The month of May has arrived bringing a mix of may or may-nots for OCTG. If oil prices can rise and hold around $50/bbl in the near term we may see a slight counter-seasonal rebound in the rig count throughout Q3 and Q4. With E&Ps now hedging production for the second half of 2016 into 2017, capital spending may be adjusted upwards later this year. These maybes offer modest encouragement for the OCTG outlook for 2H16, which we revisit in our market intel’s editorial this month. Then there’s the potential for dis-may as the world witnesses the changing of the guard in Saudi Arabia. Will the “Aggie” (yes that’s Texas A&M) Khalid-AL Falih’s Texas ties bode well for the U.S. in the days to come or will he continue as the oil-igarchies ’reign’-maker? Most suspect the latter. The swarm of major “Section” trade cases intended to galvanize the domestic steel industry continue to make news. We discussed the potential for a Section 201 safeguard in last month’s intel, which seeks to impact all imports of specific products [flat rolled steel in particular] no matter the origin. This may or may not include OCTG, a troubling matter for some who view the exclusion of OCTG as an act of “hari-kari” for the pipe business. Others see possible hazards arising for steel-consuming manufacturing industries, questioning the ability of domestic suppliers to furnish all steel demand. Meanwhile, on April 26 U.S. Steel singularly resurrected a bold and significant trade tool from the 1930s, filing a complaint to initiate an investigation under Section 337 against the largest Chinese steel producers and distributors. China’s steel export juggernaut poses a threat to the global steel industry and their unlawful tactics have been egregious. Chinese subsidized steel imports surged from 590K tons to 1.8 MM tons between 2013 and 2014 and have only billowed from there. U.S. Steel’s complaint alleges three causes of action: the illegal conspiracy to fix prices, the theft of trade secrets by industrial espionage and fraud by false labeling to evade the U.S. AD/CVD order. The remedy is an exclusion order prohibiting all unfairly traded Chinese carbon and alloy steel from entering the U.S. market. The objective being to create a fairer market overall. The International Trade Commission (ITC) has 30 days to evaluate the petition for relief and decide whether to initiate the case. While it’s true that Chinese OCTG was all but banned from the U.S. in the trade case that was finalized in 2010, the complaint alleges that the Chinese have since engaged in a scheme to duck the trade duties imposed on OCTG by shipping their pipe to other countries claiming it was produced there (referred to as “trans-shipped”). A successful Section 337 would enable U.S. suppliers of OCTG feedstock to stop the bleeding and restore decimated market share. This begs the question how does a successful Section 337 impact domestic OCTG? We see a definite upside for domestically produced raw materials. The benefit to Oil Country Tubulars is less distinct (not quantifiable) but comes in the form of removing these “trans-shipped” tubular goods from the domestic marketplace. This will help to create an improved business climate for both domestic and fairly traded imports. On the flip side, if Chinese feedstock is shut out of the U.S. altogether there is the potential for its production to be increasingly concentrated in the U.S. thus increasing substrate prices that could trickle down to domestically produced OCTG. This can lead to a greater price differential between imported OCTG and domestic OCTG, which is already struggling. As we wrap our intel for the month and contemplate the uncertain road ahead for the oil patch we can’t help but think of the words of Yogi Berra who summed it up precisely when he said, “the future ain’t what it used to be.”
Photo Courtesy Chesapeake Energy Corporation