The US Commerce Department’s decision to levy anti-dumping duties of up to 15.75% on Korean exporters of oil country tubular goods (OCTG; a family of supplies used for drilling) is being seen as a boon for domestic steel producers, but it may not have a big enough impact in the near term to dramatically change the market’s view on specific OCTG producing stocks.
“While this is a plus for TS, we maintain our Neutral rating on the shares as we don’t expect a sharp near-term rise in pricing and we see better opportunities in other service names,” write Sterne Agee analysts Stephen D. Gengaro and Ivan Suleiman, who prefer Buy-rated Halliburton Company (NYSE:HAL), Schlumberger Limited (NYSE:SLB) and Oil States International, Inc. (NYSE:OIS) to Tenaris S.A. (ADR) (NYSE:TS).
South Korean OCTG exports boomed after February’s preliminary ruling
The Commerce Department made a preliminary ruling on the OCTG dumping case in February this year that hit eight other countries with levies, ranging from 2.65% for Taiwan and 118.32% for Thailand, but spared South Korea even though all eight countries had exported a combined 580,000 tons of OCTG to the US in 2013 compared to nearly 900,000 tons exported to the US by South Korea. After the ruling these numbers became even more staggered as exports from the eight other countries fell, only to be matched by increased exports from South Korea. Gengaro and Suleiman estimate that South Korea exported 325,000 tons of OCTG to the US in the first quarter and 225,000 tons in May.
Domestic OCTG prices could regain 10% over next 12 months
While some critics will say that the decision smacks of protectionism, domestic OCTG producers have seen their prices fall by 14% over the last year and have alleged that foreign governments subsidize their steel and undermine fair market prices. Gengaro and Suleiman expect prices to rebound by 10%, but it could take another year for the change to be felt. That could add $200 million to Tenaris S.A. (ADR) (NYSE:TS) EBITDA, but they analysts say that it’s hard to estimate the relationship between Friday’s ruling and the price of OCTG so there’s still a lot of uncertainty. Add in the fact that they expect any price recovery to be gradual and it’s understandable that they haven’t changed their 12-month price target from $46.
Tenaris S.A. (ADR) (NYSE:TS) briefly pushed past $48 in trading on Friday, but has since fallen back to the pre-announcement level of ~$46.