and [lower] prices will continue to prevail until we can get back to more normalcy in activities and travel,” Fastmarkets senior analyst Kim Leppold said. “Once we come out of this, the energy industry is going to look different than when it started, given the number of bankruptcies and consolidations.”

Consolidation has hit major energy companies; some major merger-and-acquisition (M&A) deals this year included Chevron’s purchase of Noble Energy and ConocoPhillips’ buy of Concho Resources.

The combination of oversupply and the effects of the pandemic sparked a wave of layoffs in the energy sector, including at Vallourec, U.S. Steel Tubular, Baker Hughes and more.

“Even before Covid, the energy industry was going through a shift toward better profitability as investment funds were drying up,” Leppold said. “This time last year, operators were looking at a better 2020 than 2019 because 2019 was a year of cost cutting.”

But Covid has taken a toll, with pipe distributor MRC Global closing an additional nine facilities in the third quarter – bringing the total to 22 facilities closed this year, and there are plans to close another six by the end of 2020 in a cost-cutting measure.

“When this virus goes away, it doesn’t cure the problem that got us here, and what got us here is an overcapacity of tubulars and overproduction of oil and gas,” a line pipe distributor told Fastmarkets. “The only way we cure the problem is to reduce overcapacity and overproduction. When you do that it’s bad for the industry.”

Pipeline permits on pause?
Pipeline permits will have more roadblocks under the incoming Biden administration due to environmental initiatives that could mark the end for large projects like the Keystone Pipeline.

“Pipeline permitting will likely not get any easier. [President Donald] Trump himself could only do so much to get projects moving, and even those he championed still faced hurdles,” Leppold said. “We will likely continue to see pipeline operators look to use existing infrastructure to move oil and gas rather than go with new projects.”

Biden plans to crack down on drilling by pursuing “a global moratorium on offshore drilling in the Arctic,” according to an outline of his climate change initiatives.

“Look back at the [former President Barack] Obama administration, [there were] regulations on top of regulations for pipelines and federal drilling. Biden will likely follow the same track, if not [a] more aggressive [one], to appease the Green New Deal advocates,” according to Matthew Beckman, managing director at Ascent Consultants, which focuses on strategic management, organizational and leadership development.

The drill rig count totaled 312 in the week ended Friday November 13, the highest level since reaching 318 rigs in late May. Still, the latest total was down by 61.3% from 806 rigs at the same time last year.

“Until we have enough batteries to run the whole world, you’re going to need oil and gas. It’s going to be harder to drill and get pipelines built, which means it’s going to be more difficult for steel [in oil and gas],” the line pipe distributor said. “The mills who make pipe will still have too much capacity and always will.”

This overcapacity has pressured prices, despite an uptick the past two months.

Fastmarkets’ latest monthly assessment for steel electric-resistance welded (ERW) line pipe (X52), fob mill US at $850-925 per short ton ($42.50-46.25 per hundredweight) on October 27, widening upward by $25 from $850-900 per ton the prior month but still down by 4.6% from $900-960 per ton at the start of the year. 

“It might take five to 10 years for a permit, and that’s the big dilemma of where the oil patch is,” the line pipe distributor added. “There’s no stability as to when we’re going to build a pipeline, and then how you’re going to make money because there are so many roadblocks.”

Trade and tariffs
Biden’s administration could also have an impact on domestic pipe and tube companies and keep prices low with more relaxed trade policies, sources said, also agreeing that his presidency would not have an immediate influence on Section 232 tariffs.

“In the aftermath of Covid, jobs will be a priority and manufacturers will pressure leaders to make things easier for them to hire workers and sell domestic goods,” Leppold said. “One way will be to reduce their costs and allow them to import cheaper raw materials.”

US imports of OCTG products totaled nearly 20,683 tonnes in September, down by 81.9% from 114,512 tonnes in January, according to US government trade data

“We would expect that President-elect Biden would have a more favorable approach to our allies than President Trump has had. We do not expect an immediate reversal of all of the Trump trade policies. Ultimately, less of an ‘America First’ approach and a return to a more traditional approach,” Preston Pipe partner Rick Preckel told Fastmarkets.

“We expect the same vigorous trade law enforcement activities which have been continuously provided by the US Department of Commerce when presented with incidences of unfair trade practices brought to their attention by the domestic industry,” he added.

Gains recorded in HRC have finally trickled through to OCTG.

Fastmarkets’ monthly assessment for steel OCTG API 5CT – Casing J55 import South Korean-made, cif Houston, for example, was at $740-770 per ton on October 27, up by 5.6% from $700-730 per ton on September 29; and that for steel OCTG API 5CT – Casing J55 import non-South Korean-made, cif Houston increased by 4.3% to $720-740 per ton from $690-710 per ton in the same comparison.

Hot-rolled coil substrate prices, meanwhile, recorded double-digit gains during that same period. Fastmarkets’ steel HRC index, fob mill US was calculated at $33.89 per cwt on October 27, up by 12.3% from $30.17 per cwt on September 29.

“I expect a slow reversal of the Section 232 quotas or tariffs, or potentially a change to them such as higher quotas or a step-down in tariffs,” Leppold said.

Biden’s made-in-America plan includes a mission statement to, “work with allies to reduce their dependence on competitors like China while modernizing international trade rules to secure US and allied supply chains.”

The outlook for the steel pipe and tube industry in 2021 was split among sources, with some saying that the incoming Biden administration won’t make much difference while others believe that it certainly won’t help the OCTG and line pipe sector.

“The combination of Covid, the uncertain Senate races and Biden’s appeasement of the [Bernie] Sanders wing of his party doesn’t augur well for the steel or oil and gas industries,” Beckman said.

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