The EconomistAugust 10th 2019 Business 53F
or morethan a decade investors have
waited for America’s shale industry to
mature. Ahead of the latest quarterly re-
ports, they wanted to know if firms could
produce more oil and rein in spending. For
some big producers, the answer was “no”.
Many shareholders got tired of waiting.
The share price of Concho Resources, a
firm with operations in Texas’s Permian ba-
sin, sank by more than 20% overnight, de-
spite the assurance of a “free cashflow in-
flection in 2020”. An admission by Whiting
Petroleum, which drills mainly in North
Dakota and Montana, that it would not
meet targets for production wiped more
than a third off its market capitalisation
over 24 hours.
Other shale companies, including eog,
Diamondback and Parsley, presented evi-
dence that they could boost output effi-
ciently. Yet an index of American explora-
tion-and-production firms plunged by 12%
in the week to August 7th, worse than the
market as a whole.
Because fracking depletes wells quick-
ly, companies must spend more to sustain
output. In the past year producers have
shown signs of living within their means.
On August 6th Diamondback reported that
its well costs continued to drop. Consolida-
tion could boost efficiency. Based in part
on that logic, shareholders of Anadarko,
with big holdings in the Permian, were ex-
pected to approve its $38bn acquisition by
Occidental Petroleum on August 8th, after
The Economistwent to press.
Some attempts at boosting efficiency
look counterproductive, however. Drill
wells too close together and they produce
less oil. The price of gas, which once boost-
ed firms’ profits, briefly fell below zero this
spring, when companies were paying cus-
tomers to take the stuff off their hands
amid a supply glut.
The shale industry, whose shares prices
used to track that of oil, down by 18% since
April, now looks untethered (see chart).
“Investors have decided it’s too volatile,”
says Bob Brackett of Bernstein, a research
firm. So they are diverting capital else-
where. Occidental’s massively oversub-
scribed $13bn bond offering on August 6th
shows fixed-income investors’ thirst for
yield rather than an appetite for shale.
The energy behemoths have the bal-
ance-sheets to buy the wildcatters. But
many, like ExxonMobil, have enough land
in the Permian to keep them busy. They arein no hurry and, like others, wary of over-
paying—reasonable enough in light of
shale firms’ falling value. The market has
punished recent acquirers, including Con-
cho, which boughtrspPermian last year.
Carl Icahn, an activist investor, calls the
Anadarko purchase “a travesty” and is try-
ing to sack four of Occidental’s board mem-
bers. Rumours swirled in 2018 that Royal
Dutch Shell would buy a company called
Endeavor. No announcement has come. 7NEW YORK
Investors flee the PermianEnergy companiesShale sale
FracturingSources: Bloomberg;
Datastream from Refinitiv*West Texas Intermediate †SDPR S&P
oil & gas exploration & production ETFOil markets, January 30th 2015=100Oil price*2015 16 17 18 19406080100120140160“Shale” exchange-traded fund†“I
f i hadn’t been elected, you would
have no steel industry right now,” de-
clared President Donald Trump last month.
He claimed that his “massive” tariffs of
25% on steel imports, imposed in March
last year, have returned the domestic in-
dustry to rude health. A year ago he would
have been right, if habitually hyperbolic. A
tonne of hot-rolled coil, an industry
benchmark, which sold for roughly $600
in America at the start of 2018, fetched over
$800 by the summer. Volumes that Ameri-
can steelmakers shipped domestically rose
too, by 5% in 2018 compared with the
previous year.
Today the boast looks out of date. Steel
prices have slumped back to pre-tariff lev-
els. Although the price of iron ore, from
which a third of American steel is smelted,
has tumbled in the past month, it remains
roughly double what it was a year ago.
Steelmakers’ profits collapsed. Nucor, us
Steel and Steel Dynamics, the country’s
three biggest producers, all reported a
steep fall in second-quarter earnings. The
industry’s share prices languish a fifth be-low their level a year ago (see chart). Mr
Trump’s recent promise to force federal
agencies to buy steel with at least 95% do-
mestic content, up from a minimum of half
today, is unlikely to change things. It could
even make matters worse.
The reason is economics. By raising do-
mestic prices the tariffs distorted incen-
tives. The extra cash, combined with an ap-
parent rise in demand, induced steel
companies to splash out on new capacity.
Timna Tanners of Bank of America Merrill
Lynch estimates that by 2022 the projects
currently in the works could increase out-
put by the equivalent of a fifth of America’s
steel consumption in 2017.
There may be nowhere for all the extra
steel to go. Overseas, America’s high-cost
producers cannot compete with cheap al-
loys from places like China. At home, last
year’s uptick in volumes was caused chiefly
by customers substituting domestic steel
for suddenly pricier imports. Demand is
now likely to grow at its underlying rate of
1-2% a year, estimates Andreas Bokken-
heuser of ubs, an investment bank.
Higher prices may even be dampening
it. Some American manufacturers have de-
layed steel-heavy projects or switched to
alternative materials. With factory activity
slowing, as it did in July for the fourth
straight month, demand for steel is slip-
ping, too. us Steel has acknowledged that
“market conditions have softened”.
Peter Marcus of World Steel Dynamics, a
research firm, praises Mr Trump for stimu-
lating “massive investment that will mo-
dernise the industry”. Most has gone into
“electric arc” furnaces, which smelt steel
more cheaply from scrap metal rather than
from iron ore. But high fixed costs, testy
trade unions—and Mr Trump himself—
discourage companies from retiring old,
inefficient blast furnaces. Some of these
will have to go if the industry is to avoid
what Ms Tanners calls a “steelmageddon”
of excess capacity. Fresh levies from the
trade-warrior-in-chief may postpone it—
but at a cost of making the eventual reckon-
ing all the more painful. 7NEW YORK
American tariffs on foreign steel cut
both ways for domestic producersSteelmakingDouble-edged
RustySources: S&P Global Platts;
Datastream from Refinitiv; Bloomberg *Hot-rolled coilShare and commodity prices
January 1st 2017=1002017 18 196080100120140160S&P steel firmsSteel*Iron oreS&P 500