April 15, 2008
The current expansion in the tube and pipe industry isn't new, but it bears a close look nonetheless. Understanding the factors that are causing it and how manufacturers are reacting to it provide some guidance to the future of this trend.
If you have been involved in the tube and pipe industry for more than a few months, you're well aware that this industry is in the midst of an unprecedented global expansion. It has undergone periods of active investment and rapid growth in the past, but never before has an expansion of this size occurred worldwide. While this expansion leads to many questions, just two questions are critical. What is causing it? and How long will it last?
Making specific predictions about the future is risky, but a careful analysis reveals some obvious drivers and some identifiable trends that can be projected into the future with relative confidence.
Until the energy crisis of 1974, the price of crude oil was stable. Since then the value of oil has been driven in part by the level of discord between the oil-producing nations and oil-consuming nations. Even slight changes in the balance of power or small diplomatic disruptions can cause nearly instantaneous, and sometimes dramatic, fluctuations in the crude oil price.
This is fertile ground for speculators who exacerbate the severity of price fluctuations as they seek to profit from price volatility. High crude prices have created windfall profits across the industry and around the world. Fortunately, a significant percentage of those profits are being reinvested in exploration, transportation, refining, and distribution infrastructure.
Industrializing, Energy Consumption Rising. Rapidly industrializing nations such as China and India ensure that the demand for oil will remain high for the foreseeable future. China's oil consumption has increased nearly 200 percent over the past 15 years. Given that more than 800 million of its 1.2 billion citizens still live on farms where the only form of transportation is a mule or an ox cart, it's clear that China's consumption of fuel will only increase.
India, while not moving as quickly as China in the march toward industrialization, is working hard to nurture and grow an industrial base in an effort to improve the living standards of the hundreds of millions of workers who are either underemployed or unemployed. The signs of change are everywhere in India. It's only a matter of time before its consumption exerts a significant influence in the global commodities market.
Nearly every industrialized nation is concerned for its long-term energy security and is actively pursuing energy independence. For most countries this means finding and securing oil reserves within their territorial control while reducing oil dependence through conservation and diversification into nuclear, wind, solar, biofuel, and hydrogen-based energy sources. All of these require pipe.
Not More of the Same. For large-diameter, heavy-wall pipe manufacturers in North America, the future is bright. But it's brighter for some than others. In many shops the newest piece of equipment is 40 or 50 years old. In the current market condition, with demand outstripping supply, even inefficient facilities are booked to capacity and operating profitably. However, if history is a good predictor of the future, profits will attract new competitors to the market, and these antiquated operations will soon find themselves in a difficult position. The time to invest in modern, high-quality, high-yield equipment is now.
Those considering modernizing their facilities should be aware of the trend toward higher-strength materials. Over the past decade the steel industry has made significant progress in advanced chemistries and tailored processes that yield greatly enhanced material properties with minimal cost impact.
High-yield-strength materials allow tube producers to decrease wall thickness, which lowers costs, while maintaining system performance and reliability. Some oil-producing companies use higher-strength materials to increase operating pressures, thereby allowing higher production volumes.
Deeper wells and directional drilling are straining the capability of common-grade drill pipe and casing. For these applications, the move toward high-strength materials is well under way. The effect of this trend is rippling through the supply chain. Pipe manufacturers have found it necessary to upgrade to inline hot-straightening equipment because the traditional cold straighteners don't have sufficient tonnage to plasticize high-strength pipe after it has cooled. Hydrostatic testers are being replaced with systems capable of achieving test pressures that exceed 20,000 pounds per square inch (PSI).
This same issue affects large-diameter pipe manufacturers using the U and O press forming method. With customers requiring X90 and X100 material grades, some U and O pipe formers are finding they don't have sufficient tonnage to form the pipe. Many are changing over to a multistep pipe-forming press, which allows overbending and is generally better-suited to processing high-strength materials.
Some argue against new investment out of fear that offshore competition will soon flood the market and undercut domestic producers. While that potential exists, the shipping cost for large-diameter, heavy-wall pipe bears heavily on the landed cost of imported pipe. Any cost advantage offshore competitors might have is minimized, and in some cases eliminated, by the transportation costs and duties. Recent and pending actions by the WTO will serve to further limit the inflow of tubular products from low-cost countries.
Geography plays into this equation: Because the demand is high worldwide, offshore competitors are likely to follow the path of least resistance and sell their product to the closest buyer willing to pay the asking price.
Many automotive parts suppliers probably don't agree that these are good times for the tube and pipe industry. Dramatic changes are under way in the automotive sector. At the OEM level, the industry is experiencing a shift from the Big Three traditional domestic manufacturers—GM, Ford, and Chrysler—to new domestic manufacturers such as Toyota, Honda, BMW, Subaru, and Nissan. While this shift has eroded market share and production volumes for the traditional domestics and their tiered suppliers, the total volume of vehicles produced in North America is holding steady at around 16 million units per year.
For suppliers closely aligned to the Big Three, the market is beyond difficult. Suppliers that have diversified their customer portfolio to include New Domestics are in a better position, but they too are challenged by the Big Three's declining share.
Offshoring. Further complicating the situation for the domestic automotive supply chain is an accelerating trend toward offshoring. While shipping cost makes it difficult to import assembled vehicles cost-effectively, the same is not true for auto parts. Over the past decade, OEMs have demonstrated their willingness to source work to the lowest-priced supplier regardless of location, and by doing so are forcing the domestic supply chain to become competitive on a worldwide basis or get out of the business.
Since hitting a peak of $142 billion in 1999, the total value of parts sourced to domestic suppliers has declined by more than 40 percent. This rather dramatic market contraction already has caused numerous bankruptcies, and many more companies are embroiled in a life-or-death struggle to shed costs and improve productivity. A recent Reuters headline claimed "1⁄3 of domestic auto parts suppliers are in financial distress."
Clearly, the domestic automotive industry is working its way through some difficult times, but this isn't the whole story. The average volume of tubular content per vehicle is on the rise.
Three principal drivers are behind the growth of tubular content in automotive applications. The first is the need to reduce labor content per vehicle, and the second is the need to lower tooling investment per vehicle. Both of these needs are driven by increased competition in the automotive market. Twenty years ago the average vehicle model quantity sold in North America was 180,000 units per year. More competition has driven that down to less than 50,000 units per year. With dramatically lower sales volumes per model, OEMs struggle to justify the initial tooling investment in a new model. High assembly content and high labor cost drive up sticker prices and apply negative pressure on sales volume. It's a difficult situation at best. By employing tubular elements in their designs, many manufacturers have found that they can reduce assembly content, and therefore labor cost, while simultaneously reducing tooling investment.
The third driver is regulatory changes intended to improve the survivability after a crash. This means that vehicles need to absorb more energy outside the passenger compartment and prevent intrusion into the passenger compartment. In many cases, the best solution to effect these changes within the vehicle structure is a tubular element.
Technology Facilitates Tube Use. In response to this trend toward greater use of tubular elements, especially in the body and chassis areas, a number of enabling technologies have emerged. The most prominent are hydroforming and laser cutting. By embracing these technologies, OEMs have been able to reduce part count, assembly content, and tooling investment.
Laser cutting allows the tubular elements to be tailored to the application with a flexible and reliable technology. The cost per watt of laser power delivered to the workpiece has dropped dramatically in recent years; the motion systems that articulate the beam have gotten faster and more accurate; and the number of equipment suppliers capable of integrating the technology has expanded greatly.
The problem is that most suppliers that made the initial investment in these technologies have been hurt by the general market conditions and are deliberately avoiding new capital investments. That said, OEMs are still pursuing new hydroforming applications, with the most significant growth occurring in the body structure. Although anyone involved with hydroforming technology since its introduction to the automotive industry in the late 1980s knows that it has hit a plateau regarding new applications, it remains an important technology. Its attributes align well with the general needs of the market.
To thrive in this market, suppliers serving the auto industry need to drive relentlessly toward lower labor cost per unit (higher productivity and more automation), higher quality, increased value-added content, lower tooling cost, and faster response time. Like it or not, these are the areas that define value to the end customer, and failure to offer these benefits to the marketplace will only serve to accelerate the loss of market share to offshore competitors.
Nearly every supplier serving the energy sector can expect continued profitability in the short term. Long-term success will depend on the ability to work with high-strength materials and compete with modern, efficient processes.
TPJ - The Tube & Pipe Journal® became the first magazine dedicated to serving the metal tube and pipe industry in 1990. Today, it remains the only North American publication devoted to this industry and it has become the most trusted source of information for tube and pipe professionals. Subscriptions are free to qualified tube and pipe professionals in North America.