US OCTG market forecast to see a drop in drilling of up to 5% if full impact of 232 action realized
Kim Leppold, Senior Consultant, Metal Bulletin Research. Metal Bulletin Research (MBR) has examined the effects of the potential Section 232 actions on the US OCTG markets based on the recommendations set out by the Department of Commerce in mid-February.
The three recommendations are essentially a blanket tariff up to 24% on all steel products imported to the USA from all countries, a blanket quota of 63% of all steel imports in 2017 by country and product and a mix of both in the form of tariffs up to 53% on the 12 largest non-NAFTA steel exporters to the USA while all other countries are held to their 2017 exports to the USA by country and product. All other AD and CVD actions/duties will remain in place.
There remains nearly as much uncertainty as before the report was issued. The President is under no obligation to adhere to any of these recommendations and can decide a different path if he chooses to inhibit steel imports on the grounds of national security. Moreover, a complaint to the WTO could stall or impede the action coming into effect for months or years.
Nevertheless, MBR assumes an action will be announced by the early part of the second quarter and implemented this year. While there will be an initial reaction in the market when the action is announced, operators have mainly purchased their pipe for use through the third quarter and are price protected through the first half of the year. The fourth quarter will be the earliest that most of the pipe under these rules will be delivered to customers. While MBR has heard of some particular instances of cancelled orders for South Korean tonnage, currently all other plans remain in effect from our perspective.
US OCTG apparent consumption (‘000 tonnes)
Source: MBR’s OCTG Intelligence Service
OCTG imports to the USA could fall by 900kt this year…
MBR believes that the blanket quota will be the most palatable of the three recommendations for OCTG as they stand, but we suggest there will be some level of tariff attached to a quota. The quota system allows for some level of imports while giving relief to domestic suppliers. Given this assumption, as well as the assumption that the WTI oil price is currently forecast to average just under $57/bbl over 2018 according to Westwood Global Energy Group, MBR calculates that total OCTG imports could drop about 900kt in 2018 from 2017. We believe that first-quarter imports will be on a par with fourth-quarter 2017 imports and that tonnage restrictions would begin from mid-year. 2019 will show the full effects of the restrictions, and will result in even stronger import tonnage drops compared to 2018.
…with prices seeing a 20-30% gain year on year
From this analysis, MBR suspects that initially, OCTG prices, both seamless and welded, will exhibit a price spike as the market deals with potential shortages. Our current forecast suggests that OCTG prices would likely rise 20-30% over 2017 prices on an annual basis. Surface casing and tubing will rise faster than production casing. Tubing could be particularly affected in that completions on wells drilled in 2017 were expected to pick up in 2018, consuming only tubing in the process.
Rising tubular costs, could see onshore shale drilling fall by up to 5% by year-end
Thus, while initial drilling plans and investments will not be affected, the higher OCTG prices will filter through to the demand side by the end of the year. Indeed, tubing and casing costs account for about 11% of on shore US drilling costs. With 20-30% higher costs of OCTG, leaving all other costs unchanged, the share of OCTG costs rise close to 14%. This rise in costs will be enough to affect drilling and investment plans on the margin, especially in the higher-cost shale basins which were just starting to make a comeback in drilling activity. The number of wells drilled could be reduced by about 3% or as much as 5%. With the number of drill rigs in the USA now at 975, a reduction of 3% of wells drilled would amount to roughly over 500 wells during the year. This could have an increasingly negative effect on OCTG demand. Moreover, a steeper retreat in oil prices will see OCTG demand fall further given the higher share of costs.
Shortage of supply to be particularly severe in the surface casing market
Perhaps though of more concern to the major US OCTG buyers will be the availability of OCTG to them in the market place in the second half of the year. MBR’s capacity database in its OCTG Intelligence Service lists plenty of capacity in the USA to take up the slack in imports, but the issue of shortages will come in size ranges which are primarily delivered by foreign mills. Indeed, the slimmer-margin tubing and surface casing – 9 5/8”OD, in particular – are mainly supplied from the overseas market and will exhibit the most shortages and the effect on pricing could be the greatest here. Domestic made production casing – mainly 5.5” P110 – will also be affected by the actions in that raw material and substrate prices will rise for these local mills. There could also be a shortage of production casing domestically as producers shift output to chase demand for surface casing or tubing. Even as production ramps up, there will be a delay in how quickly this additional output can come on stream, this is because for a mill to increase shifts this takes time as workers need to be hired and trained.