March OCTG Prices Up Nominally Lagging Substrate Costs, Pressing Margins

Steel Market Intelligence^©

·        Summary and Outlook.  While OCTG prices have now risen for the past two months in a row, with average prices up some $45/ton off the bottom in November, it is clear that energy pipe price increases have lagged comparable steel input price increases by some $250-300/ton pressuring margins in the sector. We continue to believe that OCTG prices will trend upwards slowly in coming months, responding to margin pressure from substrate costs both domestically and globally. However, while we continue to believe that demand for OCTG will be strong in coming months and years, capacity upstarts are lumpy and this year we have more capacity starting than demand growth. Even with surging substrate costs we expect nominal pricing gains for that reason and margins may not get back to levels seen prior to the surge in hot-rolled coil prices this year.     

·        OCTG Prices Increase Again in March.  According to data released by Pipe Logix, prices for the “average market basket” of oil country tubular goods (OCTG) rose 1.3% to $1,716/ton in March from $1,694/ton in February which was also up 1.3% from January, and the first price increase since July 2010. The uptick was broad-based as 29 of the 36 individual OCTG products posted increases during the month.  Despite these two monthly increases, the average price remains some 3.7% below last July’s peak of $1,782/ton.

·        Imports and New Supply Restraining Prices.  Despite import pricing discounts that continue to be low by historical standards, OCTG imports into the US are now up some 153% in the last year. What’s interesting to note is that from August 2009 through May 2010, the discount for foreign pipe narrowed sharply from $193/ton to $28/ton while import market share surged from 24% to 58%.Given the upward trend we have seen in OCTG imports since the spring of last year, and the fact that March imports may surge over 40% sequentially, we think another trade case may come sooner than later.  In addition to high import levels, domestic OCTG capacity continues to expand with some 1.2m tons of capacity set to start up this year on top of the 900,000 tons in 2010 that might still be ramping up.