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Tubular goods to go along for the ride in oil, gas pipeline pickup

By Arleen Long, Carla Bass and Nicholas Tolomeo in Houston

April 11, 2013 - As the spread of new natural gas and oil pipelines across the US is expected to regain some speed in 2013, it should carry along with it the tubular steel products industry that makes their main component, an analysis of data and some industry observers suggest.

Gas mainline networks are set to grow by 667 miles in 2013, just over twice the 331 miles completed and put into service in 2012, according to data from Bentek, a unit of Platts.

That is still a far cry from the 4,208 miles completed in 2011 or the 5,455 in 2010 -- when major lines to serve growing production out of the Marcellus Shale and other fields were being built -- but expansion planned so far would gradually rise to 785 miles in 2015.

Analysis continues below...

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"As we start to get a more robust economic recovery, you could see more crucial bottlenecks occurring" on gas pipelines, said Michelle Michot Foss, director of the Center for Energy Economics at the University of Texas at Austin. "That will definitely send a signal to the gas side" to pick up the pace of expansions.

Each major project would include millions of dollars’ worth of steel.

Tennessee Gas Pipeline Company's planned Northeast Upgrade Project has been approved and is scheduled to begin construction in 2013. The 40-mile, 30-inch-diameter line will increase gas deliveries to the growing Northeast markets.

Based on an estimated average of 147 lb/feet, the 40-mile project would require about 15,500 st of 30-inch-diameter steel pipe.

Using the January 2013 average pricing of large-diameter pipe over 24 inches from the Preston Pipe Report, steel pipe would amount to about $23 million of the total $341 million project price tag.

Oil pipeline expansions totaled 1,363 miles in 2012, about flat to 1,351 miles in 2011. That is expected to increase to 2,752 miles in 2013. Projections for 2014 and 2015 would be slightly lower, at about 1,900 miles in each year, but those only include announced projects.

Positive signs for the market

"We are seeing some positive signs there, they are just not overwhelming," for both oil and gas pipelines, said Paul Vivian, owner of the Preston Pipe Report, which tracks energy demand for steel products. "In oil country tubular goods, we expect a light improvement in the market in 2013."

It is unclear how much the expansion will benefit the US steel industry versus overseas suppliers. US steel executives have complained about what they say are unfair trade practices by foreign competitors.

"The pipe that's flowing into North America is just unrestricted. That demand needs to be met by our North American steel companies," Mike Rehwinkel, president and CEO of Evraz North America, said at the Platts Steel Markets North America conference in Chicago in March.

In 2012 the oil and gas industry accounted for 3.43 million st of all steel mill shipments within the US, up from 3.06 million st in 2011 and 2.09 million st in 2010 according to American Iron and Steel Institute data. The oil and gas industry accounted for about 3.7% of all steel shipments in the US in 2012.

According to an estimate released this year by Nucor’s wholly owned steel scrap subsidiary, David J. Joseph Co., steel shipments to the oil and gas industry are expected to grow in 2013, potentially exceeding all other end-use markets.

The growth forecasts ranges from low of 2% to a high of 8%. This compares with 2013 growth forecasts for construction, 1-5%; automotive, 1-4%; and appliances, 1-6%.

"It is exciting for the steel industry to think about all of this possible build-out" for oil and gas pipelines, Foss said. "But at the same time their product is an input cost."

In the US, the boom in the production of gas from shale formations pushed up the miles of gas pipeline needed dramatically in the latter part of the last decade.

When the ample supply led prices to plunge, pipeline expansion projects went along for the ride down with them. But now as "gas prices have recovered enough to arrest the attrition in gas drilling," as Barclays Capital analysts wrote in a note March 28, things seem to be slowly ticking up.

Oil production is setting up for a similar trend, as new drilling techniques to unlock shale formations are expected to boost US output dramatically as well. Demand for steel tubular goods is expected to move along with it.

Energy market application make up about 7% of all US steel shipments, according to AISI. But of the steel pipe and tubular goods segment, energy applications make up above 50%, Vivian said.

US Steel, which says it is the largest tubular producer in the US, said about 84% of its tubular goods went to the oil, gas or petrochemical segments in 2012, the same as in 2011.

US Steel in December also announced a joint venture with Butch Gilliam Enterprises for a tubular business to serve natural gas producers in the Permian Basin in West Texas.

Even a slight improvement in this one category would be important in a steel sector experiencing relatively flat demand globally. India's Tata Steel Vice President Balasubramanian Muthuraman told AFP on March 28 that he expects the world steel industry to see an overall loss in 2013.

While he said Tata Steel India "will make good profits," he added: "But it is not the case of the world steel industry," he said, according to the report. He said he expects US steel output to increase some 1-2%, compared with a 3-4% gain globally.

That picture will become clearer when steel company earnings for the first quarter of 2013 start coming out the second week of April.

US steel company Nucor said in an earning guidance update in mid-March that the "strongest end markets continue to be in manufactured goods including energy."

Next page: Key indicator for tubular goods to finish 2013 relatively stable

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