U.S. Steel Corp. said it will shut down two more oil and natural gas pipe plants and lay off 756 workers, highlighting the fallout from the global collapse in the oil prices, which analysts say could muddy the company’s turnaround plans.
The plunge in oil prices during the past several months to a 5 1⁄2-year low of $47.93 a barrel on Tuesday has caused drilling companies to reduce their exploration and production budgets for 2015, hurting demand for pipes that U.S. Steel plants supply for their rigs.
Pipes are U.S. Steel’s most profitable product, and the revenue is key to the company’s efforts to improve its financial health after five years without an annual profit. The company has focused on cutting expenses, but the slowing demand for pipes creates another challenge.
“As lower oil prices discourage drilling, this will constitute a material headwind for their turnaround efforts in 2015 and most of 2016,” said Andrew Lane, analyst with Morningstar Inc. in Chicago. “But I would classify this as a temporary headwind.”
The Downtown-based steelmaker will idle 614 workers at a seamless pipe plant in Lorain, Ohio, and 142 at a tubular processing plant in Houston beginning on March 8 and continuing through May.
The Lorain plant makes so-called oil country tubular goods used inside wells. The plant has capacity to produce 780,000 tons annually. The Houston plant provides tubular processing services such as tempering and threading pipe to energy customers.
Leaders of United Steelworkers Local 1104 at the Lorain plant could not be reached. But Lane said U.S. Steel could reopen the plants if oil prices improve.
The plunge in oil is not the only headwind U.S. Steel has faced on its road to recovery. The company and other U.S. producers recently won a case against foreign competitors that they had accused of dumping pipes in U.S. markets at unfair prices. U.S. Steel is battling a decline in iron ore prices that hit a four-year low late last year and which is helping its competitors.
The shutdowns announced on Tuesday are consistent with CEO Mario Longhi’s statements and actions, responding quickly to make changes that previous management wasn’t willing to do, Lane said.
“Longhi is putting his money where his mouth is, and a long-term turnaround is still the number one priority,” Lane said. “Falling oil prices does not mean tubular won’t be a contributor in the long run.”
Company executives will discuss the situation in depth during a conference call when U.S. Steel issues fourth-quarter financial results later this month, U.S. Steel spokeswoman Sarah Cassella said. “It is happening due to softening market conditions, particularly in the energy market,” she said.
Investors have worried about the company’s health. Its stock has declined 47.2 percent from a 52-week high of $46.55 a share on Sept. 17. The shares closed at $24.58 Tuesday, down 77 cents, and has declined 8.1 percent this year.
Longhi has moved to restore confidence in the Downtown-based steelmaker and improve its performance. He has closed mills and saved almost $1 billion under its Carnegie Way initiative to cut costs and by halting an iron ore expansion project in Keewatin, Minn. The company has relinquished control of its money-losing Canadian unit.
In August, U.S. Steel closed plants in McKeesport and Bellville, Texas, that made line tubing to transport gas to processing plants and distribution systems, affecting 260 workers.
U.S. Steel’s tubular business segment is its most profitable on a per-ton basis, bringing average prices of $1,567 a ton as of Sept. 30, on shipments of 428,000 tons, compared with the company’s largest segment, flat-rolled steel, with average prices of $777 a ton on shipments of 3.69 million tons.
Tubular had an operating profit of $140 million during the first nine months of 2014, compared with $158 million in the same period in 2013.
“Energy is important to the health of the company,” Lane said.
But John Tumazos of Tumazos Very Independent Research of Holmdel, N.J., Tumazos said the market for oil and gas pipe in 2015 may be only half of what it was in 2013 and 2014 if oil stays near $50.
Besides the effect of lower oil prices on orders, more pipe manufacturing capacity is coming online. That includes the Vallourec Star tubing plant in Youngstown, Ohio; Borusan Mannesmann, a Turkish steel pipe manufacturer, building its first U.S. plant in Baytown, Texas; and Tenaris SA of Luxembourg, building its first U.S. seamless plant in Bay City, Texas, which will have capacity of 600,000 tons a year.
U.S. Steel is still operating tubular plants in Texas and Fairfield, Ala.
“These brand new mills are going to take market share from older producers,” Tumazos said. “And then there’s the question of imported steel.”
Figures from the American Iron and Steel Institute show imported steel’s market share was 28 percent as of Nov. 30, compared with 22 percent in December 2013. Imports of oil country tubular rose 7.8 percent in November, and an estimated 21.9 percent for 2014 to 4 million tons.
John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or [email protected].