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Steel's Natural Gas Boom Is Taking a Breather

By Christopher Scinta – Mar 13, 2014 at 1:14PM

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Steel for pipes used in natural gas drilling and transport looked to be a profit center for steelmakers, but even a steelmaker that got into the drilling game has called a pullback.

The predictions that natural gas from hydraulic fracturing would bring a manufacturing renaissance to America have been manifold, and in March 2012 The Wall Street Journal declared, "Steel Finds Sweet Spot in the Shale."

But here in the good ole U.S. of A, we've always been a boom and bust kind of people. And tubular steel products -- the pipes used for extracting and transporting the oil and gas -- are now looking like a sore spot. 

Nucor Corp. (NUE 2.86%), a steelmaker that doesn't even directly make so-called oil country tubular products, appears to be the canary in the gas well here.

The company got into the natural gas game, partnering with energy company Encana Corp. (OVV 4.49%) in November 2012, to drill for gas. In December, it said it would temporarily halt drilling new wells, citing, a "weak natural gas pricing environment." Nucor called the natural gas venture a "small but increasing amount of our revenues," in its annual report to the SEC.

The gas glut that caused Nucor to put a hold on drilling is perhaps even worse news for US Steel Corp. (X 3.81%), which says it's the largest tubular steel producer in North America. According to the company's website, its annual capacity for tubular products is 2.8 million net tons. 

"Our tubular business is heavily dependent upon the level of oil and natural gas drilling activity in the United States," the Pittsburgh-based company said in its 10-K filing. "Lower natural gas prices in 2012 and 2013 led to reduced drilling for natural gas. Since our flat-rolled segment supplies the majority of the substrate used by our tubular segment, any decrease in tubular demand also adversely affects our flat-rolled segment. Our operating levels and prices may remain at depressed levels until demand increases."

In the document, US Steel said tubular steel products sales were down more than $1 billion in 2013 and operating income in that segment of its business last year fell to $190 million from $366 million in 2012.

Russian roulette
And that's not US Steel's only natural gas problems. The company's European business buys Russian natural gas that's transported through Ukraine, a situation that is extremely tenuous at best as the two countries continue to dispute the future of the Crimean peninsula.

"Any curtailments and escalated costs may further reduce profit margins," US Steel said.

As for its outlook for this quarter, the company said it expects operating income to increase "moderately" compared with the fourth quarter, while also saying extraordinary weather conditions "resulted in significantly higher natural gas costs" and some operating and logistical problems in both the flat-rolled steel and tubular segments.

While cold weather across the country has recently driven up spot prices for gas to $7.90 per million BTUs, according to the EIA, that trend isn't expected to continue, and futures contracts for April recently traded at $4.41 per million BTUs, according to Nymex. Working natural gas rigs were at 335, according to the report for the week ended March 5, down 85 from a year ago, the EIA said. 

Bottom line
Nucor said it expects demand to increase in the energy sector this year, along with automotive and general manufacturing, but said it needs a sustained recovery in non-residential construction to really help business. As a result of shelving its drilling plans, Nucor said its capital spending for 2014 would be about $600 million, "significantly lower than in 2013."

So for the time being, steel demand -- at least from the energy sector -- looks like it will remain depressed as the ruthlessly efficient push to tap into America's deposits continue to drive down natural gas prices.

Christopher Scinta has no position in any stocks mentioned. The Motley Fool recommends Nucor. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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