New steel tariff could trigger similar action on OCTG, analysts and pipe producers say

March 20, 2002
NS Group Inc. Pres. and CEO René J. Robichaud

Sam Fletcher
OGJ Online

HOUSTON, Mar. 19 -- The 30% tariff that President George W. Bush recently imposed on imports of many types of steel definitely will raise costs for US manufacturers of oil country tubular goods and could trigger similar action against US imports of finished OCTG products, say analysts and pipe manufacturers.

US manufacturers of OCTG are caught between the new tariff that hikes the price of steel that they use and rising imports of foreign OCTG supplies like "the meat in a sandwich," said René J. Robichaud, president and CEO of NS Group Inc., in Newport, Ky. His firm produces seamless and welded drill pipe, casing, production tubing, and line pipe.

He said, "The price of hot-rolled steel coils has gone up drastically in anticipation of the new tariff," adding $60/ton in the last 2-3 months to the previous price of $220/ton. "We can't stand that too long," said Robichaud.

Other manufacturers of oil field and drilling rig equipment expect the new tariffs to drive up their costs as well. It would be difficult in the short term to pass that added cost along to customers in today's depressed market, say those firms and the financial analysts who follow them.

"On the surface, these tariffs don't look positive for OCTG manufacturers, since about 65% of the costs of OCTG are steel coil," said J. Marshall Adkins with Raymond James & Associates Inc. in Houston.

However, Brian T. Petty, vice president of regulatory affairs for the International Association of Drilling Contractors (IADC), said his group sided with Grant Prideco Inc. of Spring, Tex., the biggest manufacturer of drill pipe in North America, in getting an exemption from the new tariff for imports of green tubing that is made into drill pipe.

Petty claims action by the IADC and the biggest drill pipe manufacturers effectively insulated that segment of OCTG from any price fly-up as a result of the new tariffs on imported steel. "The real impact will be on casing and production tubing, because the producers weren't watching this," he said.

That may be true, analysts said. However, Adkins said, "Steel prices were likely to go up anyway, as low domestic steel prices have already trimmed US steel production by pushing about 30 US mills into bankruptcy in the last 3 years."

He said, "Hot-rolled coil prices have fallen from more than $320/ton to an extremely low price of just over $200/ton in the past 2 years. Because of mill closings and the impending federal tariffs on steel, we have already been modeling steel costs to move north of $275/ton over the course of the next 9 months." Although steel prices are expected to rise sharply, they probably won't approach the peaks seen in early 2000, Adkins said.

More importantly, he said, the latest tariffs on steel may set the stage for additional, stricter tariffs on OCTG being imported into the US. By the end of this month, OCTG manufacturers are expected to file a request with the US International Trade Commission for protection against foreign firms that they claim are dumping products into the US market at prices below manufacturing costs.

Only last summer, when ITC was reviewing foreign trade practices to determine if some countries were dumping cheap products in US markets, Adkins said, "OCTG was excluded by a margin of only one vote."

ITC did agree at that time to extend antidumping duties on OCTG—other than drill pipe—from Argentina, Italy, Japan, South Korea, and Mexico (OGJ Online, June 19, 2001). It also revoked antidumping orders on imports of drill pipe from Argentina and Mexico, in a decision taken at the end of 5-year "sunset" review of existing duties imposed on those goods.

But US manufacturers of OCTG requesting that ITC impose import penalties against a broader list of suspected violators "were told our profits were up for the first 6 months of 2001, because gas drilling was up, and the commissioners wouldn't make that recommendation," Robichaud said.

"In late summer, when the ITC was making its decisions, the rig count was peaking at nearly 1,300 rigs and OCTG prices were peaking at almost $900/ton. Likewise, domestic OCTG manufacturers were extremely profitable," said Adkins. "Even though OCTG imports were making up a significantly larger portion (30%) of the US supply than in any time in recent history, the fact OCTG prices were moving up in concert with significant increases in drilling activity led the ITC to exclude the OCTG market from the possibility of import restrictions."

"Their message to us was: 'Come back when you have tire tracks across your chests,'" Robichaud told OGJ. "Well, we do."

"We have seen huge losses posted by several of the US OCTG manufacturers in the past 2 quarters," said Adkins.

With the subsequent falloff in North American drilling, NS Group logged half as many work hours in its plants through October-December 2001 as it did in April-June of that same year. As many as 600 of its 1,300 employees were "severely impacted by layoffs or reduced hours," Robichaud said.

"We've kept two full crews at our plants, but had to let one full crew go. We've laid off hundreds of people in Texas, Oklahoma, Pennsylvania, and Kentucky," he said.

Robichaud estimates there's a current inventory of 1.6 million tons of OCTG available in the US market that's "probably good for 7 months" at the current low level of drilling activity.

He estimates that imports now supply 40% of OCTG market in the US, up from "historic averages of 15-20% in the 1990s." Robichaud suspects China, which has built some new mills, may be dumping steel products in the US at below-market prices.

"It's important to make it clear that we are not looking to eliminate imports," said Robichaud. "We can compete with cheap labor. We can compete with (foreign manufacturers) who paying are paying off (operations) debt. We can compete with anyone on the planet if we have a level playing field."

However, he said, "We cannot compete with China underwriting its steel exports.

If a foreign manufacturer is selling steel products into this country at a low price, it needs to prove that it has a full cost structure that can be paid back at that price."

Because of high levels of OCTG imports and the deterioration of OCTG consumption, pricing and profitability, Adkins expects US mills to file antidumping suits with the ITC "in the next few weeks."

"Given the very thin margin of the ITC's vote last summer," he said, "we believe there is an 80-90% likelihood that the domestic OCTG industry will indeed get some relief from foreign imports." As an antidumping case instead of a Section 21 filing, any restriction of OCTG imports would be effective for 5 years.

Another fight over charges of OCTG dumping will likely put Grant Prideco and IADC on opposite sides, as they were last summer when IADC mounted a maximum effort to sustain foreign imports of finished OCTG.

Petty said there is still no evidence of dumping by foreign OCTG manufacturers. He claims it's a bogus charge by US mills that want to squeeze out competition. "We stand for free trade," he said.

Contact Sam Fletcher at [email protected]