OCTG Decision: A Trader’s Perspective

The story went like this:

The DOC would investigate only 2 Korean producers  –  Hyundai and Nexteel  –  and the expectation was that Hyundai, one of the more established and conservative mills, would be doing just fine, while Nexteel, a newer and very aggressive producer, was expected to get some margin, which then also might be applied to the so-called “all others” category. But amazingly, they both walked away scot-free! And for the record, the “alleged” margins for Korea ranged from 66 to 158 percent. I kid you not!
 
Making my living by selling imported steel (including pipe), I have never ever seen such divergence before. The question has been asked whether maybe the Koreans keep 2 sets of books, but this theory does not hold water when we look at the other countries. While the only producer in Thailand and most of the producers in Vietnam and India got nailed with margins between 55 and 118 percent, Taiwan got a high margin of 2.65% (vs. an alleged margin of roughly 70%), Saudi Arabia of 2.92% (alleged 53%), Turkey of 4.87% (vs. approx. 45%), Ukraine 5.31% (compared to 25 – 30%)and the Philippines got away with 8.9% (again much lower than the 46 – 56% alleged). As you can imagine, most of these margins are very manageable. To add to the mystery, both the mills in Thailand and the Philippines are Chinese transplants, while the only mill in Vietnam with a lower margin is a Korean transplant. All this leads me to the conclusion that the petitioners, the US pipe industry and their lawyers, simply blew it. They either pulled these alleged margins out of thin air, or else they did a very poor job in convincing the DOC of their veracity. Considering that the industry had been talking about and threatening to file such cases for over three years, and keeping in mind that filing such cases in not cheap, this is rather peculiar.
 
Granted, these margins are preliminary. And there were some rumors today that the petitioners claimed to have some new evidence in their back pockets which could result in substantial changes in these margins. First, I am not a lawyer but if I had had such evidence, I most certainly would have included that in my original petition. Furthermore, history has shown that the variations between the prelim and the final margins are usually rather small  –  10 or 20% maybe, so a 5% margin might become 6%. So, this is nothing but a straw which the petitioners are grasping for. And for the record, the DOC is generally not known to be very friendly or accommodating to the defendants, on the contrary. So whatever “goodwill” might have existed at the DOC, it did not help.
 
In addition to the final determination by the DOC, the International Trade Commission will also have to make their final determination on the injury question. They voted unanimously for injury in all nine cases. Any change in that would make matters worse for the domestic producers.
 
Now everybody is asking what this means for the overall OCTG market. Well, this is not rocket science. The OCTG market, like most other markets I know, is driven by supply and demand. The total market is somewhere between 6 and 7 million tons, with approximately 50% of it covered by imports. In a best case scenario, the above margins will take approximately 300,000 tons of imported pipe out of the market. However, there are 2 huge caveats. First, all of these countries, especially Korea, now have a carte blanche. While before they might have applied some restraint to their sales and shipments, they now have to do nothing like that. They can open the spigots without any fear of retribution. So my take is that imports will not only not go down, they will probably go up. Moreover and probably more importantly, there are about 3 million tons of new US capacity being added to the mix – just installed, under construction or on the drawing board. It does not take a genius to conclude that under this scenario, the chances for the market to improve or even stay where it is are pretty slim.
 
Peter Brebach, Iron Angels of Colorado