ANALYSIS-Rising tungsten prices worsen oil drillers' inflation worries

By Anushree Mukherjee and Shariq Khan

Oct 8 (Reuters) - U.S. shale drillers are facing higher prices for tungsten, a rare, ultra-hard metal used for industrial tools like drillbits, as Chinese export controls have squeezed supply, threatening U.S. President Donald Trump's ambitions to boost America's fossil fuel production.

Tungsten makes up as much as 75% of the drillbits deployed in oilfields. The metal's price has surged to over $600 per metric ton unit from around $330–$340 in early February, when Trump imposed a 10% tariff on Chinese goods and Beijing hit back with curbs on exports of five critical metals, including tungsten.

While the curbs fall short of an outright ban, previous such measures have sharply curtailed exports.

China controls more than two-thirds of global tungsten production, according to the U.S. Geological Survey, making it difficult to replace its supply, industry experts said.

As a result, polycrystalline diamond compact (PDC) drill bits, typically priced at $20,000 to $100,000 depending on their size, design and other factors, now cost an additional $3,000 to $25,000, said Yaseer Ismail, a former oilfield services executive and supply chain expert.

PDC drill bits are prized in oilfields for their abrasion resistance, Ismail said. Top U.S. services provider SLB SLB.N calls them the 'workhorse of the oilfield' on its website.

WHEN IT RAINS IT POURS

Tungsten costs highlight an unexpected consequence of Trump's policies, despite his campaign promises to uplift the energy industry.

Ben Dieterich, a spokesperson for the U.S. Department of Energy, said the department gave a grant this year to Melt Technologies, a Texas company that reclaims and recycles industrial metals, to fund a pilot facility to produce tungsten carbide products.

"This will ultimately deliver greater savings for consumers," he said about the grant made in the final days of the administration of former President Joe Biden. The DOE did not immediately comment on the fact that the grant came during the Biden administration.

Since Beijing's retaliation, Trump has slapped even higher duties on Chinese imports, and levied tariffs on other items widely used in oilfields, like steel.

The industry also faces a potential oversupply after OPEC+ opted on Sunday to continue raising output after years of cuts. U.S. oil producers have been reducing drilling activity due to declining commodity prices, after output hit record levels in July according to the latest government data.

U.S. oil rig count, an indicator of future output, fell by two last week to 422, data from services firm Baker Hughes showed. At this time last year, the oil rig count was at 479.

OFS COMPANIES HAVE WARNED OF HIT

Oilfield service providers will most likely have to absorb U.S. tariff costs instead of passing them on, said Mark Chapman, lead OFS analyst at Enverus Intelligence Research.

These companies had warned in their second-quarter earnings reports that the steel tariffs would cut margins by 20 to 50 basis points, and surging tungsten costs will likely have a similar financial impact, Chapman said.

SLB SLB.N said in July it expected to take the hit in the second half of the year, after it reported sharply lower second-quarter earnings from a year ago. Days later, smaller rival Halliburton HAL.N also posted a large drop in second-quarter profits and warned of a full-year revenue decline, citing softer demand.

Brent crude oil LCOc1 was trading at around $66 a barrel on Tuesday, down over 10% so far this year.

"While the industry can generally pass through higher costs, it is challenging to do so in a market with flat to lower activity levels and especially difficult given anticipated pressure on commodity prices," said Samantha Hoh, senior clean tech analyst at HSBC.