Outlook for the North American large-diameter line pipe ... - Hatch

Outlook for the North American large-diameter line pipe market
James Ley
Hatch Beddows
23 rd 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

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
Contents
• Hatch Beddows
• Global large-diameter line pipe
market overview
• North American large-diameter
market overview
3

Our organisation
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4

HATCH – WHO WE ARE
Hatch: A Global Business.
9,000+ Staff end 2010
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5

HATCH – WHO WE ARE
Hatch Consulting is the leading management consultancy dedicated to the
mining and metals industries
• Hatch Consulting is the world’s leading management consultancy specialising in the mining and metals
industries and provides high level support services, ranging from corporate and business strategy
development through strategic market studies to implementation of new technologies, management and
operating practices
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• Hatch Beddows/Hatch Management Consulting is the strategy and market development practice,
specialising in steel and raw materials, and providing strategy development and implementation services
• Investment and Business Planning (IBP) provides economic, environmental and technical evaluations of
minerals properties and processing facilities, due diligence, pre-feasibility and feasibility studies and
related investment planning and appraisal services
6

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
Contents
• Hatch Beddows
• Global large-diameter line pipe
market overview
• North American large-diameter
market overview
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)
12000
CAGR = 5.36%
10000
7000
6000
Estimated global HSAW line pipe production (kt)
CAGR = 14.7%
8000
5000
6000
4000
4000
3000
2000
2000
1000
2007 2008 2009 2010
Europe Asia Latin America
MENA North America CIS
2007 2008 2009 2010
Europe Asia Latin America
MENA North America CIS
Source: various and Hatch Beddows
8

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
2%
26%
North American
LSAW production
has declined in
recent years
13%
23%
8% 9%
European and
Japanese
production –
“the traditional
exporters” has
stayed stable in
recent years
Chinese production is also rising quickly driven
by new emerging major players such as PCK ,
Baosteel and Liaoyang
Source: Hatch Beddows
Total estimated production in 2010 = 11.2Mt
9

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
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 (%)
9%
CIS is not an HSAW strong market with TMK and
ArcelorMittal the leading producers
12%
5%
5 new HSAW
mills have arrived
in North America
in the last couple
of years
15%
19%
22%
Turkey has several
HSAW producers
including Borusan
Mannesmann, Noksel
and Umran Boru
China has around
15-20 API HSAW
line pipe
producers
Source: Hatch Beddows
Total estimated production in 2010 =6.5Mt
10

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
Contents
• Hatch Beddows
• Global large-diameter line pipe
market overview
• North American large-diameter
market overview
11

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
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
Overview of leading North American LSAW and HSAW pipe mills
(not including Mexico)
North American LSAW capacity (kt)
CAGR = 0%
Evraz Camrose
LSAW
Evraz Regina
HSAW
United Spiral
Evraz Oregon
HSAW
Durabond LSAW
North American HSAW capacity (kt)
2000
Welspun HSAW
JSW LSAW
PSL
Stupp Corporation
Berg LSAW
Berg HSAW
1500
1000
CAGR = 46%
HSAW mill
500
LSAW mill
Source: Hatch Beddows
12
2007 capacity 2010 capacity

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
With the increasing HSAW capacity domestic HSAW line pipe production has
risen, often it appears, at the expense of domestic LSAW line pipe production
1200
1000
800
600
400
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
• However in four years production has flipped:
• In 2007 LSAW was estimated to account for
65% of North American large-diameter pipe
production
• By 2010, HSAW was estimated to account for
68% of North American large-diameter pipe
production
200
2007 2008 2009 2010
LSAW
HSAW
Source: Interviews and Hatch Beddows
13

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
North American LSAW consumption is estimated to have fallen from around
1.4Mt in 2007 down to just over 600kt in 2010. Imports of LSAW surged into the
market from 2006 through to 2009
1600
1400
1200
1000
800
600
400
200
Historic estimated North American LSAW
consumption 2007 - 2011(kt)
CAGR = -24%
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
-200
2007 2008 2009 2010
LSAW production LSAW imports
LSAW exports LSAW consumption
Source: Interviews, ISSB and Hatch Beddows
14

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
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
1200
1000
Historic estimated North American HSAW
consumption 2007 - 2011(kt)
CAGR = -2.3%
Large-diameter HSAW line pipe imports into North
America (kt)
HSAW gains acceptance
for onshore oil and gas
line pipe applications
800
600
400
200
-200
2007 2008 2009 2010
HSAW production
HSAW imports
HSAW exports
Source: ISSB and Hatch Beddows
15

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
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
• 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
• 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
• 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
• Onshore rig count activity is strong and steady
being driven by drilling in the unconventional gas
and oil shale basins
• 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
1600
1400
1200
1000
800
600
400
200
16
0
Jan 07
Comparison of HRC and plate prices $/ton
Apr 07
Jul 07
Oct 07
Jan 08
Apr 08
Jul 08
HRC US Midwest fob
Oct 08
Jan 09
Increasing steel prices
coupled with the low gas
prices make it less
attractive to build major
trunk gas pipe lines in
2011 in North America
Apr 09
Jul 09
Oct 09
Jan 10
Apr 10
Jul 10
Oct 10
Plate US midwest fob
Jan 11

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
As gas prices have dropped down to around $4/mbtu, consumption of largediameter
line pipe in North America has slowed
$/mbtu
14
North American large-diameter line pipe consumption vs natural gas price
kt
3000
12
10
8
6
4
2
Total large-diameter line pipe
consumption dropped to just 1.6Mt in
2009 and 1.5Mt in 2010
2500
2000
1500
1000
500
0
0
(RHS) LDP consumption
(LHS) Natural gas price
Source: EIA and Hatch Beddows
17

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
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
Source: Wood Mackenzie and Hatch
18

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
OCTG demand has picked up into 2010 in North America, could this help to
stimulate demand for LSAW moving into 2011 as additional pipe line
infrastructure is required for the new drilling in the gas shale basins?
Estimated apparent consumption of large-diameter line pipe in North America vs OCTG (kt)
9
8
7
6
5
4
3
2
1
0
In 2010 OCTG demand picked up
in North America whereas largediameter
line pipe consumption
continued to decline
2007 2008 2009 2010
3
2.5
2
1.5
1
0.5
0
(LHS) Apparent consumption of OCTG
Apparent large-diameter line pipe consumption
Source: Hatch Beddows
19

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
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)
10
9
8
7
6
$5/mbtu
5
4
3
2
1
0
120
100
80
60
40
20
0
25
20
15
10
US Natural gas production by source, 1990-2015
(trillion cubic feet)
5
forecast
0
(LHS) Natural gas - Henry Hub Spot Price
($/Mbtu)
(RHS) Oil - Imported Low-Sulfur Light Crude Oil
($/barrel)
Source: EIA and Hatch Beddows
20
Offshore
Coalbed Methane
Alaska
Onshore conventional
Shale Gas

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
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
Southwest
, 8.6
Canada,
4.7
• Regions in the USA with growing unconventional
production are expected to experience a higher
proportion of infrastructure development
• As a result the Southwest and Central regions are
forecast to account for 45% of projects incremental
pipeline mileage
Southeast
, 4.6
Offshore ,
2.2
Midwest,
3.3
Central,
8.4
Northeast,
2.7
• 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
Total = 37.7 thousand miles
Source: INGAA Foundation – Natural Gas Pipeline and Storage
Infrastructure Projections Through 2030 and Hatch Beddows
21

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
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
Miles of pipe
Source: INGAA and Hatch Beddows
22

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
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
1600
Projected US and Canadian pipe line additions (kt)
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”
Source: Simdex, INGAA and Hatch Beddows
23

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
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

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
The Mackenzie and Alaskan pipelines could become key alternative sources of
gas supply to the USA through to 2030
Millions of cubic metres/day
3000
2500
2000
1500
1000
Projected North American natural gas supply and consumption
Total consumption
100
80
60
40
Billions of cubic feet/day
500
20
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

NORTH AMERICAN LARGE DIAMETER LINE PIPE MARKET
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
26

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
9 th Floor, Portland House,
Bressenden Place, London,
SW1E 5BH, UK
+44 (0) 20 7906 5127
jley@hatch-europe.com
Roman Filimonov
Consultant
Hatch Management Consulting
9th Floor, Portland House,
Bressenden Place, London, SW1E
5BH, UK
+ 44 (0) 20 7906 5129
rfilimonov@hatch-europe.com
Lynn Lupori-Gray
Managing Consultant
Hatch Management Consulting
1600 West Carson Street, Gateway
View Plaza, Pittsburgh, PA 15219,
USA
+ 1 412 497 2067
llupori-gray@hatch.ca
Terance Ko
Director
Hatch Management Consulting
Room 1108-09, Tower W1,
Oriental Plaza, Beijing, 100738,
China
+ 86 10 8500 2180
tko@hatch.com.cn
27