The impact of falling oil prices isn't contained to just the oil industry. There's a ripple effect starting to be felt well beyond the oil patch. So, while you might not be surprised to hear that direct service providers like Schlumberger Limited (NYSE:SLB) are planning massive layoffs, it might be more shocking to hear that the oil slump is also leading to job cuts in the steel industry at companies like United States Steel Corporation (NYSE:X).
A tangled web
No industry operates in a vacuum. There are both suppliers and customers. And while there are still plenty of customers for oil, the supply of black gold has seemingly swamped that demand. Low prices are the obvious end result, and that's leading to energy industry cutbacks. For example, BHP Billiton Limited (NYSE:BHP), a global resources giant with a large footprint in the U.S. oil market, recently announced that it is cutting its rig count in U.S. shale regions by a massive 40% because of falling oil prices.
BHP's response isn't unique. So it's no wonder service providers like Schlumberger, Halliburton Co. (NYSE:HAL), and Baker Hughes (NYSE:BHI) have announced plans to trim staff by around 13,000 combined. The reason is that falling oil prices have turned once-desirable drilling ventures, well, unprofitable, leading customers like BHP to pull back. But these aren't the only companies affected.
You need steel to drill
For example, oil doesn't just ooze out of the ground (unless you are on Beverly Hillbillies, that is). You have to stick pipes deep into the ground and force oil up. Those pipes require steel. That's why you need to keep an eye on the oil country tubular goods (OCTG) market, as it's called in the steel industry.
To be fair, OCTG products aren't a huge part of the major steel players' businesses. For example, tubular goods made up just under 15% U.S. Steel's third-quarter sales. While that's nothing to sneeze at, it's not the company's largest business. And OCTG was just 2.2% of AK Steel Holding Corporation's (NYSE:AKS) third-quarter shipments.
Nucor Corporation (NYSE:NUE) doesn't break its OCTG exposure out. In the third quarter, though, CFO James Frias noted that, "Nucor is the market leader in serving these highly valued customers in the pipe and tube industry." Nucor sells lots of steel to tube makers that work with the energy industry. That's an area in retreat, with supplier Tenaris Hickman, for example, recently announcing plans to trim headcount by 500 people.
Layoffs like that, and the ones planned at U.S. Steel, happen when demand falls off. When demand falls off, revenues generally fall. When revenues fall, the bottom line is usually affected. It's likely the fourth quarter won't be affected too much, if at all, because falling oil prices haven't worked their way through the industry just yet. It's 2015 you need to really worry about, meaning management projections and earnings in the first couple of quarters of 2015 are increasingly important to monitor.
Bad timing, or good?
The oil industry slowdown comes at an interesting time. That's because the steel industry has recently made some headway in fighting OCTG dumping cases against foreign steel makers. That should have been a big win, but now it seems more like a hollow victory. Indeed, just as the steel industry could potentially benefit from selling into a fairer market, the market has started to shrink.
That said, gaining market share, even in a shrinking market, could provide a little bit of support for the steel companies' 2015 results. So, perhaps, the OCTG dumping win couldn't have come at a better time. Still, it's hard to believe that the oil industry will be a positive in the coming year.
If you own steel makers, falling oil prices mean you need to take a deeper dive into their outlooks for the coming year. And since the ripple effect of oil may not be fully felt yet in any industry, keep listening for updates as the year goes on. It's not likely to break the major steel makers, but it could make 2015 more challenging than U.S. Steel and Nucor were expected just six months ago.