How Do Steel Tariffs Affect the Drilling Industry?
Steel makes drilling work. Tit-for-tat tariffs will have an impact on the industry. Contractors may pay more for consumables and, eventually, for rigs and other support equipment. Manufacturers may see higher costs for tubular steel, fabrication-ready components and other inputs. Distributors, stuck in the middle, may pay more and have to charge more to keep profit margins. Customers buying drilling services may have to pay more for jobs, particularly if contractors want to keep their profit margins.
The whole supply chain has to prepare for impacts as U.S. tariffs and retaliatory tariffs from other countries settle in.
Tooling and Bits
David King, president of Kingsland Drill International, a drill pipe distributor based in Mercersburg, Penn., says price reliability from his suppliers fell by the wayside, even before the recent tariffs.
“There’s some uncertainty involved,” he says. He gets 95 percent of his inventory from a manufacturer in Minnesota. He could depend on that supplier’s price. A quote might last even 90 days or more. Now, King has to get re-quotes for anything older than 30 days and even the 30-day quotes say, “Prices subject to change based on the effect of tariffs.”
King says he even recently lost a $30,000 contract for a customer in Mexico. Between King’s original quote to the customer for long, small-diameter, heavy walled tube and the customer’s actual order, King had to adjust the price up 10 to 12 percent. It was an increase the customer just couldn’t swallow.
“My guy in Mexico can’t live with the higher prices, because he sells stuff into Mexico,” King says. “He’s got to worry about his customers buying at the higher price when they may also be supplied by a company importing their drill pipe from someplace else, which doesn’t have the tariffs.
“That was my first case of this happening, and it’s like, ‘Geez, what are we going to do? This is my best customer.’ ”
It’s not all gloom in the consumables space, though. Steve Warren, president and CEO of Throop Rock Bit based in Tonkawa, Okla., says his company hasn’t noticed any price fluctuations that would seem abnormal for the steel they use.
“Perhaps this will change as demand grows, but so far we’ve operated as normal,” he says.
Drilling rigs are, of course, mostly steel.
“Metal is absolutely the largest component of our drilling rigs,” says Michael Dynan, vice president of operations of Schramm Inc., a rig manufacturer based in West Chester, Penn.
Schramm fabricates a lot of its own parts, for things like the mast and panels. They also buy things like pumps, motors, drives and compressors from other OEMs.
“Our challenge is to meet the material specifications, and we’re going almost always for strength and quality — meaning the consistency of the material with the certifications to back up the quality of the material,” he says. “It’s less about price, and more about the reliability of the mill that we’re getting from and the known source.”
He says the raw materials cost for a company like his could go up as much as 15 percent.
“Honestly, we’re studying and researching. We’re in touch with our closest suppliers and they are literally looking at alternatives for us right now,” he says, adding that shopping around for different suppliers isn’t always an option when the quality and specifications of the component need to be exact.
That means rig buyers in the near future may need to build a little extra into their expectations for price.
“They’re going to experience pricing pressure, especially as we get into newer contracts,” Dynan says. “Ones that are confirmed, we’re going to honor. But, as we move into newer contracts, we’re working out to see what that adjustment means.”
He says a lot depends on how the company’s research goes over the next few months, but that Schramm may ultimately stick with certain suppliers — even if it means paying the tariffs.
“The most important thing to us is reliability, and track record is your best indicator of reliability,” he says.
With safety involved, it’s not worth taking chances with an unproven supplier.
Geoprobe, a Salina, Kan.-based rig and tooling manufacturer, also makes a lot of components in-house, even down to some of the mufflers fitted to the engines on their rigs.
“Obviously, fabrication and machining are big parts of building a drill rig, and so one of the base components is steel in various forms,” says Tom Omli, director of sales and marketing. “We’re using steel in nearly everything we make.”
He says most of the steel components they use come from domestic sources, but not all of them.
“It’s a very global supply chain. It goes back and forth,” he says. “So I would say primarily domestic, but with a global presence. Things are moving back and forth all the time.”
Like other rig manufacturers, Geoprobe is taking a wait-and-see approach to the latest steel tariffs. “Generally speaking, it’s too early to tell the impacts we’re going to see here,” he says. Omli, however, says Geoprobe takes disruptions like tariffs in stride as part of the cyclical nature of business.
“We do know this: It’s a disruptive change to our business. It absolutely is,” he says. “The impact, good or bad, we don’t know. But we do recognize it’s a disruptive change, and we also recognize we have disruptive changes all the time. We’ve been in business over 30 years now. We deal with disruptive changes all the time.”
He likened it to the uncertainty around health care over the last five years or so, which also had a disruptive effect on the bottom lines of a lot of companies.
“We have no control over that as a business,” Omli says. “What we do know is that we want to take care of our people. It’s really no different than the tariff, in the sense that we have no control over that. What we do know is that we want to take care of our customer and our vendors and our people. We’re going to adjust accordingly, with always those principals in mind: take care of our people, take care of our customers, take care of our vendors.”
Businesses run on certainty and predictability. Price spikes and other disruptions can make business owners anxious, particularly if they don’t know how long those spikes will last. King, for one, doubts the tariffs will last, or if steel manufacturers will even build capacity to meet the needs of the drilling industry.
Warren, however, maintains optimism for the ultimate goal of the steel tariffs.
“If you can’t produce, in the United States, one of the most basic components or raw materials that your manufacturing facility depends on for products you manufacture and sell, then you’re not starting out in a good position to begin with.”
He adds that, even before the recent round of tariffs, “free trade” wasn’t really free. “There have always been taxes, fees, tariffs on American goods, even with our NAFTA partners,” he says, pointing to 10 to 15 percent value added taxes applied to his goods going into Canada and Mexico.
Dynan is a little more guarded in his optimism. He says it could be 12 to 24 months before the real impact of tariffs sinks in.
“I think the open-ended question is, ‘Is this good for America?’ and I don’t know that anybody knows the answer to that yet. … The effects will not be known for a long time.”
Regardless of what the effects are, manufacturers and contractors need to roll with the changes, just as they would any other business challenge.
“We look at certainty as, we have it every year on different subjects,” Omli says. “We just have to adjust. Our view is really one of optimism regardless of what tariff may or may not be.”