U.S. Steel Idles Two Tubular Products Facilities As Low Oil Prices Take Their Toll

U.S. Steel (NYSE:X) has announced plans to idle two plants producing tubular steel due to the recent downturn in oil prices. ^[1] The company will idle its plants in Lorain, Ohio and Houston, Texas. These plants are a part of the company’s Tubular Products division, which produces and sells seamless and electric resistance welded (ERW) steel casing and tubing (commonly known as oil country tubular goods or OCTG), standard and line pipe, and mechanical tubing. These goods are primarily sold to customers in the oil, gas, and petrochemical markets. ^[2] The downturn in oil prices has negatively impacted the prospects of the Tubular Products segment. U.S. Steel has decided to idle two of its tubular steel plants as it faces weak demand for its products.

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Oil Prices

Crude oil prices have witnessed a significant decline in recent times. West Texas Intermediate (WTI) crude oil spot prices stood at levels of around $53 per barrel at the end of December, around 50% lower  compared to their values in June of last year. ^[3]

Crude oil prices have declined due to an oversupply situation. Global oil supply has been boosted by rising oil and gas production from the U.S., where hydraulic fracturing techniques have helped boost output. In addition, major oil producers of the Organization of the Petroleum Exporting Countries (OPEC) have not lowered output in response to falling prices, in order to preserve their market shares. ^[4] Demand for oil remains weak in the midst of economic weakness in Europe and slowing Chinese growth. China, the world’s second largest importer of oil, is expected to witness a slowdown in GDP growth to 7.3% and 7.1% in 2014 and 2015 respectively, from 7.7% in 2013. ^[5] With a weak demand situation compounding a supply glut, oil prices will remain subdued in the near term. This may hamper the growth in oil and gas production in the U.S.

Impact on U.S. Oil and Gas Production

Small and mid-size oil and gas companies have played a major role in the recent surge in oil and gas production. A significant proportion of  these companies had taken on large amounts of debt in order to fund their drilling programs. ^[6] While global oil majors may still be able to operate profitably at the current level of oil prices, indebted small and mid-size companies may find it harder to operate, particularly if oil prices fall further.

As per statements from the International Energy Agency (IEA), around 98% of crude oil and gas production from the U.S. has a break-even price of below $80 per barrel and 82% has a break-even price of $60 per barrel or lower. ^[7] If the current level of oil prices persists for an extended period of time, there could be a significant drop in production levels. The prevailing environment of low oil prices will certainly have an impact upon new projects being undertaken. As per IEA estimates, there could be a 10% reduction in upstream capital expenditure in the U.S., if current levels of oil prices prevail. ^[7] This will negatively impact the fortunes of U.S. Steel’s Tubular Products segment, as exemplified by the company’s decision to idle two of its tubular steel plants.

Impact on U.S. Steel’s Tubular Products Division

As a result of the company’s decision to idle its Lorain and Houston facilities, the shipments of the Tubular Products division will fall significantly next year. The two plants combined produce around 800,000 tons of tubular steel. ^[1] To put this into context, U.S Steel’s tubular steel shipments stood at 1.76 million tons in 2013. ^[2]

The Tubular Products segment was a fairly profitable business for U.S. Steel. Gross margins for the division stood at 15% in 2012, as compared to 8% for the company’s other business segments that year. ^[2] However, margins for the segment fell to 11% in 2013, as the company faced competition from cheap OCTG imports. ^[2] The company idled its tubular manufacturing facilities in McKeesport, Pennsylvania and Bellville, Texas, earlier on in the year citing difficult business conditions created primarily by imports of OCTGs. ^[8] With the U.S. International Trade Commission (ITC) ruling that anti-dumping duties will be levied against a majority of these imported OCTGs, the competition from OCTG imports is likely to dissipate. ^[9]

However, plummeting oil prices are likely to at least partially offset the gains due to decreased competition from imports. A fall in demand for OCTGs is likely to negatively impact both shipment volumes and realized prices for the Tubular Products division. The exact impact upon shipments, realized prices, and consequently, margins, remains to be seen. However, the weak oil pricing environment is clearly a threat to the fortunes of the Tubular Products division. If the prevailing weakness in oil prices persists for an extended period of time, the company will have to rely upon its other business segments to drive its results.

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1. U.S. Steel Lays Off 756, Blaming Low Oil Prices, Wall Street Journal [↩] [↩]
2. U.S. Steel’s 2013 10-K, SEC [↩] [↩] [↩] [↩]
3. WTI Crude Oil Spot Prices, Y Charts [↩]
4. Global Oil Glut Sends Prices Plunging, Wall Street Journal [↩]
5. Goldman Sachs cuts China growth forecast sharply, Market Watch [↩]
6. Energy Boom Can Withstand Steeper Oil-Price Drop, Wall Street Journal [↩]
7. Low oil prices to bite into 2015 U.S. shale growth: IEA, CNBC [↩] [↩]
8. U. S. Steel To Idle Two Tubular Facilities In Pennsylvania And Texas; Foreign Dumping Of Unfairly Traded Tubular Products A Contributing Factor, U.S. Steel Press Release [↩]
9. U.S. steel pipe makers win key anti-dumping case against cheap imports, Reuters [↩]