Insights for Tube, Pipe, and Profile Manufacturers – Issue 4

February 1st, 2023

Natural Gas Supplies in Flux

The Dutch government hasn’t veered from a position it stated last October when it announced plans to close Groningen, Europe’s largest gas field. A viable energy source since the 1960s, the gas field has become a point of contention over the decades because the gas extraction process is tied to seismic activity in the area. Seismic events occur about twice a week in the area and have led to hundreds of thousands of property damage claims.

Its output peaked at 88 billion cubic meters (bcm) in 1976, but it has dropped significantly since then. By 2015 its output was 30 bcm, which is about 7.5 percent of Europe’s consumption.

Elsewhere, progress has stalled in increasing the output from the world’s largest gas basin. As reported by Simon Watkins at OilPrice.com, Iran and Russia signed an agreement stating that Russia would support the development of Phase 11 of Iran’s South Pars gas field with equipment, technology, manpower, and expertise, a project worth $15 billion.  The economic sanctions against Russia have begun to bite and Russia has essentially nothing to offer at this point, according to the article.

It’s hard to estimate the impact that these events—and the export sanctions against Russia—will have on the industry but, as such, they illustrate the dynamic nature of the energy business and present an opportunity for other gas producers to step up production.

Fighting Inflation

The federal government seems to be winning the fight against inflation. According to data from the Bureau of Labor Statistics, the consumer price index showed that annual inflation has fallen from a peak of 9.1% in June 2022 to 6.5% in Dec. 2022.

Inflation is mainly a product of the prevailing interest rates and the amount of money in circulation. When too much money is floating around in the economy, the dollar loses value against prices; inflation ensues. Low interest rates encourage borrowing for big-ticket items, which can cause an economy to overheat, contributing to escalating prices.

Fighting inflation is a matter of increasing the benchmark interest rate too cool the economy and removing some money from circulation to shore up the dollar’s value against the cost of goods and services. This sort of thing is always tricky. Too much, too soon can be worse than too little, too late.

The Federal Open Market Committee has been nudging interest rates up for about a year. It doesn’t dictate a benchmark interest rate, but it states a target, which increased from 0.25 percent to 4 percent throughout 2022. According to the research department of the Federal Reserve Bank of St. Louis, the latest federal funds interest rate is at 4.10 percent.

Less closely watched is the actual amount of money in circulation, but it’s just as crucial as the benchmark interest rate. For most purposes, economists define money using the narrowest definition, M1, which is limited to currency and anything that can be converted to currency immediately—checking account balances and savings account balances.

Month-to-month GDP data is interpolated from quarterly GDP data. Source: The Bureau of Economic Analysis.

From 1960 to 2019, the amount of M1 in circulation grew from $139.6 billion to $20.65 trillion. The GDP grew from $540.2 billion to $25.7 trillion. Along the way, the amount of M1 to GDP varied from 9 percent to 26 percent. After COVID-19 hit and the government threw vast amounts of money into the economy, the percentage of M1 relative to the GDP grew to an astounding 84 percent.

Producer Prices

Judging by the state of producer prices, inflation is settling down. Data gleaned from SteelBenchmarker™ show that the price for hot-rolled band in November 2022 was just 15 percent higher than the average HRB price throughout 2020. In the middle of October 2021, HRB was trading at almost 3.5 times the average price of HRB in 2020.

Since November the price has since been inching upward, but it’s still within 20 percent of the 2020 price.

According to Macrotrends, lumber prices are also back in a normal range. From 2009 to 2019, the price per, varying from $138 to $640, and the average price over the decade was $316 per hundred board feet. During the pandemic, the price peaked at more than 5 times the average price, hitting $1,670 in May 2021. The most recent price is $464 per 100 board feet.

The good news here is that, based on these trends, raw material prices are less likely to hinder manufacturing and construction in 2023 than they did in 2021.

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