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A Site Selection Web Exclusive, August 2014
WEB Exclusive story

Piping Up

Facility investment and job creation might hinge on an upcoming ruling on steel pipe dumping. Or they might just keep going full steam ahead.

Borusan Mannesmann, which used to make pipe only in Italy and its home country of Turkey, just began producing pipe at a new $150-million, 200-worker plant in Baytown, Texas.
Photo courtesy of Borusan

Tenaris in February 2013 announced a $1.3-billion seamless pipe mill for Bay City, Texas, in Matagorda County, creating 600 jobs. Gov. Rick Perry greets Tenaris North America President Germán Curá at the announcement.
Tenaris in February 2013 announced a $1.3-billion seamless pipe mill for Bay City, Texas, in Matagorda County, creating 600 jobs. Gov. Rick Perry greets Tenaris North America President Germán Curá at the announcement.
Photo courtesy of Governor Perry's office

t first blush, it would appear that US domestic steel manufacturers’ anti-dumping case against foreign imports of Oil Country Tubular Goods (OCTG) from nine countries was a lock, especially after the US Dept. of Commerce’s July 11 finding of “significant unfair trade margins,” including 10 percent to 15 percent from South Korea.

But as with many a legal case, a clearer sense of the truth can be found by visiting the courthouse, where the affidavits and testimony live. Or, in this case, visiting the US International Trade Commission’s archived testimony. The ITC is due to issue its own ruling Aug. 14.

Central to the picture is corporate facility investment and hiring — or divestment and shutdowns — by domestic and foreign-owned companies, all eager to serve the frenetic oil & gas activity in North America.

“The Department of Commerce’s intensive investigation and final decision shows that the dumping of OCTG transpired through unfair methods and market distorting pricing which caused material harm to the American market," said US Steel President and CEO Mario Longhi. "As a result of rising imports, United States Steel has suffered mightily — orders have been reduced, mills have been idled and jobs have been lost. Our only recourse against such actions was with the US Department of Commerce and their ability to support the rule of law and create a level playing field for American manufacturing. We applaud their decision to prevent further gamesmanship of our laws and to secure our nation’s economy."

The finding came after a February preliminary determination "in which Commerce failed to assign dumping margins on South Korea’s imports," explained the Alliance for American Manufacturing (AAM), "despite the fact that it has no domestic market of its own, represents more than half of all OCTG imports, and has shipped goods to the US market at prices below fair value in deceptive ways designed to circumvent international trade laws."

On the other side, Dong Heui Pi, deputy GM of Hyundai HYSCO, one of the leading producers of OCTG in Korea, alluded in ITC testimony July 15 to "unprecedented outrageous methodologies" that caused the US Dept. of Commerce to reverse that earlier ruling. And he said US end users of the product do not rely primarily on imports due to the risk inherent in a longer supply chain.

It's not just Korea. Other countries named in the case include India, the Philippines, Saudi Arabia, Taiwan, Thailand, Turkey, Ukraine and Vietnam.

New Domestics

Among the idled: US Steel plants in Bellville, Texas, and McKeesport, Pa., as well as layoffs in Lorain, Ohio. The company operates seven other tubular product plants. The McKeesport idling affects 160 rank-and-file workers and 20 managers, and is scheduled to go into effect Aug. 17. In addition to letters to Congress and the DOC, AAM hosted large-scale rallies in Lorain; Granite City, Ill.; Munhall, Pa.; Lone Star, Texas; Fairfield, Ala.; and, Virginia, Minn.

In 2008, antidumping duties were levied to halt what the AAM calls "a staggering surge of dumped Chinese OCTG products. Domestic industry was given an opportunity to recover, subsequently making almost $1.6 billion in capital expenditures between 2010 and 2012 while employing thousands of dedicated American workers in the process."

Yet during that same two-year period, according to July 15 testimony before the ITC from US Sen. Robert P. Casey, Jr. (R-Pa.), imports of OCTG still rose by nearly 111 percent, from 840,000 net tons to 1.77 million tons.

"The domestic industry claims to be injured by subject imports, yet domestic capacity and production has increased along with employment," testified Kirk Murray, vice president and GM of Pan Meridian Tubular, an importer and distributor affiliated with Seah Steel Corp., a major producer of ERW OCTG in Korea and Vietnam. "Many domestic mills have been turning away requests from their customers for more OCTG. How can that be if the market is in over-supply? Investments in new capacity by US mills have been substantial, and domestic producers compete head to head with other domestic producers. This head-to-head competition has created a fight for market share among domestic mills. Put simply, these investments were not made because the investing producers considered the market injured, and the decisions were made when imports were still at their traditional 50 percent market share."

In an August 1 earnings call, Paolo Rocca, chairman and CEO of Italian firm Tenaris, noted that an ITC ruling confirming the DOC finding would provide "welcome relief to the US domestic producer, allowing sales to increase and profitability to recover. In the first half of the year, imports from the southern countries accounted for 29 percent of US OCTG demand and the share of imports from South Korea alone exceeded the share of the largest US producer."

Tenaris was among those excluded from the DOC finding. Its sales in North America represented 45 percent of its total sales in the first half of 2014. That's one big reason it's making a big $1.5-billion manufacturing plant investment in Bay City, Texas, where it will employ 600. Not far away, in Baytown, Turkey's Borusan Mannesmann is making its own manufacturing investment in steel pipe manufacturing.

Rocca said the company expects the US and North America to be "a significant driver of growth for Tenaris in the coming years." That includes Mexico, where energy reform loosening the hold of Pemex may drive increased exploration and production activity that requires OCTG product.

According to Germán Curá, managing director, North American operations for Tenaris, imports from Korea to the US totaled about 925,000 tons in 2013, and another 750,000 tons during the first half of 2014 alone. "If injury is finally confirmed, I think domestic industry in general and we, Tenaris, in particular are prepared to ultimately source the existing demands of the US industry," Curá said. "And with that, I believe that US mills ... would be in a position to expand the present utilization."

Buddy Brewer, CEO of Borusan Mannesmann Pipe US Inc., was one of many witnesses testifying to the ITC July 15. He has worked in the US OCTG industry for more than 30 years. He focused on the company's $150-million manufacturing investment in Baytown, which launched operations in March, employs 200 people, and sources steel coil from Mississippi and Indiana. He called that facility investment decision "the reason that imports of OCTG from Turkey have not caused material injury to the domestic industry and will never threaten or cause such injury."

Competing American Style

Brewer spoke of the advantages of a US production base, including having its own heat treatment and threading capabilities in order to avoid bottlenecks at existing intermediate processors. More important, perhaps, "certain end users just will not accept imported material for a variety of reasons," he said. "By investing in the United States and producing OCTG here that we can also process, we can compete on the same terms as other US producers.

"This has become the investment model here in the US OCTG industry," he continued, getting to the core issue. "Many of the so-called 'domestic mills' are owned by foreign steel companies who have invested here to get access to the prime segments of the U.S. market. Just like every major US mill, including US Steel, we will continue to import certain sizes from our foreign firm that are outside of the size capability of our US mill. I do not understand how these foreign-invested companies and US Steel can simply exclude their importing sources and bring a case against my source of imported product in Turkey. How can it be that Turkey's imports are injuring US producers while much larger imports from petitioners have no effect on domestic producers? That makes no sense."

Brewer went into further detail on Borusan's site selection process, and how the thinking behind it got to the heart of the trade battle, i.e. whether the competition is truly unfair, or just more competitive than some would like:

"Once Borusan decided to establish a US operation, we considered several options," testified Brewer. "Buying an existing, used facility and equipment would have been cheaper and faster, and we evaluated several options, including the Lakeside Steel facilities later purchased by JMC Steel Group." Those operations, purchased in Jan. 2012, include facilities in Ontario, Texas and Alabama, where two new processing plants were under construction at the time of the purchase by Chicago-based JMC.

But Borusan didn't find the Lakeside assets competitive, "and opted instead to construct a greenfield facility," said Brewer. "Borusan's decision to make this investment was based on our evaluation of the long-term fundamentals of the US OCTG market, which we believe are very strong, and on the inherent advantages of being a US supplier. Borusan was well aware of the other investments and capacity expansions that were in the works at the time, as well as of the competition from imports. But Borusan concluded that the US OCTG market's long-term prospects were strong, and that the presence of import competition did not diminish the value of entering the US industry. That is why we went forward with our investment, and I have no doubt that other domestic producers — many of whom are much larger and have made much bigger investments — came to the same conclusions."

"The argument seems to be that political uncertainty will cause us to increase shipments to the United States. That is plausible, but it has not proved true. Since the start of the political unrest, we have not lost sales in the home market, we have not lost sales in Russia, and we have not lost sales in the EU."

— Fadi Hraibi, Chief Commercial Officer for Ukraine-based Interpipe, in July 15 testimony before US International Trade Commission protesting Ukraine's inclusion in a finding of injury to the US domestic market

Borusan's imports from Turkey will decline as US production ramps up. "So, why have we been included in this trade case?" asked Brewer. "The answer, I suspect, has to do with intra-industry, domestic competition. As all of the new domestic OCTG capacity comes on stream, some US producers have felt pressure to fill out their mills and to have the products from their new facilities accepted in the market place. This is particularly true for those producers who are repurposing older mills or who don't have a long track record of production in the United States. This has lead to price-cutting, which is one reason why OCTG prices have been soft over the past year or so. We have largely avoided this problem of price cutting because of Borusan's reputation for quality, and because we have built a brand new mill, and hired very experienced, proven mill operators to run it.

"We have also invested a lot of time in bringing customers to our mill as it was being constructed, so they can assure themselves of what they are getting. But to really compete successfully in this market in the long run, we need to be able to offer our customers a complete range of sizes and products, and as I mentioned, there are some sizes that we can't currently produce here and will need to continue to import from Turkey. Virtually every other major US producer including Tenaris, Vallourec Star and TMK IPSCO and even US Steel, follow a similar strategy. By potentially denying us the ability to bring in OCTG from Turkey to fill out our product line, I believe the major domestic producers are seeking to gain an advantage in competing with our domestic production.

"My understanding has always been that the unfair trade laws are intended to protect domestic businesses and workers from unfair foreign competition," Brewer concluded. "It is not supposed to be a tool for large domestic producers to try to squeeze out new domestic competitors. The US trade laws should not be used in this way."

Chuck Scianna, like Brewer, has over 30 years in the OCTG business. He's president of Sim-Tex, L.P., which distributes OCTG produced from a number of sources including Korea, Germany, and the United States. The conclusion of his ITC testimony echoed Brewer and others:

"OCTG prices have been declining over the past year, but that appears to be a result of a combination of factors having little to do with overall imports," he said. "Within the review period, additional domestic capacity has been added by Northwest Pipe, Boomerang Tube, Welded Tube, Vallourec, Tejas Tubular, Energex and others. New capacity has created some pressure on the 'domestic only' sectors of the marketplace as these new entrants compete for market share. Again, as domestic mills, those mills command a premium over imports from non-domestically controlled sources. This has always been a characteristic of the domestic market.

"If there has been damage to the US OCTG market then why is Tenaris building a new seamless mill in Bay City with a capacity of 600,000 tons?" he asked. "Why is Tejas building a new seamless mill in Nebraska with announced capacity of 120,000 tons? Add to that new seamless capacity being built by Benteler, PTC and TPCO totaling over 1 million tons.

"Consumption of OCTG in 2014 was projected to be 6.8 million tons," said Scianna. "It is going to be 7.2 million tons — the total previously projected for 2017. These producers have not been injured by subject imports."

In other words, folks, this is the playing field. In sports terms, constant attempts to level it are akin to a never-ending sequence of instant replay reviews — the players lose momentum and focus, and the customers start looking around for alternatives. Real competitors, say the upstarts with veterans in their backfield, know when the time is right to stop quibbling with the referee and just start knocking some heads.

Having its own heat treatment (shown) and threading capability is one strategic advantage behind Borusan's establishment of a US domestic manufacturing plant.
Photo courtesy of Borusan

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