IPD 2Q16

HEADQUARTERS 1200 N. ARLINGTON HEIGHTS RD. SUITE 150 ITASCA, IL 60143

TEL: 630.467.0000 FAX: 630.467.0001

WEB: ASA.NET IPD@ASA.NET

2Q16 IPD COMMODITY REPORTS The IPD COMMODITY REPORTS are prepared quarterly in March, June, October & December by the members of the IPD Executive Council

ROUTE TO

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.

© 2016 American Supply Association. All Rights Reserved.

2Q16 IPD COMMODITY REPORTS

|

1

CARBON STEEL Carbon Steel Pipe For the past 15 months (yes, it’s been that long), steel pipe prices have continued to search for and find lower pricing levels, driven by a declining energy market as well as lackluster global demand. At the time of this writing and according to data from HYPERLINK “http://gis.bakerhughesdirect.com/Reports/StandardReport.aspx” Baker Hughes, the U.S. rig count was 418, a level not seen since the late-1990s. This dramatic drop, among other factors, is causing a rationalization of domestic steel pipe manufacturing capacity. For example, U.S. Steel recently elected to split its tubular division from its basic steel making operations and, almost immediately, announced the idling of its Fairfield seamless pipe mill as well as its Lone Star steel pipe manufacturing facility. While the U.S. continues to be awash in pipe of all kinds and types, the underlying steel substrates, i.e. scrap, ores, seem to have found their footings.

Prices for these materials are starting a slow climb from what may later be characterized as the floor or bottom. Since the 1Q16 Reports, all of the major producers of domestic Hot Rolled Coils (HRC) have announced multiple increases of $30+ dollars, at least one of which appears to be holding, albeit by its fingernails, resulting in steel pipe price increases. With the just announced preliminary trade actions against seven separate nations for HRC, we can expect more increases from the domestic producers.

2

|

2Q16 IPD COMMODITY REPORTS

© 2016 American Supply Association. All Rights Reserved.

While demand worldwide continues to be spotty, major

Significant uncertainty remains over foreign political and

international coil producers are enacting modest increases,

economic instability in the Middle East as a result of lower oil

though not nearly to the extent of their domestic

prices. The prevailing forecast for 2Q2016 anticipates that the

counterparts, which are being reflected in higher import pipe

oversupply of oil will maintain pressure on the price per barrel

offerings - nothing substantial but modest increases that seem

of oil.

to be holding, nonetheless.

With the expectations that domestic steel pipe prices will rise faster than those from the rest of the world, expect the pricing differential between domestic produced steel pipe and import steel pipe to grow, which will make import pipe, both ERW and seamless, a more attractive alternative. The wild card remains the pending dumping litigation against Third World producers.

Carbon Steel Welding Fittings & Flanges Similar to the forecast for 1Q2016, the market for carbon steel welding fittings and flanges remains oversupplied. Large distributors continue to work off excess inventory. Downward pricing pressure persists into the second quarter. Commodity steel prices have continued their decline. There may be a weakening in the carbon steel welding flange market, with some decreases being reported.

Oil prices have continued to decline. Year-over-year comparisons show a barrel of oil at $55 in February, 2015, versus struggling to hold at $32 per barrel in February, 2016.

There has been a lot of speculation that the world’s largest oil producers may agree to a cap on production, but to-date, this remains to be seen. Lower oil and natural gas prices (February, 2015, at $2.60 MBT versus February, 2016, at $1.80 MBT) have continued to be a drag on upstream demand.

STAINLESS STEEL PIPE, FITTINGS & FLANGES Ready to Rebound?

Many had hoped that the turn of the calendar year would serve as the floor for plummeting nickel prices. At the very least, many had wished for stability in an area that has become accustomed to instability. Having claimed the dubious award for “most oversold” market in 2015, nickel seemed due for a rebound. But the general rule of “supply and demand” collided with “oversold market” on February 11, 2016, when nickel prices reached their lowest per ton price since 2003. While the World Bureau of Metal Statistics reported that the nickel market had a slight deficit relative to demand at the end of 2015, prices continued to fall all the way to $7,550 per metric ton.

A decisive number of global suppliers of nickel are sustaining losses and have responded to the continued drop in market demand with plans to limit production. Amidst plans to reduce mining production and exports by as much as 20.0 percent, the nickel market has responded by rebounding just short of the head and shoulder pattern target of $9,795 on April 12, 2016. As consumers follow the trend of increasing raw material, nickel based materials, such as stainless steel,

Upstream market conditions remain very weak, and demand

should expect to see gradual cost increases. During this

remains low. According to the Baker Hughes North American

period of tremendous instability, many consumers reduced

Rotary Rig Count on February 19, 2016, there has been an

inventory to minimize risk during a flat to slow economic

overall reduction in operating rigs to 720 from 1,670 a year

growth period. Presuming the price increases endure,

ago with oil rigs leading the decline (413 versus 1,019 last year).

distributors throughout the channel should start to switch

Gas rigs have been reduced to 101 from 289 a year ago. The

from destocking to restocking, creating an initial spike in

largest decline in rigs for 2016 versus 2015 is in the Permian

pricing followed by steady demand growth through 2017.

Basin, down to 165 from 362. Eagle Ford is at 54, down from

As consumers and distributors of stainless steel products

160, and Williston is down to only 36 from 123 a year ago.

prepare for optimistic economic growth in 2016, expect to

Even with oil and gas prices in decline, there are still a number of large infrastructure projects underway. According to Jeff

see demand driven material increases aligned with a reduced supply of raw material.

Share, the editor of Pipeline & Gas Journal, who recently spoke

Expectations of market balance and even a potential deficit

at an industry function in Houston, Texas, “There is funding and

has HSBC analysts predicting a gradual increase in pricing as

continued construction on dozens of pipelines throughout the

cutbacks continue at high cost mining operations. Analysts

United States with many major utility and energy companies.”

also stated, “The least oversupplied commodities and those used

© 2016 American Supply Association. All Rights Reserved.

2Q16 IPD COMMODITY REPORTS

|

3

Stainless Steel Butt-Weld Fittings

in higher value-added products should be the best performers, including copper, nickel, and zinc.” Some concerns regarding

Market pricing remain stable, but demand is soft. Welded pipe

China’s inventory draw down can potentially slow growth

prices being the leading indicator of movement in this product

and inflation. However, the lack of any official monitoring

area, upward movement is not anticipated at this time.

in place for low-grade ore used in China’s nickel pig iron production masks the true impact and keeps the outlook for a

Stainless Steel 150LB. Fittings

sustained global price recovery cloudy. Moreover, LME stock

Inventory levels are sound and unchanged from 4Q2015, and

levels remain stubbornly high and continue to weigh on the

pricing remains unchanged as well. Soft stainless steel raw

battered metal’s fundamentals.

material prices suggest not anticipating any change at the present time.

LME CASH PRICE AVG (LB)

Stainless Steel 3000LB. Fittings

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

March. Copper Comex prices are up $00.30/lb. since mid-

0

Jun 12

3

0

Dec 12

40,000

Mar 12

Copper prices have been inching upward in February and

Sep 12

6

Jun 11

80,000

Dec 11

9

Mar 11

12

120,000

Sep 11

15

160,000

Jun 10

200,000

Dec 10

18

Mar 10

240,000

Sep 10

21

Jun 09

280,000

Dec 09

24

Mar 09

320,000

Sep 09

27

Jun 08

360,000

Dec 08

30

Mar 08

400,000

Sep 08

33

Jun 07

36

440,000

Dec 07

480,000

Sep 07

Forged fitting prices remain stable as reported in 1Q2016, CASH PRICE OF PRIMARY NICKEL (LBS)

LME INVENTORY (MT)

LME INVENTORY (MT)

Outlook for Some Key Stainless Steel Products Stainless steel raw material surcharges from the major

and there do not appear to be any increases on the horizon.

Demand remains relatively soft but stable with no market shortages observed.

COPPER TUBE & FITTINGS

January lows. With the uptick, are prices finally moving off a bottom or just rising for a higher fall that is yet to come?

Copper’s seasonal price usually peaks during April or May each year. It also has a tendency to move to lows late in the year, in this case, bottoming out in January.

domestic manufacturers declined for March, 2016, even in the face of the four, major domestic steel mills announcements of proposed price increases. With current weak prices of molybdenum, nickel and chromium, it’s reasonable to anticipate the increases are not sustainable.

Stainless Steel Pipe Stainless steel pipe market prices are soft but stable, and demand is slow. The supply chain is still stable with no significant shortage of material observed. Lead times for domestic product are normal, and the flow of import product is unchanged.

Stainless Steel ANSI Flanges Inventory levels are adequate to meet current demand levels.

Copper can be a good indicator of world economic conditions.

So far this year, global financial markets have been chaotic. In the U.S., copper traded down to the lowest level in seven years to a low in mid-January. It has inched up above the $2 level,

Pricing is moderate and aggressive. Import sources continue

for now. Is this just a seasonal adjustment underway with

to supply an abundance of competitive product.

prices set to drop to a new low later this year?

4

|

2Q16 IPD COMMODITY REPORTS

© 2016 American Supply Association. All Rights Reserved.

One analyst does not see the recent rise in prices as an emerging bull market. “I do not see a new bull market

Oil

model, which will likely suppress any rallies to all-time highs.

What will it do is anybody’s guess. Typically, there 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 may very likely be the outcome.

Additionally, huge stockpiles of copper in China could cause

MALLEABLE IRON FITTINGS

emerging for this base metal that is dependent on demand from areas of the world that are investing heavily in infrastructure and heavy manufacturing,” said Andy Hecht, the chief market strategist for Carden Capital and its sister company, Carden Futures. “China is shifting to a consumer-based economic

new demand for the metal to suffer for years to come. Bountiful production of copper at higher production costs in response to the price over recent years has hurt demand as inventories grew and price diminished demand.”

Interest Rates and the US Dollar Affect At its March meeting, the Federal Reserve abruptly pulled in its rate hike plans for the year. The Fed sited, “global risks” facing the U.S. economy as the basis for the move. This decision triggered a slump of the U.S. dollar. Oil and commodity prices have jumped at the news with copper a big gainer so far.

© 2016 American Supply Association. All Rights Reserved.

Announcements by several vendors indicate an 8.0 percent import malleable iron increase this spring. Domestic malleable iron is holding flat, but there are signs suggesting an increase in the months to come. Rising labor, healthcare and environmental compliance costs are all key components of the upward pricing pressure. Ample capacity is reported by both import and domestic manufacturers, and strong fill rates are seen in both sectors. This is partly due to the mild winter enjoyed in most northern states, which has had a negative impact on demand. The downturn in energy has also had some impact on malleable iron demand, but the major use of this product remains in commercial and residential building along with the gas utility market.

2Q16 IPD COMMODITY REPORTS

|

5