Posted on 13 Jan 2015
Just
a few years ago, back in 2011, Northeast Ohio was abuzz about the rebirth of
its steel industry. France's Vallourec was investing close to $1 billion in a
new steel mill in Youngstown, TimkenSteel was investing $225 million in its
Stark County mills and, in Lorain, Republic and U.S. Steel were investing,
respectively, $85 million and $95 million in their operations.
All of those mills make what is known as “oil country tubular goods” —
basically, the steel tubing needed to drill for gas and oil, along with the
fittings and components used with the tubing itself. With each new shale well
using more than three miles of pipe to go down and then laterally into the
nation's shale plays, all of the companies were rushing to serve this rapidly
growing market.
Today, though, the region is reeling from news last week that U.S. Steel plans
to idle its Lorain mill, putting more than 600 steel workers out of work.
What gives? More like what gave — and that would be the price of oil.
Oil was selling for more than $100 a barrel in 2011, and drillers were
scrambling to get to it, whether it was trapped in the tar sands of Canada, the
shale plays of the Dakotas or just about anywhere else below ground or water.
Today, oil is worth half that and has been trading at or below $50 a barrel. As
a result, the number of rigs drilling in the United States, especially for oil,
is dropping by the week. It's one of the worst oil-price crashes in history,
say economists.
“If this is a burp or a hiccup, I'd hate to see what a belch looks like” said
Ed Hill, who is an economist, the dean of the Levin College of Urban Affairs at
Cleveland State University and the head of one of the few academic research
teams focused on the economics of shale drilling in Ohio.
Hill is one of many experts who think the price of oil will remain low for some
time, too.
The Arab Gulf states continue to pump oil, even as new oil from places like
Canada force down the price. Nations like Russia and Venezuela might actually
have to pump more oil at the lower prices, because they don't want to see their
overall revenues from oil sales decrease.
If Hill is correct and it takes six months or more for oil prices to come back
— and some economists say the prices could remain low for not months, but years
— the number of drilling rigs and therefore customers for the region's steel
mills likely will continue to drop.
The
number of active drilling rigs in the U.S. was rising last year, and grew from
1,751 rigs in January 2014 to 1,931 rigs by June of that year, according to the
oilfield service company Baker Hughes. Since fall, however, drillers have shut
down more than 100 rigs, with 1,811 still in operation at the start of this
year. More are expected to be set aside if low oil prices linger.
Drilling is continuing in Ohio; there are about 50 rigs operating in the
state's Utica Shale and, through the end of 2014 at least, that number has
continued to rise in recent months, albeit slowly.
But local drilling does not necessarily translate into success for local steel
companies. Drillers in Ohio are mostly after natural gas and related liquids,
but they are a small part of the national market — and that's what determines
the fate of the companies' sales.
“We're very involved in all of the shale plays across the country,” said U.S.
Steel spokeswoman Sarah Cassella, speaking shortly after it came to light that
USX, as it's known, would be idling its mill in Lorain and laying off 614
steelworkers.
That makes USX the first steel company operating here to announce layoffs
because of what's happening in the oil and gas markets — and the company said
that was the prime reason for its decision to mothball the Lorain plant.
So far, at least, other companies with mills here are holding pat.
At Vallourec, which continues to produce steel tubing for drillers, the company
is watching the markets closely.
“We are looking at oil price trends very cautiously and closely monitoring our
customer's activity,” company spokeswoman Jeanie Gaetano said in an email
exchange.
“The oil and gas sector is, by nature, cyclical. We've adapted to similar
cycles in the past and will adapt according to the evolution of the demand.”
The company's not guaranteeing there will never be layoffs, but Gaetano did
express some optimism, at least over the long run.
“Vallourec is confident in the market. We are confident in the long-term
attractiveness of global oil & gas markets and committed to our strategy of
providing the most innovative and competitive tubular solutions,” she said.
At TimkenSteel, things might be a
little different. That's because, as both Hill and the company itself pointed
out, TimkenSteel makes steel for other purposes other than drilling and has a
more diverse base of customers to cushion it from a downturn in a single
sector, like oil and gas.
TimkenSteel spokesman Joe Milicia said he was limited in what he could say,
only because the company is entering a quiet period running up to the release
of its 2014 earnings at the end of this month. But he said the company has not
laid off any steelworkers recently, and stressed TimkenSteel's diverse array of
products.
“What I can tell you is that we are continuing to operate all of our
manufacturing sites,” Milicia said. “We are a different kind of steel company
in that we create tailored products for many niche markets. We manufacture
special bar quality steel and seamless mechanical tubing for a diverse client
base, including energy, automotive, industrial equipment, construction, rail,
heavy truck, military and power generation industries.”
That is definitely a factor in the company's favor, Hill said. Another factor
that likely will buoy some companies will be if they have the lowest production
costs, he said, because that will enable them to continue to sell to drillers
even if demand and prices drop.
Hill said he suspects one reason the USX plant in Lorain was the first affected
is because its costs might be higher.
“When it comes to the Lorain USX plant, it's been the most aggressive about the
dumping of drill pipe,” Hill said. “They were very aggressive in their
complaints about the Korean producers. Through those complaints, it was clear
that plant was having cost issues in competing with foreign pipe.”
If oil prices stay low and drilling continues to be curtailed, other companies
could find their production costs are prohibitively high as well, Hill said.
There's reason for some pessimism, though.
Iryna Lendel, an economist on Hill's team who studies the oil and gas industry
both here and abroad, said the number of rigs might fall even faster in the
coming year than they have been lately, which would directly impact the steel
industry.
“In December 2014, there was a projection to park about 500 rigs in 2015 due to
lower rates of drilling,” Lendel said. “Obviously, the companies that have a
larger share of oil and gas industry supplies in their portfolio are going to
suffer first, so are companies with higher production costs and
inefficiencies.”
Not only would 500 rigs represent a huge portion of the U.S. drilling fleet —
more than a quarter of the rigs now active — but they represent a huge amount
of potential steel sales, Hill said.
He suggests some simple math: Each rig can drill about 15 wells per year, with
roughly 3.8 miles of pipe being put into the largest new wells (and the well
bores continue to get longer as drilling continues).
That's 57 miles of pipe that each rig uses per year. Multiply that by 500 and
it adds up to 28,500 miles of pipe.
That's the amount of material sales U.S. steel mills could lose, if the price
of oil remains low, Hill said.
