1Q16 IPD Commodity Report by Westlund PVF

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1Q16 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.

1Q16 IPD COMMODITY REPORTS

CARBON STEEL Carbon Steel Pipe One, unassailable fact that has made itself very apparent: the commodity boom of the past fifteen years is over for the foreseeable future. Nowhere is this more evident than the world of steel pipe. Hot rolled coils, which are the ‘Mother’s Milk’ of tubular products, are currently pricing at levels not seen in 12 years. According to the venerable Donald R. McNeeley, president & CEO of Chicago Tube & Iron Corp., the published reference point for coils is approximately $350 per short ton versus $603 per ton one year ago and over $1000 per ton in 2008. Scrap prices have dropped precipitously during the past year, but in the last few weeks, they seem to be stabilizing. One scrap dealer advised it is now charging customers to pick up their scrap versus paying them over $200 per ton a year ago. In turn, this scrap dealer gets $110-125 per ton when sold to the local mills. With the marketplace finally grasping the fact that the current pricing levels will be with us for the foreseeable future, everyone in the supply chain is deleveraging inventories. While painful, inventories will come back into balance and more normal business activity resumes, in the long run. Although some compare the current pricing contraction to the financial crisis of 2008, the current decline is directly attributable to supply and demand. Fifteen years ago, the U.S. steelmaking capacity of approximately 120 million tons, at full capacity, was part of the 1 billion tons produced worldwide. At 100.0 percent full production capacity today, U.S. capacity is relatively unchanged at 120 million tons, while worldwide production registers at two-plus billion tons. This helps to explain the pricing declines we are experiencing as worldwide demand has decreased significantly, i.e. developments in the energy market and China as primary causes. The additional one-plus billion tons of capacity added over the past 15 years, now choking the supply chain, was financed primarily with borrowed monies, making the removal of steelmaking capacity from the chain all the harder to remove as debt has to be paid back. The good news is the U.S. economy continues to grow, which should drive bloated inventories down. Construction spending and architectural indices all point to increasing construction across a broad array of industries. On the energy front, the operating rig count continues to contract and reflects the supply glut of all things energy-related. Most commercial and industrial markets still seem to be solid, especially in the Northeast, Pacific Northwest and San Francisco Bay as well as in and around Dallas and Houston, Texas, but they are nowhere near strong enough to make an impact on inventories or availability of carbon steel pipe on2

1Q16 IPD COMMODITY REPORTS

hand due to the sudden drop in drilling activity. This is borne out by the imminent closing of the Northwest Tube ERW mill in Atchison, Kansas, as well as dramatically reduced output from TMK IPSCO’s ERW facilities, all of which had large energy piping products as part of their production mix. We are seeing import carbon steel ERW drop as much as 20.0 percent over the highs of last quarter, and while carbon steel seamless has also dropped, it’s nowhere near as much as ERW. Current estimates show that we are likely at or within 5.0 percent of a bottom in pricing, so hopefully by the time this report is released for 2Q16, we’ll see a rebound in pricing and demand. Carbon Steel Welding Fittings & Flanges The market remains oversupplied. There are a number of large distributors working off excess inventory compared to current demand. Until there is a balance of inventory to demand, there will remain downward pricing pressure for 1Q16. Indications suggest that prices could decline by as much as (5.0) percent. The largest distributors are reporting that manufacturers have started to reduce capacity. Expectations are the oversupply will remain through 1Q16 before improving. Upstream market conditions remain very weak, and demand remains low. According to the Baker Hughes Rotary Rig Count, there has been an overall reduction in operating rigs from 2,354 a year ago to 928 as of November 25, 2015 with oil rigs leading the decline (now 636 versus 1,801 a year ago). Gas rigs have been reduced to 292 from 553 during the same period. The largest declines in rigs are in Eagle Ford (down to 73 from 209), Permian (down to 221 from 566) and Williston (down to 62 from 191). Midstream activity in the US remains stable. There are a number of large infrastructure projects underway, and large pipeline projects continue in anticipation of long-term natural gas pricing forecasts. Uncertainty remains over political and economic instability throughout the Middle East as a result of lower oil prices. Due to oversupply, lower oil prices are expected to remain through 1Q16. Forged Steel Fittings According to the domestic manufacturers and import master distributors contacted for this installment, there is little change in the A105 forged steel business. The manufacturers claim industrial PVF wholesaler-distributors are continuing to reduce inventory due to the slowdown in the energy and industrial sectors. Looking ahead, all reported they see no signs that either sector will recover in the first half of 2016. Thus, it is no surprise that all also reported no price increases are anticipated on the horizon and that inventories are very strong. © 2016 American Supply Association. All Rights Reserved.

STAINLESS STEEL PIPE, FITTINGS & FLANGES

Tug of War

Darkest Before the Dawn?

fundamentals, and the whole industrial chain has fallen into a

“Nickel prices have already seriously deviated from the market

The dollar’s highs and oil’s lows have stirred a bitter stew for all base metals this year, but nickel has the inauspicious distinction of worst performer on the London Metal Exchange (LME). Spot prices on the LME hit the lowest level since May, 2002, during late November, and it’s the only base metal to sink beneath the levels recorded during the global financial crisis of 2008-09. Its price path is even more surprising, since there was strong consensus at the beginning of 2015 that nickel prices would be at least stable throughout the year. Actually, there was a fairly compelling case for increases, due to the ban Indonesia imposed on its exports of ore and the expectation that supply shortages would begin to surface in China. And while Philippine suppliers shipped considerably more ore to China than analysts anticipated, the real driver to nickel’s astonishing decline has been continued, weak demand. Any hopes for a relatively soft-landing in China’s slowdown in consumption of industrial metals crashed along with its stock market this past summer. The only things seemingly going “right” for nickel’s fundamentals are LME inventory levels that have dropped nearly (17.0) percent from the record highs registered in June. But since current inventory levels of refined metal are still very high, they would probably need to drop another (20.0) percent or so before there would be anything resembling tightness that would spur prices. It was recently reported that around 70.0 percent of the world’s nickel producers are losing money. Therefore, we can expect imminent production cuts with the potential for supply to come back into balance with demand sooner than later. If industrial activity picks up in China, nickel’s price picture could change relatively quickly. LME CASH PRICE AVG (LB)

Jun 15

Dec 15

Mar 15

Sep 15

Jun 14

Dec 14

Mar 14

Sep 14

Jun 13

Dec 13

Mar 13

submitted last month by the eight Chinese nickel producers, who together comprise the vast majority of the country’s capacity. The impetus of the letter was to admonish aggressive short selling by a growing crowd of speculators in the hope regulators would act to curb or mitigate the incursion. While all industrial metals traded on the Shanghai Futures Exchange have declined markedly due to the factors listed above, nickel has been hit considerably harder than the others. Open interest options and trading volumes have soared as the price has plummeted through key support levels. It’s important to note that nickel only began trading on the SHFE in April, 2015. The phenomenal production and consumption growth in recent years has made China the world’s largest consumer of nickel by a wide margin. The eight major producers plan to respond to the “bear attack” by reducing their aggregate output immediately. They pledge to reduce combined production volume by at least (20.0) percent in 2016. Will the producers truly act in solidarity? Will the cuts be deep and expeditious enough to turn the tables on the speculators? What Happens From Here? There are certainly a lot of moving parts related to the current and near term price outlook for nickel – and by extension – stainless steel pipe, fittings and flanges. Macroeconomics will certainly set the general course for all industrial metals. We have officially been in a bear market for all commodities, since the spring of 2011. It is no coincidence that the dollar entered a bull market at precisely the same time. The dollar has climbed by more than 8.0 percent this year alone and is

CASH PRICE OF PRIMARY NICKEL (LBS)

Sep 13

Jun 12

Dec 12

40,000

Mar 12

80,000

Sep 12

Jun 11

120,000

Dec 11

Mar 11

160,000

Sep 11

Jun 10

200,000

Dec 10

240,000

Mar 10

Sep 10

280,000

Jun 09

Dec 09

320,000

Mar 09

Sep 09

360,000

Jun 08

Dec 08

400,000

Mar 08

Sep 08

440,000

Jun 07

Dec 07

480,000

Sep 07

LME INVENTORY (MT)

vicious circle.” This statement was part of an open letter jointly

at 12-year highs. Oil, the ultimate commodity, is at its lowest level since early 2009, and the International Energy Agency (IEA) forecasts that the oversupply glut of oil is still growing and will continue until the latter part of 2016. These issues, combined with the anxiety about China’s economy, threaten to suppress global demand and prices for metals even further. But in the opinion of the panel compiling this report, the worst of the damage has already been done to nickel, and we look for prices to stabilize, if not increase, during 1Q16.

1Q16 IPD COMMODITY REPORTS

Stainless Steel Butt-Weld Fittings

INPUTS THAT IMPACT STAINLESS STEEL PRICES 90,000

9,000

Stainless steel pipe market prices tightened and even began to rise in the wake of the antidumping action against welded stainless pipe producers from India. However, the moves were short-lived, as declining nickel prices have caused market participants to resume more hand-to-mouth procurement practices. This has dampened demand and exerted downward pressure on welded product. The U.S. International Trade Commission (ITC) has made an affirmative injury determination in its preliminary phase antidumping (AD) and countervailing duty (CVD) investigations. Accordingly, both the AD and CVD investigations have now moved to the phase involving the U.S. International Trade Administration (ITA) of the U.S. Department of Commerce (DOC). DOC granted a request for extension by the Petitioners to postpone its preliminary CVD duty determinations until February 29, 2016. The AD preliminary duty determinations will also likely be extended until April 27, 2016. Petitioners allege a 32.06 percent dumping margin; they made no specific allegations as to the extent of any subsidies provided. At the time of this writing, the supply chain is still stable with no significant shortage of material observed. However, lead times for domestic product are extending. Stainless Steel ANSI Flanges Market pricing remains at low levels and largely unchanged from the last installment of this report. Delivery lead times for import product remain very aggressive. Accordingly, inventories are more than adequate to meet current market demand levels, which is modest at best. Based on raw material prices, there is no sign of price recovery in the near term.

1Q16 IPD COMMODITY REPORTS

2.500

2.000

1.500

1.000

Jun 15

Dec 15

Sep 15

Mar 15

Jun 14

Dec 14

Sep 14

Mar 14

Jun 13

Dec 13

Sep 13

Mar 13

Jun 12

Dec 12

Sep 12

Mar 12

Jun 11

Dec 11

Sep 11

Mar 11

Jun 10

Dec 10

Sep 10

Mar 10

Jun 09

Dec 09

Sep 09

Mar 09

Dec 08

0.000

Jun 08

0.500

Sep 08

Stainless Steel Pipe

316/L SURCHARGE

3.000

Mar 08

Stainless steels raw material surcharges from the major domestic manufacturers have declined for the sixth, straight month as both metals and scrap prices have continued their slow downward spiral looking for the bottom.

304/L SURCHARGE

4.500

Dec 07

SCRAP & CHROMIUM PRICES (M/T)

Outlook for Some Key Stainless Steel Products

SURCHARGES FOR AUSTENITIC STAINLESS STEELS 5.000

SURCHARGE (PER POUND)

Jun 2015

Dec 2015

Mar 2015

Sep 2015

Jun 2014

Dec 2014

Mar 2014

Sep 2014

Jun 2013

Dec 2013

Mar 2013

Sep 2013

Jun 2012

Dec 2012

Mar 2012

Sep 2012

Jun 2011

Dec 2011

3.500

Mar 2011

Sep 2011

4.000

Jun 2010

1,000

Dec 2010

10,000

Mar 2010

2,000

Sep 2010

20,000

Jun 2009

3,000

Dec 2009

30,000

Mar 2009

4,000

Sep 2009

40,000

Jun 2008

5,000

Dec 2008

50,000

Mar 2008

6,000

Sep 2008

60,000

Jun 2007

7,000

Dec 2007

70,000

Continued deflation of welded pipe prices has presented downward pressure on stainless steel butt weld fittings. Any further deterioration of pipe prices could cause additional downward movement for fittings. Supply is good, and demand is moderate to soft.

Jun 07

Chromium

Sep 07

18-8 SCRAP

8,000

Sep 2007

MOLYBDENUM PRICES (M/T)

Molybdenum 80,000

Stainless Steel 150LB. Fittings As reported in 4Q15, demand is stable. Inventory levels remain sound. Market pricing remains unchanged. However, if stainless steel scrap prices remain at ultra-low levels, the potential is there for a regression in market pricing during the first part of 2016. Stainless Steel 3000LB. Fittings Forged fitting prices remain stable as reported in the prior quarter. With raw material prices declining, no increases anticipated on the horizon. Demand remains relatively soft but stable, with no market shortages observed.

COPPER TUBE & FITTINGS In early-mid December, many commodity prices were trifling with multi-year lows. Copper has been trending downward since to 2011. Currently, It is near $2.00 per pound, and it may not have found a bottom just yet. With this downward momentum, it is very likely that we will see copper prices below $2.00 per pound. China The weak copper market can be attributed to a number of factors, but the major contributor is a softening in Chinese growth, including in areas such as real estate development and industrial production. China has been one of the world’s © 2016 American Supply Association. All Rights Reserved.

top commodity consumers, so the slowing demand there is helping push prices lower. Additionally, copper is also oversupplied, and that is also a bad omen for pricing.

when compared to the previous quarter, and so it would appear business levels declined modestly for the quarter. However, manufacturers reported overall growth in new orders, production and the number of employees for the third consecutive quarter, despite sharp declines in export orders, backlogs and prices. Price drops in plastics products can be the result of weakening market demand, but this time, it is the result of the sharp decline in resin and crude oil prices. This, actually, has a positive effect on the demand for plastics products, in the long run. Manufacturers in the PVF industry concurred that business for the second half of 2015 has been strong for shipments, despite the price erosion. The general consensus from the plastics manufacturers polled for 2016 is steady growth in production and pounds domestically, but due to the value of the dollar, low crude oil prices, resin prices and a weak export market, overall growth in revenue will be modest.

There are stockpiles of copper in mainland China purchased by metal traders using the commodity as collateral. The declining value of copper equals declining collateral value. This could cause investors to face margin calls on those loans. If investors are forced to sell inventory stored in warehouses with hundreds or thousands of tons scattered across the country, the result could be a further decline in market prices. In such a declining price environment, it could quickly become a downward spiral and have far-reaching implications.

Incidentally, the U.S. plastics industry remains our nation’s third-largest, behind the petroleum and automotive industries and ahead of basic chemicals. In 2014, the U.S. plastics industry employed more than 940,000 people and saw a record $427.3 billion in shipments. Plastic shipments have seen 11.5 percent growth since 2012.

VALVES

PLASTICS, RESINS & HDPE

The good news is that there is a light at the end of the tunnel, according to Brian Beaulieu with ITR EconomicsTM and as presented at Network2015 in Chicago. It is with this long term knowledge of economic growth that the outlook for the valve industry remains promising, if not bright. Since the 3Q15 report, commodity prices have hit historic lows, exports continue to wane due to unfavorable exchange rates foisted on us by a strong dollar, and the price of a barrel of oil has dipped below $40 dollars, which has left us with a very lackluster performance for the second half of 2015. ASA’s industrial PVF members are seeing declines in both sales and orders where, according to R. W. Baird’s Industrial Review, both areas are running below expectations for 63.0 percent of those surveyed, and 50.0 percent of respondents are now predicting negative “organic” growth for 2015. But before any of us start smoking from the tailpipes of our cars, economic analysts at ITR EconomicsTM still maintain that the PHCP-PVF industry - as a whole - will post a “3.6 percent increase” in 2015 over the prior year. Obviously, this is a national average, so particular industrial sectors, such as oil and gas, are not likely to reflect this performance for 2015. On a positive note, ITR EconomicsTM forecasts that after a slow start in the New Year, sales will increase each quarter, and we will finish 2016 with a very respectable 5.7 percent growth in year over year sales.

Plastics News Business Monitor Index registered a value of 98.7 in 3Q15. A value below 100 for this index indicates that overall business activity levels for plastics processors slowed

There seems to be pricing stability in the valve arena. The fluctuations in materials’ costs have stabilized, which has enabled manufacturers to firm their costs and continue

Interest Rates & the U.S. Dollar Eyes remain on the Federal Reserve’s next move with its impact on the value of the dollar. If and when the Federal Reserve increases rates, the dollar could become weaker. As the dollar weakens, it makes the metal cheaper to buy for investors who don’t use the U.S. currency. As the dollar strengthens against other currencies, it forces copper prices to tweak lower. Copper is traded in dollars and becomes less expensive for traders who rely on stronger currencies to fund their purchases. Oil There usually isn’t much of a link between energy and copper prices; however, a significant decline in oil prices has and could further result in lower copper prices. Most of the copper industry uses a lot of diesel in the production process. Many copper producers have seen less productivity costs this year. If production expenses continue to decline, coupled with an overall weak copper market, lower prices will most likely be the outcome.

1Q16 IPD COMMODITY REPORTS

to improve performance, efficiencies and make product improvements. All of these benefits are passed to the distributor without increased pricing. We expect this trend to continue into 2Q16. The lead free issues of previous years are now behind us, as most users are familiar with the requirements and have adjusted their inventories to meet their market requirements. Outlook & Overview for Key Valve Markets Oil & Gas The Wall Street Journal’s headline on December 3, 2015, read, “Oil falls to under $40 a barrel!” As expected, this industry continues to weaken with falling oil prices pressuring both investment and backlogs. Chemical This market remains at a relatively healthy level, as downstream investment has held up - so far, though pricing pressure has begun to emerge as additional supply comes online. Commercial Construction This market has been and remains the most positive “bright spot” for R. W. Baird’s survey participants nationwide, with commercial construction respondents confidently predicting a 10.0 percent growth in 2016. General Industrial Markets are fairly mixed, right now, with commodity manufacturers and large exporters experiencing significant declines, while consumer base product manufacturers are experiencing a strong upswing.

1Q16 IPD COMMODITY REPORTS

Power The only encouraging area in this market is the coal/oil to gas conversion market, which is vibrant and cannot come online quick enough for the consumer. All other areas are “sluggish,” at best. Municipal Water This market is finally showing some signs of life in the area of new construction, which has been non-existent since the 2008 crash. Infrastructure repair and replacement has kept this market from “turning off the lights” over the last six to seven years and again will likely be “steady and stable” for 2016. Conclusion An improving economy slowly assists the growth for the valve industry in 2016. With the stability in raw material costs, valve prices should be consistent throughout 1Q16 and into 2Q16. Availability of valve products is expected to continue to reflect the trends for local inventories.

GROOVED PRODUCT The energy drop off and industrial market softness have negatively impacted demand. The commercial segment remains stable, and large commercial work on the horizon for 2016 should be beneficial. Markets in New York City, along with Florida, remain vibrant. Business has trailed off in the Midwest, and the energy situation is impacting commercial work in the Southwest.