3q16 ipd report by Westlund PVF

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3Q16 IPD COMMODITY REPORTS The IPD COMMODITY REPORTS are prepared quarterly in March, June, October & December by the members of the IPD Executive Council

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This report is published as a member service of the American Supply Association’s Industrial Piping Division (IPD). Its contents are solely for informational purposes, and any use thereof or reliance thereon is at the sole and independent discretion and responsibility of the reader. While the information contained in this report is believed to be accurate as of the date of publication, ASA, its IPD and the authors disclaim any and all warranties, express or implied, as to its accuracy and completeness. © 2016 American Supply Association. All Rights Reserved.

3Q16 IPD COMMODITY REPORTS

CARBON STEEL Domestic Pipe What a difference three months can make! Last quarter’s report suggested that a bottoming out of prices might be occurring. Little did anyone realize there would be an 85.0 percent increase in Hot Rolled Coils (HRC) from $350/ton to $650/ton, all of which has occurred in 2Q16. As a result, any attempt to keep up with pipe price increases is now a full-time job. Since February, 2016, there have been FIVE (5) A53-B ERW price increases totaling approximately $350/ton for domestic carbon steel pipe. While the industry will benefit from these increases, it is very hard to imagine that they will have the staying power to make them truly beneficial. Some of the increases are due to normal restock buying that occurs after the first of the year. Additionally, the trade cases that were filed last year against various foreign producers of HRC have had the desired effect of shutting off the unrestrained flow of the product that kept supply and demand in balance. Without the demand from the energy sector, it is almost a certainty that pricing will retreat from these levels. Import Pipe While the import sector for finished welded steel pipe has experienced increased pricing based upon the aforementioned dynamics, it has been nowhere nearly as aggressive as in the domestic sector. Since January, 2016, there has been more than a 22.0 percent increase in tonnage pricing for finished welded pipe. There has also been a firming up on seamless carbon pipe. But currently, we are already starting to see internationally produced HRC retreating from current levels, which means the spread between domestic and import pipe will continue to widen. Look for pricing to soften in 3Q16, sooner than later. The proverbial crystal ball is cloudy as to how much of a drop is anticipated, but an educated guess would be around 10.0 percent. In Wall Street parlance, is the recent dramatic price run up a ‘dead cat bounce?’ If energy markets stay quiet, it might just be. Welding Fittings & Flanges The forecast for 3Q16 is for this market to remain oversupplied. Prices appear to be stable, although large distributors continue to work off excess inventory. If there is no increase in demand, downward pricing pressure could remain thru the quarter. Commodity steel prices are forecasted to stabilize as the market adjusts to current demand levels, and we begin to see the impact of increased tariffs on Chinese steel. Year-over-year comparisons show the price per barrel of oil closed at $48.85 on June 21, 2016, versus $29 in June, 2015. Even though OPEC met, there was no consensus to reduce output to stabilize pricing. There have been a few concerns over oil 2

3Q16 IPD COMMODITY REPORTS

output, such as the rebel attacks in Nigeria and the wildfires in Fort McMurray disrupting Canadian oil sands production, that have led to small increases and some price stability Lower oil and natural gas prices ($2.620 MBT in June, 2016, versus $2.83 MBT in June, 2015) have continued to be a drag on upstream demand. Upstream market conditions remain very weak. Demand remains low. According to the Baker Hughes North American Rotary Rig Count on June 10, 2016, there has been an overall reduction in operating rigs from 986 a year ago to 479. Oil rigs have led the decline. There are now 328 versus 635 last year. Gas rigs have been reduced to 85 from 221 a year ago. The largest declines in rig count are in the Permian Basin, down to 142 from 232, Eagle Ford is at 30, down from 104, and Williston is down to only 24 from 76 a year ago. There are a number of projects underway, but concern is that infrastructure turnarounds are being delayed. Significant uncertainty remains over political and economic instability in the Middle East as a result of lower oil prices. The forecast for 3Q16 is that oversupply of oil and natural gas, coupled with little increase in demand, will continue to keep pressure on the price of oil and gas. Forged Steel Fittings The outlook for forged steel fittings in 3Q16 remains flat. Pricing has been stable for an extended period of time, and there is a sufficient supply of both import and domestic fittings in the market. Import lead times are favorable and consistent, lending to strong supply. The upstream oil market, a major consumer of forged steel fittings, remains very soft with approximately half the rig count compared to this time last year. Other key markets, like the industrial segment, remain weak creating little room for growth. Manufacturers and distributors alike are competing for a smaller piece of available market share, creating very competitive conditions. Raw material costs, like special bar quality (SBQ), remain steady because of lack of overall demand in the markets outside of the automotive industry. Pricing is expected remain stable, and the only pressures could be downward.

STAINLESS STEEL PIPE, FITTINGS & FLANGES All Signs Lead Upward Finally, after reaching the lowest point in recent memory in February, nickel and other key metal ingredients for producing stainless steel seem, to indicate signs of recovery. As of June 17, 2016, nickel closed at $9,050.00 per metric ton on the London Metal Exchange (LME), up from the low posted on February 11, 2016, of $7,550 as stated in the 2Q16 installment © 2016 American Supply Association. All Rights Reserved.

440,000

400,000

360,000

320,000

280,000

Jun 16

Mar 16

Jun 15

Dec 15

Mar 15

Sep 15

Jun 14

Dec 14

Mar 14

Sep 14

Jun 13

Dec 13

Mar 13

Sep 13

Jun 12

Dec 12

Mar 12

Sep 12

Jun 11

Dec 11

Mar 11

Sep 11

Jun 10

Dec 10

Mar 10

Sep 10

Jun 09

Dec 09

40,000

Mar 09

Sep 09

80,000

Jun 08

120,000

Dec 08

Mar 08

160,000

Sep 08

Jun 07

200,000

Dec 07

240,000

CASH PRICE OF PRIMARY NICKEL (LBS)

LME CASH PRICE AVG (LB) 36

Sep 07

LME INVENTORY (MT)

LME INVENTORY (MT) 480,000

grade reserves and favorable regulations. According to the report, “Copper and nickel will be the bright spots in mining capital investments.” Fortunately, that is not the only news indicating a gradual increase in stainless steel prices. According to data from MetalPrices.com, molybdenum, another key metal for stainless steel, has seen increases of 34.0 percent since January of this year. Manganese has also risen 11.0 percent since mid-January, while chromium has fallen 15.0 percent. In June, Argus Media reported 316 stainless steel scrap prices have begun to move higher amid tight supply and gains in nickel and molybdenum prices. American Metal Market (AMM) reported stainless steel surcharges in June will rise for nickel-based stainless grades for the third, consecutive month indicating higher metal prices. Expect the continued development of gradual cost increases as outlined in the 2Q16 installment of this report, and demand driven material increases with a reduced supply of raw materials will continue to drive a recovery.

SURCHARGES FOR AUSTENITIC STAINLESS STEELS 5.000 304/L SURCHARGE

316/L SURCHARGE

4.500

4.000

3.500 SURCHARGE (PER POUND)

of this report. This is a rise of nearly 17.0 percent in the last four months. The road has not been as smooth a recovery as anyone would like, but after giving back a high of $9,795 in April to the mid -$8000 mark in May, June has seen a steady rise back up to the current level. LME inventories for nickel have been on a steady decline since January, falling from a high just above 450,000 lbs. to 380,000 lbs. as of mid-June, down 15.0 percent. This may indicate that market fundamentals, which were out of alignment in March and as stated in the last installment of this report, may have seen a correction and are moving toward a more traditional supply and demand model. But as we have witnessed in the past, nothing is certain with this metal, and instability is still the ‘new normal.’

3.000

2.500

2.000

1.500

1.000

INPUTS THAT IMPACT STAINLESS STEEL PRICES 90,000

9,000 Chromium

Jun 2016

Mar 2016

Jun 2015

Dec 2015

Sep 2015

Mar 2015

Jun 2014

Dec 2014

Sep 2014

Mar 2014

Jun 2013

Dec 2013

Mar 2013

Sep 2013

Jun 2012

Dec 2012

Sep 2012

Mar 2012

Jun 2011

Dec 2011

Mar 2011

Sep 2011

1,000

Dec 2010

10,000

Jun 2010

2,000

Mar 2010

20,000

Sep 2010

3,000

Dec 2009

30,000

Jun 2009

4,000

Mar 2009

40,000

Sep 2009

5,000

Dec 2008

50,000

Jun 2008

6,000

Mar 2008

60,000

Sep 2008

7,000

Jun 2007

70,000

Dec 2007

8,000

SCRAP & CHROMIUM PRICES (M/T)

18-8 SCRAP

80,000

Sep 2007

MOLYBDENUM PRICES (M/T)

Molybdenum

Jun 16

Mar 16

Jun 15

Dec 15

Mar 15

Sep 15

Dec 14

Jun 14

Mar 14

Sep 14

Jun 13

Dec 13

Mar 13

Sep 13

Jun 12

Dec 12

Sep 12

Mar 12

Jun 11

Dec 11

Mar 11

Sep 11

Jun 10

Dec 10

Mar 10

Sep 10

Dec 09

Jun 09

Mar 09

Sep 09

Jun 08

Dec 08

Mar 08

Sep 08

Jun 07

0.000

Dec 07

0.500

Sep 07

As for positive news about nickel, BMI Research, reported global mining projects for the remainder of 2016 and 2017 will favor copper and nickel due to significant investments in brownfield and greenfield projects bolstered by a combination of a gradual recovery in prices, low production costs, high-

Preliminary Anti-Dumping Levied on Pipe from India Anti-dumping duties have been placed on welded stainless steel pipe imports from India by the U.S. Department of Commerce (DOC). Steamline Industries was levied with 18.9 percent dumping duties, along with all other Indian exporters with the exception of Sunrise Stainless, which received a de minimis duty of 1.91 percent. Final determination by DOC is expected in md-September. The anti-dumping petition was filed by Bristol Metals, Felker Brothers, Marcegaglia USA, and Otukupu Stainless Pipe. Outlook for Some Key Stainless Steel Products Pipe Increases in surcharges over recent months are signs of a slow departure from the bottom as a potential recovery creeps forward. 316/L surcharges are gaining at a more rapid pace 3Q16 IPD COMMODITY REPORTS

than 304/L as molybdenum has increased nearly 30.0 percent since January. The fallout surrounding the anti-dumping suit filed against Indian welded pipe producers last September should result in gradual price increases as supply shortages become more prevalent. Any increases are expected to be relatively modest as poor market demand continues to drive distributors to carry reduced inventory. However, if nickel prices should increase significantly, this panel expects demand and prices to increase reciprocally.

is slipping and is lower than where it was at the end of 2015 and 1Q16. According to the Financial Times, “London Metal Exchange (LME) copper stocks have surged by almost 40.0 percent this month (June) or 50,000 metric tons - spooking investors already concerned about flagging demand for the metal and plentiful supplies.” LME recorded the largest two-day inventory surge since 2004.

150LB. Fittings Fitting prices continue to hover around the bottom as market demand remains relatively flat. Slight increases may be on the horizon as scrap prices continue to strengthen. Following a regression in price during 1Q16, market prices stabilized by the middle of 2Q16. Lead times should continue to be stock to two weeks. ANSI Flanges Flanges continued to see price reductions into 2Q16, while at the same time, the market noticed slight increases in demand. Expectations for 3Q16 are for pricing to remain flat as many believe that further price deterioration is not realistic. Moreover, there is the potential for supply chain disruption stemming from a limited exclusion order imposed against Viraj Profiles, Ltd. of India for violation of Section 337 of the Tariff Act of 1930, which declares, “The infringement of certain statutory intellectual property rights and other forms of unfair competition in import trade to be unlawful practices.” Butt-Weld Fittings Butt-weld products are expected to continue to see flat to moderate demand in 3Q16. Market pricing has been trending lower, but higher replacement costs should turn that tide. Overseas suppliers have incorporated modest increases as importers respond to replacing inventory. Steady production continues to provide consistent and predictable lead times.

“One theory doing the rounds,” according to the paper, “is that a major metals trader is moving copper that had been sitting in China, the world’s largest consumer of copper , to LME warehouses in Singapore, Malaysia, Taiwan and South Korea, where financial incentives are being offered to store metal.” If this theory is true, expect inventories on the London Metal Exchange to continue to rise as de-stocking from China occurs. Conversely, sixty day Comex stock levels have declined approximately 15.0 percent. We should continue to see declining prices given international oversupply coupled with moderate demand.

3000LB. Fittings The drop in demand for products largely dependent on the oil and gas industry seems to have plateaued during 2Q16. Stabilizing oil prices could potentially lead to increased project activity toward the close of 2016. Hopes of rebounding material cost lead some to expect minimal price increases to trickle in during 3Q16. Supply remains solidly consistent.

COPPER TUBE & FITTINGS Lately, commodities have been on a positive run. Copper is often a front-runner and an indicator for commodity markets, but these days, it is an outlier. Copper continues to be very weak. We saw a rally over the past few months that took copper to $2.30 per pound but never beyond. Now, copper 4

3Q16 IPD COMMODITY REPORTS

year. Imports are running strong over the first five months, up 22.0 percent compared to the same period last year, after a weaker dollar boosted Chinese purchasing power.” The increase in refined copper imports could be taken as bullish. However, upon reading the fine print, imports of copper concentrate for use by smelters jumped 45.0 percent from a year ago. The surge in concentrate imports suggests that China’s copper refined imports could ease further in June as rising domestic smelting production will increase domestic supply and reduce import demand. That could keep a lid on prices for some time. In closing, a continued rise in commodities may pull copper prices upward. However, copper is currently deteriorating close to multi-year lows, and technical signals point to a retest of those levels.

PLASTICS, RESINS & HDPE PVC Currently, the overall PVC market is flat. There are, however, pockets of activity that are being driven by some projects. Manufacturers naturally trim inventory during the winter and ramp production back up when spring arrives. Unfortunately this year, spring brought with it a still sluggish economy and weak demand. Lead times from the mills are good and should remain so throughout the summer months. HDPE 3Q16 will be somewhat challenging for HDPE manufacturers. For the most part, production lines are full, but they don’t have much backlog. This is simply because of the drop off in the water transfer business due to the over capacity of very cheap natural gas. HDPE resin prices rebounded nicely earlier this year after being what many characterize as too low for most of last year. Looking ahead, anticipate weak demand, and judging from where the spot market is right now, pricing should hold steady thru 3Q16. Cheap natural gas, a key component of in the production of HDPE resin in North America, will also keep pricing relatively flat. A game changer is in-store for later this year that will have a drastic effect on the HDPE pipe grade resin. Chevron, INEOS and other major players all have new reactors coming online by year’s end. This will add billions of pounds of excess capacity that will make its way through the supply chain. Five years ago during the design phase of these reactors, natural gas was booming, and China’s appetite for imports was insatiable. But now, both have slowed dramatically, and the reactors are ready to come online. Of course, most of this resin is not of pipe grade variety, but a lot of it will be, and it has to go somewhere. All this excess capacity will likely put a lot of downward pressure on pipe prices later this year. © 2016 American Supply Association. All Rights Reserved.

VALVES “Robust” is clearly not a word that can be used to describe 2016 as, “the Year of the Valve,” thus far. Both R. W. Baird’s Industrial Review and ITR EconomicsTM have lowered their expectations for industry growth for the first half of 2016 from a modest 2.0-3.0 percent to virtually no growth. However, both are also more optimistic for the second half of 2016, predicting about 4.0 percent growth overall for 2016. Pricing in the valve markets has remained relatively stable with raw material costs holding steady for the last 18 months. Any sustained movement in those raw material costs will likely trigger quick reactions from the supplier community as the absorption of the inflationary pressures on other costs is becoming increasingly difficult. The supply side remains stable with strong inventories in both the manufacturing and distribution communities as reported by R. W. Baird. Oil and Gas The oil and gas markets remain very weak with maintenance projects providing much of the activity. The markets remain plagued by the volatility of oil prices and are not predicted to recover until prices stabilize to a point where profitable exploration and production can be realized. The most recent increases in oil prices will do little to spark these markets as prices remain below what is required to trigger spending. Chemical The chemical market remains stable with many expansion projects funded for 2016 and 2017. As capacity expansions have fueled this sector’s growth, this merits closer monitoring. Expanded capacity may reduce chemical pricing and threaten future expansion and valve requirements. Commercial Construction Overall, this sector has continued to show strong signs nationally. As always, there are certain areas leading the pack and contributing to the national growth. The Pacific Northwest, with its need for new hi-rise offices and the corresponding residential growth, is leading the way. Additionally, the Southeast is seeing a strong rise in the hospitality market. These geographies are leading the growth in the marketplace. The health care sector remains strong in many areas of the country. Although certain markets lag behind expectations, low interest rates continue to feed this area. Power With the federal government’s position on coal fired plants and our country’s insatiable need for energy, there has been a drastic increase in the permitting of combined cycle plants, especially in the Northeast and Midwest, where coal was the fuel of choice. This avenue for valve growth is continuing. 3Q16 IPD COMMODITY REPORTS

Municipal Water Infrastructure The topic brought to light by the revelations in Flint, Michigan, has led many cities, counties and water districts across the country to examine their own situations. Without clear direction and funding from the federal government to resolve the concerns surrounding their water supplies, local municipalities are left to their own decisions on whether to repair, replace, rebuild. Those decisions should lead to an increase in water projects at the local levels. Given the mandate in 2014 to remove lead from plumbing products used in potable water, one would think there will be immediate action taken to resolve ‘the problem’ and meet the requirements of the 2014 mandate. Shutting down drinking fountains and providing bottled water, as some school districts have done, is clearly not the answer. This sector has the potential to be a significant growth area but only when a decision is made to identify the real issues along with plans to rectify those concerns. Summary The stable pricing predicted at the end of 2015 has held and is expected to remain constant for the balance of 2016. With

3Q16 IPD COMMODITY REPORTS

pricing in place, along with the strong inventory positions taken by manufacturers and distributors, supply-related issues should not be a contributing factor moving forward. The continually improved service levels bolster both the end-user and contractor community’s planning and profitability alike.

GROOVED PRODUCT The major grooved manufacturers have announced a 6.0 percent price increase effective this summer. The primary factor driving the price increase is rising scrap prices. Regulatory compliance costs and increasing healthcare costs are also factoring into the increase. Commercially, the manufacturers are witnessing a nice rebound in the major metro markets around the country. The industrial market is still lagging but is getting somewhat more optimistic with the potential stabilization of oil prices. The oilfield sector remains depressed as the recent rise in oil prices has not been sufficient enough to trigger a new wave of drilling activity. But we are getting closer to the point where the lower lifting cost areas in the country could begin to get more active than they have been in recent years.