International Trade Commission Ruling In OCTG Case Boosts Prospects For U.S. Steel

The U.S. International Trade Commission (ITC) recently ruled that oil country tubular good (OCTG) imports from six countries would be subject to anti-dumping duties. ^[1] OCTG refers to steel casing and tubing primarily used in the oil, gas and petrochemical sectors. The ITC ruled that anti-dumping duties would be levied against OCTG imports from South Korea, India, Taiwan, Turkey, Ukraine and Vietnam, with imports from the Philippines and Thailand exempted from additional duties. Imports from the Philippines and Thailand were a part of the U.S. Department of Commerce (DOC) ruling on additional duties on OCTG imports. Imports from Saudi Arabia, which were a part of the original complaint made by domestic steelmakers, were exempted from additional duties as a part of an amended final determination by the DOC. ^[2]

The ITC ruling is a major victory for domestic steel producers such as U.S. Steel (NYSE:X).

See our complete analysis for U.S. Steel

OCTG Imports

U.S. Steel’s foreign competitors 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. 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. ((U.S. Steel’s 2013 10-K, SEC)) 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. ^[3]

The ITC ruling includes OCTG imports from South Korea. This is extremely significant as OCTG imports from South Korea were worth around $818 million in 2013, much more than the combined value of tubular imports from the other countries involved in the case. ^[4]

The ITC 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. ^[5] 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. ^[5] 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 the first half of 2014. ^[6]

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 ITC’s ruling is subject to appeal and the countries involved have 30 days to file their appeals. ^[4] However, if the ruling withstands any appeals filed, it will be a major boost to the prospects of U.S. Steel.

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1. U.S. steel pipe makers win key anti-dumping case against cheap imports, Reuters [↩]
2. U. S. Steel President And CEO Comments On Affirmative Decision By International Trade Commission In OCTG Trade Case, Market Watch [↩]
3. U.S. To Probe Steel Pipes From Turkey, 8 Others, Daily News [↩]
4.  U.S. steel pipe makers win key anti-dumping case against cheap imports, Reuters [↩] [↩]
5. U.S. Steel’s 2013 10-K, SEC [↩] [↩]
6. U.S. Steel’s Q2 2014 10-Q, SEC [↩]