Dear Valued Customers,

The first quarter of 2022 was a wild ride, and we can expect a fair amount of chaos through the rest of the year.  Between existing market conditions, like port congestion and disruptive world events like the Russian invasion of Ukraine, forecasting promises to be difficult.  Below, I lay out a few current and upcoming events along with some analysis about how they are likely to affect the pipe supply and pricing.

In January, I predicted that prices would hold high through at least June, but now I expect that to extend through the end of the year.  The common theme for the next six to nine months will be persistent shortages and rising prices.  I recommend securing your import material early and offering short timelines on your quotes.  Domestic suppliers are unlikely to be able to scale up fast enough to offset import shortages.  I advise against using placeholder numbers on quotes unless you know where and when you can get the pipe.  Pricing is moving quickly and numbers from last month are likely to be too low today.

• Russia/Ukraine – The effect of the war is two-fold. The first is that both Russia and Ukraine were significant exporters of hot rolled coil (the raw material used to roll steel pipe) and finished steel pipe.  With sanctions against Russia, and disruptions to the supply chain in Ukraine, this material is out of the market.  Also, they were both exporters of coal, which is used to produce HRC in other countries.  With these disruptions we have seen rapid increases in HRC and steel pipe pricing, as well as some mills refusing to quote this month.  This will drive higher prices and shortages as the conflict drags on.
• China’s zero Covid policy – China’s strict approach to managing Covid-19 outbreaks brought major shutdowns to mills in China this month, reducing the global production of HRC and finished steel pipe significantly. China supplies much of the HRC for Asian pipe producers.  With limited capacity, they will prioritize higher paying customers first, effectively shutting down production in lower cost countries of origin like Taiwan.  In addition, the Chinese ports will get congested as they try to catch up.  As other countries try to fill the void, there will be congestion at other overseas ports.  This is likely to cause widespread delays in shipments.
• S. Port congestion – We have been talking about this for months, and there has been some improvement in recent weeks, but this is likely to be short-lived. The improvement mostly comes from the break that we get each year from the lunar new year, when overseas mills shut down for almost a month.  With mills ramping up to full capacity again, we will see congestion at our ports return.  There is also the looming threat of negotiations between port management and the West Coast dock workers union.  The contract expires on July 1.  The ports have signaled that they are ready to start negotiating, but the longshoreman’s union has stated that they are not going to be ready to talk until late May.  This is typical, because the union gains leverage the closer that they get to the deadline.  The delay in taking up negotiations probably signals that they plan to ask for a lot and may need to strike to get it.  In 2014/2015, the last time this contract came up for negotiation, there were significant delays due to work slowdowns and strikes.  This created a lot of backlog at the ports that took 6 months to clear up.  The situation is worse today as the ports are already struggling with large backlogs.
• Fuel Prices – Pipe is very heavy relative to its value, so it is affected more severely than things like consumer goods, electronics, or food. High fuel prices increase the cost of ocean freight, overland freight from the port to distributors, and delivery freight from distributors to customers.  Expect the high price of fuel to make its way into the price of pipe.
• Increased purchases of OCTG pipe in other markets – OCTG stands for oil country tubular goods. This is a designation of pipe used in the oil industry for wells and pipelines.  It is significantly more costly than A53A and A53B pipe that is used for structural and water applications.  When there is high demand for these pipes, mills tend to produce them first, which reduces the supply of pipe in our segment.  I don’t know enough about OCTG to know why the demand consumed such a huge portion of the global production capacity last month, but it did.  I had two overseas mills advise that they were not accepting orders in 6”-10” sizes because of this.  That means that the West Coast will experience a gap in material arrivals around August, and material may get tight.  I don’t know if other distributors were able to secure their needs for that month.  There are likely others in the same situation, so summer shortages could be severe.
• California Executive Order N-7-22 – This act, signed by Governor Gavin Newsom on March 28 severely restricts the issuance of permits to drill ag wells in areas of California deemed to have unsustainable levels of groundwater. If you would like to read it, here is a link:  https://www.gov.ca.gov/wp-content/uploads/2022/03/March-2022-Drought-EO.pdf.

It takes effect on May 25, 2022.  I expect that in the short term, there will be a push to get permits in ahead of the regulation, potentially putting a strain on supplies of well casing pipe in California.  After that, I expect this to reduce demand for well casing for as long as this regulation remains.  The extent of the effect on pipe demand will be driven by how strictly this order is enforced.  County officials who support the Governor may immediately stop issuing permits, while officials in counties that are hostile to the Governor may issue as many permits ahead of the deadline as possible.  Without wading too deeply into politics, I question the Governor’s decision to handicap food production across most of the Central Valley and Southern Coast.  Given that California is the world’s 5^th largest producer of food and President Biden has predicted serious global food shortages, one could argue that residential consumption in large cities would be a better place to address the current drought problem.

Given these market conditions, expect weak supply versus slightly higher than average demand, resulting in intermittent shortages.  The shortages are likely to be worse in early summer and improve after that.  Overseas orders are likely to ship late, take longer to arrive and unload, and have higher freight costs than expected, leading to higher prices.  Toward the end of the year, demand for well casing may taper off, but other pipe demand will remain strong.  This may result in lower pricing as we move into 2023, depending on what the oil industry does and how well the economy performs.
Sincerely,
John Peery
President
Cal Sierra Pipe, LLC
209-466-0988