What's driving the tube/pipe industry?

Photo by Renee Tillmann.

It has been nearly two years since the previous TUBE® exposition in Düsseldorf, and the world’s tube and pipe industry is gearing up for another trip to the Ruhr industrial region March 26-30. What can exhibitors and attendees expect this time around? Most indicators point to a successful show with a strong turnout.

The financial crisis that wreaked havoc on the U.S. economy, and spread elsewhere, is gone but not forgotten. The recession lasted half of 2008 and half of 2009, giving way to an expansion that, unlike the recession, is spreading slowly. Growth in 2011 was restrained by a number of factors. All eyes were on North Africa early in the year as the regimes of Tunisia and Egypt fell and civil unrest spread to Libya, Syria, Yemen, and Bahrain. Instability in this oil-rich region often leads to a spike in oil prices, and indeed the spot price for Brent crude, an international benchmark, increased more than $30 per barrel from December 2010 to April 2011.

Trouble came from Asia as well. The March 11 earthquake and tsunami in Japan disabled the Fukushima Daiichi nuclear plant and disrupted a multitude of manufacturing supply chains; flooding in Thailand (which began in July) likewise did the same.

The sovereign debt crisis threatened the stability of the government of Greece and sent financial reverberations throughout the European Monetary Union. The same crisis also threatened Italy, Spain, and Portugal.

How will these factors play out in 2012? The exhibitors interviewed for this article expect that some industries will lag, others will excel, but they are confident that 2012 will be a solid year overall.

Taking the Pulse of the Industry

“The products we make, metalworking lubricants, are process aids,” said Ike Tripp, president and CEO of Etna Products Inc., “so we are a harbinger of future trends, good and bad.” When economists such as those at the National Bureau of Economic Research (NBER) see a recession in the making, Etna typically sees it six months earlier, Tripp said.

“We saw the recession starting in 2008,” he said. “The Great Recession was in 2008 and 2009; 2010 came back strongly, and 2011 was an OK year,” he said. “Right now it feels like we’re in a recession, even though we’re not in a recession. Our customers are making product and shipping product, but they’re looking over their shoulders, wondering what’s next. This past year many things have impacted manufacturing,” he said, recounting the earthquake and tsunami in Japan, flooding in Thailand, and the euro crisis. Discounting future disasters, Tripp sees 2012 as a stable year for manufacturing as a whole. He cited the energy and automotive industries as two bright spots.

What’s Going on in the Energy Industry?

John Hillis, president of T&H Lemont, a manufacturer of tube and pipe mills and roll tooling, said that his company, which has customers mainly in the Americas, has seen increased demand for mill tooling for the past few months.

“Tooling consumption is a leading indicator," Hillis explained. “As tube and pipe producers see business ramp up, they spend more on tooling, either buying new tooling to expand their capabilities, replacing existing tooling to keep up with demand, or regrinding current tooling to keep up.” However, this can’t go on forever. “As demand continues to grow, they think about expanding their capacity by buying a new mill,” he said.

“Energy is a strong market right now,” Hillis said. “Some say North America has too much capacity for OCTG, but many of our customers don’t believe it. This may be related to [expected] future drilling activity, or the government’s actions on imports,” he said, referring to recent rulings by the U.S. International Trade Commission that renewed tariffs on many tubular products for five more years.

Photo by Renee Tillmann.

Hillis said that the interest isn’t specifically in API-grade products, but in OCTG and specialty products such as downhole pipes and a relatively new tubing product used to heat shale oil so it can flow.

Dudley Boden, vice president of sales for Magnetic Analysis Corp., a manufacturer of ultrasonic and eddy current testing equipment, said that the trend in energy-related projects is worldwide.

“There are a lot of big projects in the offing,” Boden said. Many of the projects, started in 2010, were bogged down because of an excess of caution, but the time for waiting is over.

“Now these projects are breaking,” Boden said. He cited OCTG as a main driver in the U.S. and overseas.

A close look at oil-related data reveals that the economic downturn of 2008-2009 was just a short break. The world’s petroleum consumption grew from 60 million barrels per day in 1985 to 85.9 million BPD in 2007. It fell for two years, then shot past the previous peak to 86.4 million BPD in 2010. Many companies have realized that any further delays in exploration activity mean they’ll miss out on the upswing.

The “Annual Energy Outlook 2011,” a Dept. of Energy publication, predicts that extraction activity will increase the world’s oil supply from 90 million BPD in 2012 to 112 million BPD in 2035, a 24 percent increase.

Paul Russo, vice president for the George A. Mitchell Co., concurs. In addition to push pointers, machines that prepare tube ends for cold drawing, the company also makes end forming machines for oil and gas applications.

“We’re getting a lot of business from the energy industry,” Russo said. Drill pipe and casing require threaded ends, he explained, and Mitchell’s machines provide a preliminary step, either a mandrel expansion or die reduction, so the ends can be threaded with a female or male premium thread, respectively.

“Our machines handle oilfield pipes from 2-3⁄8 up to 20 in. diameter,” Russo said. “We recently shipped four machines to South America, and right now we’re building two of the biggest machines in the company’s history.”

Russo referred to this as a historic time for the company, but it might just be getting warmed up.

Photo by Renee Tillmann.

“One of our customers told us that this is the tip of the iceberg,” Russo said.

Although oil gets most of the publicity, natural gas—especially gas extracted from unconventional sources—has a growing role in the energy industry.

“Our biggest driver is the energy industry, and we have seen a lot of investment in gas shale plays,” said Mike Pollard, executive vice president of sales and marketing for Fives Bronx Inc. (formerly Bronx/Taylor-Wilson), a manufacturer of hydrostatic pipe testers, straighteners, cutoff machines, and finishing machines for facing, deburring, and end-profiling pipe.

Data from the U.S. Energy Information Administration backs up Pollard’s statement. According to “Review of Emerging Resources: U.S. Shale Gas and Shale Oil Plays,” dry shale gas production increased from 1.0 trillion cubic feet in 2006 to 4.8 trillion cu. ft. in 2010. This is facilitated by advances in technological processes such as hydraulic fracturing and horizontal drilling, and supported by rising natural gas prices. The wellhead price for natural gas was around $2 per thousand cu. ft. throughout much of the 1980s and 1990s; since 2000 it has averaged more than $5 per thousand cu. ft., with occasional spikes to more than $10 per thousand cu. ft.

“Shale plays are increasingly important, not only in the U.S., but around the world,” Pollard added. Geologists have identified nearly 50 shale basins in 38 countries, and the energy potential is vast. A single find in the U.K. is estimated at 200 trillion cu. ft., which is more than the total of all known U.K. fields.

What’s Driving Automotive, Aerospace?

The world’s automobile manufacturers made 73.2 million cars and light trucks in 2007; their output fell to 61.8 million in 2009, which was followed by a whopping 77.9 million in 2010. The rebound was so extraordinary it affected some suppliers that don’t consider the automotive industry to be a core business.

“We have gotten a few hits in automotive,” Russo said. “We’ve heard little from that industry for four or five years, but we’re seeing a resurgence. It’s not tied to any one geographic area; the main inquiries have come from Japan, India, and the U.S.,” he said.

Boden has also sensed a renewed interest in automobile production in countries such as Indonesia and India. India, with more than a billion people, is of particular interest. The annual per capita income is just $1,500, so it’s still a poor country, but rising incomes are giving more people a path to the middle class and enough income to buy an automobile.

India’s auto industry turned out a mere 800,000 cars and commercial vehicles in 2000; the output doubled in five years and doubled again in the next five years. Small, affordable cars such as Tata Motors’ Nano, a four-seater touted as the lowest-priced production car in the world, have been part of this trend. However, Boden also noted that many Indians don’t care for it. Nearly everything about it is tiny, from the two-cylinder, 624-cubic-centiliter engine to the 1,300-pound curb weight to the 90-inch wheelbase (which is roughly half the engine size, half the weight, and 12 in. shorter than a typical North American compact car).

“The Nano hasn’t really taken off,” Boden said, indicating that the market has room for other makes and models. “The price differential between a Nano and a conventional car is small,” he said.

Pollard noted that the growth of leased automobiles has changed the structure of the U.S. automotive industry. Lease agreements account for about 20 percent of cars on the road these days; the typical lease period, 36 months, implies a three-year replacement cycle.

“If everyone still purchased cars, the auto industry would be much different today,” Pollard said.

Some of the rising demand for testing automobile components isn’t related to the quantity of cars manufactured but the efficiency of cars manufactured. Boden is seeing increasing interest in testing tubular products made from titanium and exotic stainless alloys—corrosion-resistant materials that weigh less than their conventional counterparts. Lighter autos that use less fuel help the manufacturers comply with rising corporate average fuel economy (CAFE) standards and help consumers deal with rising gasoline prices.

The aviation industry is likewise sensitive to rising fuel costs. Pollard noted that the aviation industry has quite a bit of long-term potential as airlines replace aging aircraft with new ones that use fuel more efficiently. In addition many expect the aviation industry to grow substantially over the next couple of decades. For example, Boeing expects its fleet to double from 19,410 planes to 39,530 planes by 2030.

Steel Still Dealing With the Boom-Bust Cycle?

Boden pointed out that the recent economic bust wasn’t as bad for the steel sector as it could have been. Previous decades were noted for a cyclical pattern of rapid growth for steelmakers as steel prices rose, then their demise when steel prices collapsed. These days most companies in the industry are healthier.

“In the five to seven years leading up to the recent crash, there was a lot of consolidation in the industry, and there aren’t many weaklings left,” Boden said. “Many of the small players were bought by big companies working toward long-term goals, and they have enough of a financial cushion to withstand price fluctuations.” The outcome is likely to be a smoother recovery because the industry won’t be in disarray.

Election Uncertainty, Regulatory Hurdles

In Tripp’s view, many in business are cautious because 2012 is an election year. Will the next election usher in an era of policies and programs that are more or less favorable to business?

Regardless of the election’s outcome, Tripp sees the continuous generation of new government regulations as a large and growing problem. He cited two specific examples, starting with the drilling moratorium that shut down Gulf of Mexico oil drilling operations in water deeper than 500 ft. after the Deepwater Horizon blowout in 2010. Many, including a federal judge who heard a case to repeal the moratorium, said that it was too broad. The other example, likely related to the first, is the administration’s delay in approving the Keystone pipeline, an overland project intended to bring oil from Canada to several points in the U.S.

These are just two occurrences. Speaking broadly, Tripp mentioned the growth of the Federal Register,a record of federal regulations and mandates. According to a press release issued Aug. 24, 2011, by the Center for Fiscal Accountability, the Federal Register grew by 367 pages in a single day—12 new rules were implemented, 11 proposed, and 108 notices were sent.

Despite all that, Tripp cited a reason to hope for some improvement in this area. Recent legislation requires a cost-benefit analysis for any regulation that would have a potential impact of more than $100 million on the government budget.

What About the European Debt Crisis?

The sovereign debt crisis that started in Greece has sent repercussions throughout much of Europe. It’s wreaking so much havoc that many wonder about the future of the European Monetary Union and of the currency itself.

“There is no question that the European Community is challenged with the euro-debt crisis,” Tripp said. While the 2008-2009 time period was a calamity for manufacturers throughout the world, Tripp sees a silver lining regarding the expo.

“Some companies made it through 2008 and 2009, and the ones that couldn’t are gone. The ones that are left are the strong companies that are always looking for new technologies, new ideas, and new things they can do to continue to thrive in a challenging environment, and that’s why they go to Düsseldorf.” In other words, Europe’s sovereign debt crisis has weeded out the weakest companies, it appears to be manageable, and it isn’t likely to have a big impact on the world’s tube and pipe industry.

A telling factor is the value of the euro. Valued at 0.63 euro per dollar in July 2008, it weakened to 0.82 euro per dollar in June 2010, losing 30 percent of its value. Since then the currency has gained back more than half the value it lost, trading at 0.77 euro per dollar at press time (early January).

Furthermore, although the TUBE expo is in Europe, the exhibitors and visitors aren’t exclusively European. “The Düsseldorf show is a critical show, a world-stage show,” Tripp said.

If the amount of booth space exhibitors have reserved for the expo is an indicator of exhibitor confidence, many see it the way Tripp does. For the 2012 expo, it exceeds 500,000 net square feet, which is an increase of more than 5 percent over the 2010 expo.