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U.S. Steel to idle pipe factories after oil price slump

Some 15,000 pieces of pipe for TransCanada Corp.ís Keystone XL pipeline lie in a field in North Dakota on April 23, 2013.

The Globe and Mail

U.S. Steel Corp., the country's second-biggest producer of the metal, plans to idle two pipe plants and lay off more than 750 employees as the oil-price slump cuts spending by energy companies.

U.S. Steel yesterday notified 614 workers about potential dismissals in March at the company's plant in Lorain, Ohio, which produces 780,000 tons a year of seamless tubular steel products. It issued similar notices to 142 employees at its tube factory in Houston, which processes 120,000 tons annually.

U.S. Steel has benefited from the high-margin line of business in recent years amid the country's oil and gas boom. It's helped Chief Executive Officer Mario Longhi's efforts to transform the 144-year-old manufacturing giant – which has posted five annual losses and was ejected from the Standard & Poor's 500 Index last year – into a more efficient producer.

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Yet, with the U.S. benchmark price for crude tumbling more than 50 per cent since June, oil and gas companies have cut budgets and explorers are expected to cut spending on capital projects by an average of 20 per cent this year, Citigroup Inc. said in a Jan. 4 note to clients.

"The tubular segment has been the company's most reliable profit driver," Sam Dubinsky, a New York-based analyst for Wells Fargo, wrote in a note today.

He called the idlings and layoffs a "negative" for U.S. Steel and said that the tubular sector "could go from an earnings tailwind to a headwind in 2015."

Oil Woes

U.S. Steel made the decision to idle the plants because of "softening market conditions influenced by oil prices and trade," Courtney Boone, a spokeswoman, said in a phone interview today.

In 2013, U.S. Steel's tubular division comprised 10 mills with a production capacity of 2.8 million tons a year, according to a company filing. The segment posted a $69-million profit in the third quarter of 2014, up from $49-million a year earlier, even as the company posted an overall net loss.

"Sales had been quite strong and had boosted company-wide results when the general steel-mill side of the business was struggling," Andrew Lane, a Chicago-based analyst for Morningstar Inc., said in a phone interview. "U.S. Steel is now kind of experiencing the other side of the coin."

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U.S. Steel will continue to produce and finish tubular products at its facilities in Alabama, Arkansas and Texas, the company said in an e-mail.

Swift Action

Even before the recent decline in the price of oil, U.S. Steel said its tubular business was under pressure from cheap imports from Asia. That was behind the company's decision in August to halt two unprofitable tube mills in McKeesport, Pennsylvania, and Bellville, Texas. The company has taken part in an anti-dumping action with the U.S. Department of Commerce to limit some of those imports.

Longhi, who became CEO in September 2013, has been "very willing to take swift action in hopes of restoring consistent profitability to the company," said Lane.

The workers at Houston and Lorain received WARN Act notices, legally mandated alerts issued at least 60 days ahead of any closings or large-scale firings.

U.S. Steel fell 3 per cent to $24.58 (U.S.) at the close in New York.

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