North American large-diameter line pipe market

Outlook for the North American large-diameter line pipe market

James Ley

Hatch Beddows

23rd March 2011

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET

Contents

Hatch Beddows

Global large-diameter line pipe market overview

North American large-diameter market overview

2


Contents

Hatch Beddows



3

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Contents

Hatch Beddows



7

GLOBAL LARGE-DIAMETER LINE PIPE MARKET OVERVIEW

Globally, LSAW demand grew strongly in 2010 driven by Russia and China. Spiral (HSAW) line pipe demand has seen healthy growth since 2007 with the US and Asian market primarily driving this

Estimated global LSAW line pipe production (kt) Estimated global HSAW line pipe production (kt)

12000 7000

10000 6000 CAGR = 14.7%

5000 8000

4000

6000

3000

4000

2000

2000 1000

2007

Europe

MENA

2008

Asia

2009 2010 2007

Europe

MENA

2008

Asia

2009 2010

Latin America

CIS

Latin America

CIS North America North America

Source: various and Hatch Beddows 8

CAGR = 5.36%

GLOBAL LARGE-DIAMETER LINE PIPE MARKET OVERVIEW

Russia was the largest producer in the world for LSAW in 2010, closely followed by China. LSAW production in Europe, Japan and India has been relatively stable in recent years

Estimated global LSAW line pipe production by region in 2010 (%)

Russian production increased strongly in 2011 driven by TMK, OMK, Chelpipe and Severstal

26%

2%

European and

Japanese

production –

“the traditional

exporters” has

stayed stable in

recent years

23% 13%

9% 8% North American

LSAW production

has declined in

recent years

Chinese production is also rising quickly driven

by new emerging major players such as PCK ,

Baosteel and Liaoyang

Source: Hatch Beddows 9

Total estimated production in 2010 = 11.2Mt


China and India have a strong presence in the spiral (HSAW) market and North America (primarily the USA) has increased its presence in the market – Turkey is another hot spot for HSAW line pipe production

Estimated global HSAW line pipe production by region in 2010 (%)

CIS is not an HSAW strong market with TMK and

ArcelorMittal the leading producers 9%

5% 12%

22%

19% China has around

15-20 API HSAW

line pipe

producers

5 new HSAW

mills have arrived

in North America

in the last couple

of years 15%

Turkey has several

HSAW producers

including Borusan

Mannesmann, Noksel

and Umran Boru

Source: Hatch Beddows 10

Total estimated production in 2010 =6.5Mt


Contents

Hatch Beddows



11


North American HSAW capacity has drastically risen in recent years with the arrival of five new HSAW mills and expanding capacity at one existing operation

North American LSAW capacity (kt)

CAGR = 0%

Overview of leading North American LSAW and HSAW pipe mills (not including Mexico)

Evraz Camrose LSAW

Evraz Regina HSAW

Evraz Oregon HSAW

North American HSAW capacity (kt)

2000 United Spiral Durabond LSAW

Stupp Corporation

Berg LSAW

Welspun HSAW 1500 JSW LSAW

1000 PSL

Berg HSAW

HSAW mill 500 LSAW mill

2007 capacity 2010 capacity Source: Hatch Beddows

12

CAGR = 46%


With the increasing HSAW capacity domestic HSAW line pipe production has risen, often it appears, at the expense of domestic LSAW line pipe production

Estimated North American large-diameter line pipe production 2007-2010 (kt) North American large-diameter linepipe production

has remained relatively consistent between 2007

and 2010 at ~ 1.03Mt 1200

However in four years production has flipped: 1000

In 2007 LSAW was estimated to account for

65% of North American large-diameter pipe

production 800

By 2010, HSAW was estimated to account for

68% of North American large-diameter pipe

production

600

400

200

2007 2008

LSAW

2009

HSAW

2010

Source: Interviews and Hatch Beddows 13


North American LSAW consumption is estimated to have fallen from around 1.4Mt in 2007 down to just over 600kt in market from 2006 through to 2009

2010. Imports of LSAW surged into the

Large-diameter LSAW line pipe imports into North America (kt)

Indian mills who were present in

importing both HSAW and LSAW

into the USA heavily in 2007/8/9

have set up their own HSAW

operations in the USA now e.g.

Welspun, PSL etc. and have left

the import market

Historic estimated North American LSAW consumption 2007 - 2011(kt)

1600

1400

1200

CAGR = 1000

800

600

400

200

-200

2007 2008 2009

LSAW imports

2010

LSAW production

LSAW exports LSAW consumption

Source: Interviews, ISSB and Hatch Beddows 14

-24%


The market for HSAW large-diameter line pipe has been stronger in recent years with close to 1Mt estimated to have been consumed in the market in 2010. As with LSAW, imports surged in 2007 and 2008

Large-diameter HSAW line pipe imports into North America (kt)

HSAW gains acceptance

for onshore oil and gas

line pipe applications

Historic estimated North American HSAW consumption 2007 - 2011(kt)

1200

1000

800

600

400

200

-200 2007 2008 2009 2010

HSAW production HSAW imports HSAW exports

Source: ISSB and Hatch Beddows 15

CAGR = -2.3%


Currently HSAW would not have a significant price advantage over LSAW. However, the ability to produce HSAW in longer lengths and the weakness of offshore market demand currently plays to HSAW strengths

Comparison of HRC and plate prices $/ton

The price differential between plate and coil has

narrowed in 2010/11 in North America compared

with 2008/9 suggesting that HSAW does not have

a significant price differential over LSAW currently

Increasing steel prices 1600

1400

Nonetheless, there are some technical advantages

for HSAW such as the ability to produce the pipe in

80 foot lengths, reducing the amount of on site

welding that is proving attractive

1200

1000

800 The offshore market in the Gulf of Mexico, where

LSAW would traditionally dominate has low inquiry

activity with the bulk of demand being onshore

where HSAW is competitive

600

400

Onshore rig count activity is strong and steady

being driven by drilling in the unconventional gas

and oil shale basins

200

0 Demand for gathering pipe small and medium

diameter line pipes (e.g. ERW and seamless) is

currently more stable than larger OD trunk line

demand

Source: AMM and Hatch Beddows

HRC US Midwest fob Plate US midwest fob

16

Ja

n 0

7

Ap

r 0

7

Ju

l 0

7

Oct

07

Ja

n 0

8

Ap

r 0

8

Ju

l 0

8

Oct

08

Ja

n 0

9

Ap

r 0

9

Ju

l 0

9

Oct

09

Ja

n 1

0

Ap

r 1

0

Ju

l 1

0

Oct

10

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n 1

1

coupled with the low gas

prices make it less

attractive to build major

trunk gas pipe lines in 2011 in North America


As gas prices have dropped down to around $4/mbtu, consumption of large- diameter line pipe in North America has slowed

North American large-diameter line pipe consumption vs natural gas price

$/mbtu kt

14 3000

12 2500

10 2000

8

1500

6

1000 4

500 2

0 0

(RHS) LDP consumption (LHS) Natural gas price

Source: EIA and Hatch Beddows

17

Total large-diameter line pipe consumption dropped to just 1.6Mt in

2009 and 1.5Mt in 2010


Even with the low gas price currently the largest gas shale basins such as Marcellus are still economical to drill and this continues to stimulate demand for OCTG and the smaller-diameter gathering line pipe grades

Estimated breakeven costs for developing different North American gas shale basins

18 Source: Wood Mackenzie and Hatch


OCTG demand has picked up into 2010 in North America, could this help stimulate demand for LSAW moving into 2011 as additional pipe line infrastructure is required for the new drilling in the gas shale basins?

to

Estimated apparent consumption of large-diameter line pipe in North America vs OCTG (kt)

9 3

8

2.5

7

6 2

5

1.5

4

3 1

2

0.5

1

0 0

2007 2008 2009 2010

(LHS) Apparent consumption of OCTG Apparent large-diameter line pipe consumption

Source: Hatch Beddows

19

In 2010 OCTG demand picked up

in North America whereas large-

diameter line pipe consumption

continued to decline


The long-term gas price forecast from the EIA is currently not favourable to stimulating demand for major gas trunk lines, although long-term gas production from the shale basins is expected to rise

North American forecast gas and oil prices ($/mbtu) US Natural gas production by source, 1990-2015 (trillion cubic feet)

10 120 25

9

100 8

20 7

80

6

15 5 60

4

40 3 10

2 20

1 5

0 0

0

(LHS) Natural gas - Henry Hub Spot Price ($/Mbtu)

(RHS) Oil - Imported Low-Sulfur Light Crude Oil ($/barrel)

Offshore Coalbed Methane Alaska

Onshore conventional Shale Gas

Source: EIA and Hatch Beddows 20

forecast

$5/mbtu


As a result it is in regions that the shale basins occur that are forecast to require the largest additional line pipe additions – a number of the new HSAW pipe mills built are well placed to supply line pipe to these regional markets

North American regional pipe line mile additions, 2009 – 2030 (1,000 miles)

Western, Arctic, 1

2.2 Regions in the USA with growing unconventional

production are expected to experience a higher

proportion of infrastructure development Canada, 4.7

As a result the Southwest and Central regions are

forecast to account for 45% of projects incremental

pipeline mileage

Southwest , 8.6

Central, 8.4 A number of the newly built HSAW pipe mills such

as Berg, Welspun and Stupp are all well located to

supply HSAW line pipe through to these regional

markets in the USA

Southeast , 4.6

idwest, 3.3

Offshore , 2.2

Northeast, 2.7

Source: INGAA Foundation – Natural Gas Pipeline and Storage Infrastructure Projections Through 2030 and Hatch Beddows

21

Total = 37.7 thousand miles


Beyond 2012, excluding years with Arctic projects, 1,000-1,500 miles of new transmission pipelines are forecast to be needed to serve US and Canadian natural gas consumption through to 2030

Projected US and Canadian pipe line additions (miles) – INGAA base case forecast

Source: INGAA and Hatch Beddows

22

Mil

es

of

pip

e


Large-diameter line pipe demand for new additions is forecast to strengthen in 2012 on the back of shale gas activity, later out into the decade the Mackenzie project and a potential Alaskan pipe line are forecast to stimulate demand

Projected US and Canadian pipe line additions (kt)

1600

1400

1200

1000

800

600

400

200

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Forecast gas pipe line additions Alaskan pipe line? Mackenzie project

Note: Assumed that the average OD for gas pipe lines in North America is 30” 23

Source: Simdex, INGAA and Hatch Beddows


Despite the shale gas activity in North America a gas pipeline from Mackenzie in Canada and one of the Alaskan pipe line’s are forecast to be built, entering in 2017 and 2023, in order to meet rising North American demand

• More than one Alaskan pipe line is planned currently e.g.:

• Transcanada’s and ExxonMobil’s Alaskapipe line, BP and ConocoPhillip’s Denali pipeline etc/

• Despite shale gas activity in the USA and the low gas prices there is reason to think that one of these

pipelines might progress:

• Gas demand is expected to continue to rise in the USA over the longer-term, the decline in conventional

gas supply will limit the impact of increases from the shale basins– Alaskan/Canadian supply would help

to make up the shortfall

• Politically the US will want to ensure that it reduces it’s dependence on having to import energy from

outside North America as much as possible

• Some of these mega projects are already far into the planning phase, a lot of money has been invested by

various stakeholders as momentum builds it is difficult to stop this

• The Mackenzie pipeline, despite also competing with the Alaskan pipe appears to be further ahead in its

planning

• IOC’s behind this project e.g. Exxon, ConocoPhillips, Shell and ESSO need to decide by the end of 2013 if

they will progress

• It’s forecast that Mackenzie would also need to be built to meet North America’s growing gas demand out

to 2030

24


The Mackenzie and Alaskan pipelines could become key alternative sources of gas supply to the USA through to 2030

Projected North American natural gas supply and consumption

3000 100

2500

80

2000

60

1500

40 1000

20 500

0

2010 2014 2018 2022 2026 2030

Conventional

Shale formations

Mackenzie pipeline

Net LNG imports

Offshore (mostly GOM)

Other unconventional (primarily coalbed methane)

Alaska (own use plus pipe exports)

Source: ICF International, NEB and Hatch Beddows 25

Mill

ion

s o

f cu

bic

me

tre

s/d

ay

Bill

ion

s o

f cu

bic

fe

et/

day

Total consumption


North American large-diameter pipe capacity is now sufficient to meet forecast large-diameter line pipe demand – the Alaskan/Canadian gas pipe lines if they progress might create some sourcing issues for API plate and coil

• The forecast for large-diameter line pipe is only looking at additional line pipe needed and does not take into

account any replacement activity that is required

• In the short-term 2012 forecast total large-diameter line pipe demand is likely to move back towards 2008

levels of up to 2Mt of pipe

• Currently North American large-diameter line pipe capacity is adequate enough to meet the demands of

forecast additional large-diameter line pipe requirements

• In the longer-term current information suggests that the Canadian/Alaskan pipe lines, if they progress, might

require high-grades of API plate/coil such as API 5L X80, and perhaps up to X100?

• API coil and plate sourcing for these projects in North America might be difficult – many producers

currently struggle to source suitable tonnages of API coil and plate for pipe making within North America

itself and look to the export market

• If Mackenzie and/or Alaska were to specify the use of just LSAW pipe for these projects international

LSAW mills would likely secure part of the supply of these pipelines as North American LSAW capacity is

unlikely to be able to supply these tonnages on their own

• However, a very strong North American HSAW capacity has now built-up suggesting that HSAW is likely

to supply significant quantities of these pipelines if they progress as well

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THE MIDDLE EAST OCTG AND LINE PIPE MARKETS

Thank you for your attention. For further information, please contact:

James Ley Senior Consultant

Hatch Management Consulting

Roman Filimonov Consultant

Hatch Management Consulting 9th Floor, Portland House,

Bressenden Place, London, SW1E

5BH, UK

9th Floor, Portland House,

Bressenden Place, London, SW1E 5BH, UK

+44 (0) 20 7906 5127

[email protected]

+ 44 (0) 20 7906 5129 [email protected]

Terance Ko Director


Room 1108-09, Tower W1,

Oriental Plaza, Beijing, 100738,

China + 86 10 8500 2180

Lynn Lupori-Gray Managing Consultant


1600 West Carson Street, Gateway

View Plaza, Pittsburgh, PA 15219,

USA

+ 1 412 497 2067

[email protected]

[email protected]

27

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North American large-diameter line pipe market