Department of Commerce Ruling in OCTG Trade Case a Major Boost for U.S. Steel

The U.S. Department of Commerce (DOC) has ruled that additional duties will be levied on imports of oil country tubular goods (OCTGs) from eight countries, including South Korea. The DOC has ruled that OCTG imports from these countries are priced unfairly low and punitive tariffs will be imposed upon them. The inclusion of South Korean OCTG imports amongst those on which additional duties are to be imposed, is a reversal of the DOC’s preliminary ruling which exempted them from additional duties. ^[1]

This is great news for American steelmakers such as U.S. Steel (NYSE:X). If the DOC’s ruling is upheld by the U.S. International Trade Commission (ITC), it could revive the fortunes of the company’s Tubular Products division. The Tubular Products division produces and sells seamless and electric resistance welded (ERW) steel casing and tubing (commonly known as oil country tubular goods or OCTGs), standard and line pipe, and mechanical tubing. These goods are primarily sold to customers in the oil, gas and petrochemical markets. Imports of foreign OCTGs have negatively impacted the prospects of U.S. Steel’s Tubular Products division. These imported OCTGs are priced significantly lower than U.S. Steel’s tubular products. U.S. Steel and other domestic steel producers had sought the imposition of anti-dumping duties (AD) and countervailing duties (CVD) against these imports, claiming that these products were priced unfairly low. ((U.S. Steel’s 2013 10-K, SEC))

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OCTG Imports

U.S. Steel’s foreign competitors may have lower labor costs, and some are owned, controlled or subsidized by their governments. This may result in their production and pricing decisions being influenced by political and economic policy considerations, in addition to prevailing market conditions. In countries such as China, state-owned steel producers are heavily subsidized, which enables them to export to the U.S. at competitive prices and undercut local producers.

Energy-related tubular products imported into the U.S. accounted for approximately 49% of the U.S. domestic market in 2013. ((U.S. Steel’s 2013 10-K, SEC)) U.S. Steel and other domestic steel producers contend that a significant number of these imports are priced unfairly low. These companies filed anti-dumping duty (AD) and countervailing duty (CVD) petitions against OCTG imports from India and Turkey along with AD petitions against OCTG imports from the Philippines, Saudi Arabia, South Korea, Taiwan, Thailand, Ukraine and Vietnam. OCTG imports from these nine countries had a combined value of $1.8 billion in 2012 which was more than double their 2010 values. Rising U.S. oil and natural gas production has increased the demand for these OCTGs. ^[2]

As per the DOC’s preliminary findings in February 2014, imports of OCTGs from South Korea were exempted from additional tariffs. However, in its final ruling, the DOC has changed its mind and imposed duties ranging from 9.89 to 15.75% on South Korean OCTG imports. ((U.S. sets duties on South Korean steel pipe in about-face, Reuters)) This is extremely significant, as U.S. imports of OCTGs from South Korea were worth around $818 million in 2013, much more than the $630 million worth of tubular imports from the seven other countries on which additional duties are being imposed. ^[3] These include Turkey, India, the Philippines, Saudi Arabia, Taiwan, Thailand and Vietnam. Ukraine was exempted from duties under a suspension agreement.

The DOC ruling may help boost the prospects of U.S. Steel, which was reeling under the impact of these OCTG imports.

Impact on U.S. Steel

The imports of cheap OCTG products have negatively impacted the fortunes of U.S. Steel’s Tubular Products division. Though this division accounted for only around 16% of U.S. Steel’s revenues in 2013, it is an important segment because of the high margins that tubular goods command. Gross margins for Tubular Products stood at 15% and 11% in 2012 and 2013, respectively. In comparison, gross margins stood at 8% and 7% in 2012 and 2013, respectively, for Flat-rolled Products and U.S. Steel Europe, U.S. Steel’s other reportable segments. ^[4] Demand for OCTGs is strong due to robust oil and gas drilling activity in North America. However, margins for the Tubular Products division have been under pressure due to competition from imported OCTGs.

Segment income from operations for the Tubular Products division fell nearly 48% from $366 million in 2012 to $190 million in 2013. ^[4] This was primarily because of a fall in the average realized price for this division. Realized prices for the Tubular Products division have fallen due to competition from cheap OCTG imports. The average realized price fell from $1,687 per ton in 2012 to $1,530 per ton in 2013, and further to $1,479 per ton in Q1 2014. ^[5]

The company had recently announced the idling of two facilities producing tubular steel, citing difficult business conditions created primarily by the imports of tubular goods. ((U. S. Steel To Idle Two Tubular Facilities In Pennsylvania And Texas; Foreign Dumping Of Unfairly Traded Tubular Products A Contributing Factor, U.S. Steel Press Release)) The faltering prospects of the Tubular Products division are a blow to U.S. Steel, particularly as both demand and pricing for its other segments remain weak, with the U.S. and European economies still recovering.

The Road Ahead

The imposition of duties on OCTG imports is still subject to the final ruling of the ITC. U.S. Steel and other petitioners must prove at the ITC hearing that they were injured by the flood of cheap OCTG imports. ^[6] If the DOC’s ruling is upheld by the ITC, it would provide a boost to the prospects of U.S. Steel’s Tubular Products division.

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1. U.S. sets duties on South Korean steel pipe in about-face, Reuters [↩]
2. U.S. To Probe Steel Pipes From Turkey, 8 Others, Daily News [↩]
3. U.S. Targets South Korea Over Steel, New York Times [↩]
4. U.S. Steel’s 2013 10-K, SEC [↩] [↩]
5. U.S. Steel’s Q1 2014 10-Q, SEC [↩]
6. U. S. Steel President And CEO Applauds Positive Decision From U.S. Department Of Commerce On OCTG Trade Case, U.S. Steel Press Release [↩]