Cost & Price Analysis
Due to the increased cost of raw materials ( iron ore and nickel), the prices of OCTG witnessed a noticeable price increase in Q1 2021 and likely to maintain the higher prices for the next several months, in particular in the North American market, due to low demand. OCTG prices in the US increased significantly in April, reaching their highest level since September 2018. The midpoint of the monthly Platts domestic OCTG assessment was $1,400/st on 1st April 2021, which higher by $200 from March 2021 and up from the lowest of $775/st during the summer ( source).
Prices rise and fall with demand however the highly competitive nature of OCTG generally restrains the profit margins of the major producers. As would be expected commodity grades have lower margins than premium grades and lead time demands can push prices up significantly. Below are the trailing 12-month net margins of some of the main OCTG suppliers, as of Q1 2021.
|Net Margin (TTM)
The main cost components in OCTG pricing are:
1. Raw Materials - Represents circa 25% to 45%
Includes iron ore (Fe) and/or steel scrap (used in steelmaking) and other alloying metals such as Molybdenum (Mo), Chromium (Cr), Nickel (Ni), Silicon (Si) and Manganese (Mn).
Indices to follow: Scrap prices are typically a good leading indicator of OCTG prices as are hot-rolled coil prices in the ERW segment
2. Manufacturing - Represents circa 45% to 55%
Manufacturing is a long, repetitive, energy-intensive process requiring large quantities of electricity typically generated from natural gas.
Indices to follow: Natural Gas prices
3. Shipping - Represents circa 5% to 10%
Due to the volumes of both raw inputs and finished product shipping costs can place significant pressure on OCTG pricing.
Indices to follow: Dry Baltic Exchange is a useful indicator of shipping costs.
4. Overheads - Represents circa 8% to 20%
Overheads from the main OCTG suppliers can range between 8% to 20%.
5. Profits - Represents less than 5%