State of the Steel Industry and the effect on the outlook for the Tube and Pipe Markets Kim Leppold Metal Bulletin Research NASPD Fall Meeting October 20, 20 Austin, TX
Contents MBR s tube and pipe group Global steel market conditions US steel market US structural tubing markets OCTG and linepipe situation and outlook Q&A
MBR A global research & analysis team based in America, Europe, Asia and the Middle East Americas: Kim Leppold Kleppold@metalbulletinresearch.com Tel: + 610 404 0801 Europe/MENA/Asia: James Ley James.ley@metalbulletinresearch.com Tel: + 44 207 779 8521 CIS: Roman Filimonov Roman.filimonov@metalbulletinresearch.com Tel: + 44 207 827 6422 Eastern Europe/Middle East: (based in Istanbul) Marina Vertemberg Bozkurt Marina.bozkurt@metalbulletinresearch.com Tel: + 90 539 595 10 57 China: (based in Shanghai) Ginger Ding gding@metalbulletinresearch.com Tel: + 86 21 5877 0857* 35
MBR TUBE AND PIPE GROUP MBR has brought it s successful 5-year outlook reports for OCTG and LDP into an online annual service allowing a more detailed market coverage for the client Online website platform, sitting alongside detailed report, providing quarterly updates to supply/demand forecasts for the global markets Active following of all major large-diameter linepipe projects and OCTG contracts in the global markets Long-term market and price forecasting to 2022 Demo s of both data platforms are available next door!
GLOBAL STEEL MARKET TRENDS International steel prices found a floor in Q2 20, thanks to recovery in China, with US prices outpacing gains elsewhere Global domestic HR Coil price comparison ($/tonne) 1,050 950 850 China Domestic (Ex-warehouse) US Domestic (EXW) EU Southern HRC ($/tonne) 750 650 550 450 350 250 Jul 10 Oct 10 Apr Jul 11 11 11 Oct 11 Apr Jul 12 12 12 Oct 12 Apr Jul 13 13 13 Oct 13 Apr Jul Oct Apr Jul Oct Apr Jul Oct Apr Jul Source: MBR s Steel Forecaster
GLOBAL STEEL MARKET TRENDS Chinese demand growth surged in Q3 20, marking the first gain in steel consumption in over two years, growth continued in Q4 20 Global apparent steel consumption China vs ROW % Chinese demand RoW demand 10% 5% 0% -5% -10% -% Q1 20 Q2 20 Q3 20 Q4 20 Q1 20 Q2 20 Q3 20 Q4 20 Q1 20 Q2 20 Q3 20 Q4 20 Q1 20 Q2 20 Chinese steel consumption up by approximately 10% year-on-year so far in 20 Source: MBR s Steel Forecaster
GLOBAL STEEL MARKET TRENDS y-y changes in ADC, % China is now driving global steel consumption growth while growth in the rest of the world sputters Global apparent steel consumption China vs ROW 20% China RoW % 10% 5% 0% -5% -10% Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Feb Mar Apr May Jun Jul Apparent steel consumption growth in the rest of the world has been declining since June 20 Source: MBR s Steel Forecaster
GLOBAL STEEL MARKET TRENDS Mt Chinese apparent steel consumption headed lower for the rest of 20? Chinese apparent steel consumption outlook 70 60 50 40 30 20 10 0 20.0%.0% 10.0% 5.0% 0.0% -5.0% -10.0% -10 Mar May Jul Sep Nov Mar May Jul Sep Nov Mar May Jul Sep Nov -.0% Chinese demand changes y-y Chinese demand Vale ArcelorMittal Other analysts In order to meet most industry forecasts, Chinese steel demand would have to plunge for the remainder of 20 Source: MBR s Steel Forecaster
GLOBAL STEEL MARKET TRENDS Mt pm OECD estimates of surplus capacity are shrinking even as Chinese steelmakers increase production to meet rising domestic consumption OECD Surplus Capacity of Crude Steel (Mtpm) 70 Implied surplus monthly capacity 60 50 40 30 20 10 0 Dec 13 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun While we state that overcapacity is the problem, historically it is production that over-compensates for changes in consumption Source: MBR s Steel Forecaster
GLOBAL STEEL MARKET TRENDS Crude steel output in July 20 broke May 20 s all-time record high 0 Global crude steel production (M tonnes) 5 0 135 130 125 120 1 110 105 Jul Sep Nov Mar May Jul Sep Nov Mar May Jul Sep Nov Mar May Jul Source: MBR s Steel Forecaster Global crude steel output up 4.6% year-on-year through July, with July output up 6.3% y-o-y, while China s output is up 5.4% y-o-y in the year-todate, and 10.3% y-o-y in July
GLOBAL STEEL MARKET TRENDS Both global and Chinese steel output will exceed 20 levels to reach record highs in 20 Global crude steel production (M tonnes) 1,800 1,600 1,400 China ROW 1,200 1,000 800 600 400 200 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 20 20 20 20f 2018f Chinese crude steel output forecast to rise 4% in 20, global output forecast to rise 3% in 20 Source: MBR s Steel Forecaster
NORTH AMERICAN STEEL MARKET TRENDS Tell us the rules so we can play the game Source: AMM, MBR
NORTH AMERICAN STEEL MARKET TRENDS US apparent steel consumption rose 9% y-o-y in H1 20 US apparent steel consumption (M tons) 35,000 Total Steel Products Import Share % 40% 38% 30,000 36% 34% 32% 25,000 30% 28% 20,000 26% 24% 22%,000 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 20% Apparent consumption growth also reflects increasing imports in 20, with imports representing a rising share of total consumption Source: MBR s North American Steel Market Tracker
NORTH AMERICAN STEEL MARKET TRENDS '000 tons '000 tons US domestic steel supply highlights inventories rose as a result of imports, but distributor shipments remained ahead of year-ago US service center flat-rolled steel shipments and inventories US service center carbon plate shipments and inventories 130 120 110 Daily Shipments (LHS) Inventory (RHS) 7000 6000 20 18 Daily Shipments (LHS) Inventory (RHS) 1,500 1,300 100 90 5000 '000 tons 12 10 1,100 900 '000 tons 80 4000 8 6 700 70 Jul Jul Jul Jul 3000 4 Jun Dec Jun Dec Jun Dec Jun 500 Source: MBR s North American Steel Market Tracker
NORTH AMERICAN STEEL MARKET TRENDS US apparent steel consumption climbing in 20, after two consecutive years of decline 0 US apparent steel consumption (M tons) 120 100 80 60 40 20 0 2010 2011 2012 2013 20 20 20 20f US apparent steel consumption in 20 will be second only to consumption in 20 Source: MBR s North American Steel Market Tracker
NORTH AMERICAN STEEL MARKET TRENDS US crude steel output on target to rise 4% in 20, forecast to rise 3% in 2018 US crude steel production (Mt) 90.00 88.00 86.00 84.00 82.00 80.00 78.00 76.00 74.00 72.00 70.00 2010 2011 2012 2013 20 20 20 20f 2018f US steelmakers have struggled to raise average operating rates above 75% of capacity without jeopardizing prices Source: MBR s North American Steel Market Tracker
NORTH AMERICAN STEEL MARKET TRENDS Scrap consumption is declining with steel production but also in market share to alternative metallics US scrap consumption (m tonnes) US scrap, pig iron, and DRI consumption (m tonnes) 80 70 60 50 40 30 20 10 0 2000 2003 2006 2009 2012 20 70 60 50 40 30 20 10 0 2010 2011 2012 2013 20 20 20 Scrap Pig iron DRI Source: USGS, MBR
NORTH AMERICAN STEEL MARKET TRENDS US scrap exports provide the swing demand that can either support or sink domestic prices US scrap exports vs. prices 1800 350 00 00 1200 300 250 1000 200 800 0 600 400 200 100 50 0 Mar May Jul Sep Nov Mar May Jul Sep Nov Mar May Jul 0 Scrap exports ('000 tonnes) - RHS HMS #1 ($/l.ton) - LHS Source: ISSB, MBR s Steelmaking Raw Materials Market Tracker
NORTH AMERICAN STEEL MARKET TRENDS Demand in 20 has not yet recovered from 20 from many of the major scrap destinations 2500 US scrap exports (YTD through July) 2000 00 1000 500 0 Turkey Mexico Taiwan India South Korea China Canada 20 20 20 Source: ISSB, MBR s Steelmaking Raw Materials Market Tracker
NORTH AMERICAN STEEL MARKET TRENDS Will the current prices last and what does this mean for downstream products? US domestic flat product price forecasts ($/ton) 1,000 HR Coil CR Coil HDG Forecast 900 800 700 600 500 400 300 Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Prices rose at mid-year due to stronger markets and Section 232 optimism. We suspect that prices are now at or near their peak for the current cycle. Source: MBR s North American Steel Market Tracker
Contents MBR s tube and pipe group Global steel market conditions US steel market US structural tubing markets OCTG and linepipe situation and outlook Q&A
STRUCTURAL AND INDUSTRIAL PIPE OVERVIEW US structural consumption has been rising but will likely level off if construction spending continues to falter will hurricane recovery provide a boost? 2500 2000 00 1000 US structural and industrial tube and pipe consumption (kt) 80 70 60 50 40 30 20 US HSS imports (kt) 500 0 2011 2012 2013 20 20 20 Welded round industrial and structural tube Welded square and rectangular sections 10 0 May Sep May Sep May Sep Canada Mexico South Korea Turkey Italy ROW May Source: MBR
STRUCTURAL AND INDUSTRIAL PIPE OVERVIEW Outside of NAFTA, Asia origins dominate the HSS supply to USA Major HSS exporting regions to the USA in H1 20 vs. H1 20 (kt) : 9 : 9 : 6 : 10 : 4 : 10 293kt vs. 360kt : 72 : 81 ` ` : 23 : 37 : 3 : 11 Source: ISSB and MBR
Contents MBR s tube and pipe group Global steel market conditions US steel market US structural tubing markets OCTG and linepipe situation and outlook Q&A
HISTORICAL OCTG OVERVIEW Global seamless OCTG production dropped sharply in 20 and did not recover in 20, the same was the case for ERW OCTG production Global seamless OCTG production by region (Mt) Global ERW OCTG production by region (Mt) 12 10 8 6 4 2 7 6 5 4 3 2 1 2010 2011 2012 2013 20 20 20 2010 2011 2012 2013 20 20 20 North America China Middle East Europe South America Africa Other Asia CIS North America China Middle East Europe South America Africa Other Asia CIS Source: MBR
HISOTRICAL OCTG OVERVIEW OCTG demand fell in all regions in 20 and 20, but it was North America that displayed the sharpest declines, with the CIS the strongest performers OCTG apparent consumption by region index (2013=100) 130 120 110 100 90 80 70 60 50 40 30 2013 20 20 20 20 Africa China CIS Europe Middle East North America Other Asia South America Source: MBR Global OCTG Intelligence Service
HISOTRICAL OCTG OVERVIEW Global seamless OCTG consumption fell for three consecutive years since 20, with major drops seen in USA and China. US ERW OCTG consumption, which accounted for 70% of the global ERW market, dropped to 55% in 20. Global seamless OCTG consumption by region (Mt) Global ERW OCTG consumption by region (Mt) 12 10 8 6 4 2 8 7 6 5 4 3 2 1 2010 2011 2012 2013 20 20 20 North America China Middle East Europe South America Africa Other Asia CIS 2010 2011 2012 2013 20 20 20 North America China Middle East Europe South America Africa Other Asia CIS Source: MBR
NORTH AMERICA OCTG The US OCTG market is highly reliant on imports (more than 50% in some years), with very little exported (mainly to Canada) US consumption of OCTG 2010-20 (kt) US shipments, imports and exports of OCTG 2010-20 (kt) 7000 6000 8000 7000 5000 4000 3000 2000 1000 0 6000 5000 4000 3000 2000 1000 2010 2011 2012 2013 20 20 20 0 Welded Seamless -1000 2010 2011 2012 2013 20 20 20 Domestic shipments Imports Exports Source: MBR
NORTH AMERICAN OCTG TRENDS Indeed, total US imports (ERW and Seamless) dropped by more than half in 20 from 20 South Kora saw ERW OCTG exports fall by 2/3 rd but still remained the largest OCTG exporters to the USA Major OCTG exporting regions to the USA in 20 vs. 20 (kt) : 98 : 32 : 8 : 41 : 87 : 33 2Mt vs. 961kt : 248 : 270 ` ` : 304 : 126 : 618 : 296 : 56 : 7 (South Korea) Source: ISSB and MBR
NORTH AMERICAN OCTG OUTLOOK In total, we believe that North American consumption in 20 will be over 5Mt in 20, significantly higher than 20/6 but below 20 levels NA OCTG apparent consumption (seamless and welded, kt) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Oil prices $50/bbl Rig numbers remain strong (928 on Oct 13th) which means OCTG demand continues to stay firm as consumption per rig continues to constantly rise Uncompleted wells increased Re-fracking Global oil production outlook mixed Section 232 looks likely to have no major impact on OCTG market for now (Commerce to provide report to Trump by 2018? After Tax changes?) Given more jobs depend on steel consumption than steel production, MBR believes that 232 will be less severe than thought Source: MBR
NORTH AMERICA OCTG The Permian basin is the most active shale basin in North America in terms of rig counts and well completions. This is driving OCTG consumption per rig higher than prior to the oil price downturn Rig counts from selected shale basins (unit change y/y) 300 200 100 0-100 -200-300 -400 Eagle Ford Williston Permian Marcellus Source: Baker Hughes, EIA, MBR
NORTH AMERICAN OCTG TRENDS Imports in 20 have recovered strongly as a result of market forces as well as concerns over future trade restrictions Major OCTG exporting regions to the USA in 20 vs. 20 (kt, year-to-date through July) : : 105 : 23 : 45 : 9 : 110 489kt vs. 1.75Mt : 1 : 253 ` ` : 55 : 4 : 6 : 655 : 6 : 7 (South Korea) Source: ISSB and MBR
NORTH AMERICA OCTG ERW OCTG imports have surged back into the USA in 20 350 300 250 200 0 US ERW OCTG imports ( 000 tonnes) ERW OCTG imports from South Korea are now already close to 800kt in 20 ( through September license data), could surpass 1Mt by the year end Year-end inventory concerns will slow activity now through Q4 Trends: P110 still favored but L80 picking up in popularity 100 50 0 Oct Apr Jul Oct Apr Jul Oct Apr Jul Casing requirements are increasing in size Push up in connection requirements in the Permian (API to semi, and semi to premium, still threaded and coupled and not flush) South Korea Taiwan Canada Turkey Philippines ROW Source: ISSB and MBR
RECENT MARKET HISTORY LSAW production and consumption for API 5L applications has not increased significantly between 2012 and 20, averaging just over 8Mt Global LSAW production by region 2012 20 (kt) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 35000 30000 25000 20000 000 10000 5000 Global LSAW capacity by region 2012 20 (kt) 2012 2013 20 20 20 North America South America Middle East Africa CIS Europe Asia ex China China Average global capacity utilisation (%) * 2012 20 20 32 29 25 2012 2013 20 20 20 North America South America MENA CIS Europe Other Asia China Source: Company interviews and MBR estimates *This is for API 5L grades and does not include API 2 structural applications etc. Global capacity has been revised up significantly in China due to more detailed information being received to MBR in recent years. Source: Company interviews and MBR estimates
RECENT MARKET HISTORY HSAW production for API 5L applications has remained around 5.5Mt, again there is no shortage of capacity when viewed from a total global level Global HSAW production by region (kt) Global HSAW capacity by region (kt) 7000 25000 6000 20000 5000 4000 000 3000 10000 2000 1000 5000 2012 2013 20 20 20 North America South America Middle East Africa CIS EU Other Asia China 2012 2013 20 20 20 China Other Asia CIS EU MENA North America South America Average global capacity utilisation (%)* 2012 20 20 29 25 24 *Only includes production for the API 5L markets, and not for structural non-api certified applications Source: Company interviews and MBR estimates
NORTH AMERICAN LINEPIPE TRENDS Shipments and imports surged in 20 after years of flagging demand North American LDP apparent consumption (kt) 3,500 3,000 2,500 2,000 1,500 1,000 500 2010 2011 2012 2013 20 20 20 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2010 2011 2012 2013 20 20 20 HSAW LSAW ERW Production Net imports Source: MBR s Five Year Strategic Global Large Diameter Linepipe Market Outlook
NORTH AMERICAN LDP TRENDS No dominant supplier to the US LDP market as there is in OCTG Major LDP exporting regions to the USA 20-20, average annual tonnage (kt) 1kt 73kt 808kt 107kt 86kt 84kt 47kt ` ` 188kt Source: ISSB and MBR
OUTLOOK INTO 20 NORTH AMERICA A new administration and a surge in drilling in the Permian will support pipeline development in the USA, but 20 will likely be a transition year Apparent LDP consumption for North America (kt) 3500 3000 2500 2000 00 Forecast Trump Effect - Current Administration has voiced commitment to clearing the hurdles for delayed pipeline projects A surge in Permian drilling is now supporting plans for infrastructure building, transporting oil and gas to the Texas Gulf Coast and Cushing Over 1b bpd of planned oil pipeline capacity, 3k-km and over 460kt of linepipe 2k-km and 600kt of linepipe for gas Melted and manufactured requirement remains a topic of discussion waiting for recommendations 1000 500 0 20 20 20 20 * LDP = LSAW+HSAW+ERW (over OD) Source: MBR
OUTLOOK INTO 20 CHINA China have kicked start development of several major domestic LDP pipeline projects that saw delays in 20-20; 20 will likely be a pick-up year Apparent LDP consumption for China (kt) 4500 4000 3500 3000 Forecast China is prioritizing the development of WEP connecting lines and branch lines over the undeveloped WEP trunklines Russsia-China oil and gas pipelines are moving The next major project to move in 20 the east-section of Xin-Zhe-Yue Synthetic Gas Pipeline 2500 2000 00 1000 500 0 20 20 20 20 * LDP = LSAW+HSAW+ERW (over OD) Source: MBR
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