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.

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