U.S. shale is a boon to manufacturers but not their workers

YOUNGSTOWN, Ohio Fri Jun 14, 2013 12:26pm EDT

Steelworkers wait to meet U.S. President Barack Obama during a change of shift at V&M Star, in Youngstown, Ohio in this taken May 18, 2010 file picture. REUTERS/Jason Reed/Files

Steelworkers wait to meet U.S. President Barack Obama during a change of shift at V&M Star, in Youngstown, Ohio in this taken May 18, 2010 file picture.

Credit: Reuters/Jason Reed/Files

YOUNGSTOWN, Ohio (Reuters) - This city has been down for so long, it's hard to believe what's risen up here in the heart of America's "Rust Belt."

On an industrial site littered with scrap metal, a French-Japanese joint venture called Vallourec Star has just opened a $1.1 billion state-of-the-art steel pipe mill.

The plant, the largest capital investment by a manufacturer in northeast Ohio since the 1960s and Youngstown's first new steel mill since the 1920s, is a big example of the money that has flowed into the state's industrial sector in recent years thanks to the surge in U.S. natural gas and oil drilling.

The uptick in energy exploration has prompted companies like The Timken Co. and U.S. Steel Corp. to pump hundreds of millions of dollars into their plants in the state to boost production. Wayne Struble, the policy director for John Kasich, Ohio's Republican governor, said the flood of energy-related dollars could be a major "game changer" for the state.

But state employment data, academic research and a week-long tour of half a dozen factories in Ohio suggests the shale gas revolution has been a disappointment when it comes to job creation.

"The industries benefiting are more capital intensive than labor intensive," said Tom Waltermire, the chief executive of Team NEO, the economic development agency for northeast Ohio.

"Even a manufacturing renaissance won't require the same headcount per unit of output as we had 20 or 30 years ago. If it did require that, the renaissance would never happen."

In March, a study by Cleveland State University concluded that while gas exploration had unleashed a surge in economic activity in Ohio, job growth - even in counties directly affected by the drilling - was stagnant. The employment growth that many assumed would follow the energy investment was "not yet evident," the study's authors said.


The Vallourec Star plant, for example, will employ just 350 workers. Those jobs won't begin to make up for ones lost just a year ago, when RG Steel closed its plant here and laid off more than 1,000 workers - let alone the tens of thousands of jobs Youngstown has lost since the late 1970s, when the steel mills that drove the local economy closed.

And some recent investments, like the $100 million Timken put into a new intermediate finishing line at its Faircrest Steel Plant in Canton, are resulting in fewer, not more, jobs.

Timken's old intermediate finishing line employed more than 200 workers and processed pipe and other products in 10 days, according to plant manager Larry Pollock. The new facility, built to meet surging demand from the energy industry, employs fewer than 30 and can process the same material in as little as two hours, plant manager Larry Pollock said.

In the brightly lit and relatively quiet plant, no human hand touches the pipes as they speed down the line. Workers monitor the process at half a dozen computerized control consoles. "A lot of the old assets were standalone work centers, independently loaded and unloaded, very labor intensive," Pollock said.

Data from the state's Bureau of Labor Market Information tells the story. After bottoming out in 2010, Ohio's manufacturing sector has added nearly 42,000 jobs in recent years. But the state still has nearly 110,000 fewer manufacturing jobs today than it did in 2007, when the last recession began.

Meanwhile pay across the sector is going down, not up, according to the U.S. Bureau of Labor Statistics Quarterly Census of Employment and Wages.

Manufacturing workers in Ohio, for instance, have seen their wages fall 1.3 percent in the last year alone.

In a sign of how the labor supply is far exceeding demand, Vallourec Star got more than 20,000 applications when it solicited applications for its 350 openings online. "You can see how hungry people are," says Joel Mastervich, the company's president and COO.


Despite disappointments on the job front, the shale drilling has created a new and lucrative niche business for companies that make the steel, pipe, compressors and other products energy companies need.

Pipeline and processing companies operating in Ohio have invested $4 billion in the state in the recent years, according to the state's economic development agency.

"It's a good time to be selling stuff in Ohio," says Jack Lafield, the founder and chairman of Caiman Energy, which has formed a $1.5 billion joint venture with Dominion Energy to build plants and pipelines to process gas and non-gas liquids.

The shale boom has already spurred some companies to remake themselves. Two years ago, sales at American Road Machinery (ARM), a small metal fabricating shop in Minerva that makes truck-mounted snow plows and leaf vacuums, were in a tailspin as a result of sharp cuts in spending by cash-strapped municipalities. An exceptionally warm winter in 2011 and spring in 2012 added to the company's problems.

Nick Ballas, ARM's president, looked around at the flurry of gas drilling in his backyard and asked himself: "How do we play in this game?

Today, half of ARM's revenue comes from truck-mounted vacuum tanks and winches that are hot items with drillers and oil service companies.

But the oil and gas business is notoriously cyclical, and that has Ballas nervous. In neighboring Pennsylvania, the drilling for shale gas "went from zero to full speed to full stop in three years," he says as he eyes the half dozen unsold tank trucks parked in his yard.

A report in mid-May from Ohio's Department of Natural Resources (DNR) suggests Ballas has reason to be cautious. The report concluded that the state's shale deposit was heavy on lower-priced gas and light on more profitable oil.

Since the oil and other liquid petrochemicals believed to be trapped here were the big draw for many drillers, not the gas itself, the report raised questions about just how much demand the industrial companies will actually enjoy as a result of the Ohio shale play - and whether some may have gotten ahead of themselves as they invested to meet expected demand.

The bigger companies, including Vallourec Star, U.S. Steel and Timken, insist their huge investments in new capacity are justified by the global shale oil bonanza, not by the success or failure of any single shale play in the United States.

"We are as excited to see the things that are happening in North Dakota, Brazil, Singapore and China as we are watching what's going on in Tuscarawas County, 30 miles to the south of us," says Jim Griffith, the CEO of Canton, Ohio-based Timken.

But even before the DNR report, Timken said during its first-quarter earnings call that it was already seeing lower demand from oil and gas customers and it warned that it expected the weakness to continue through the year.

U.S. manufacturers aren't the only ones scrambling to supply the shale drillers. John Wilkinson is the 36-year-old manager of U.S. Steel's operations in Lorain, just west of Cleveland. U.S. Steel recently spent $100 million on the 100-year-old plant to build a new line to meet demand from the energy industry. "The steel industry is back," Wilkinson tells Reuters. "We're starting to see it and it's a fantastic feeling."

But Wilkinson can also tick off the names of the foreign companies that are building new plants to sell to drillers, including Tenaris SA, controlled by Argentina's Techint group and based in Luxembourg, as well as China's Tianjin Pipe Group Corp.

"In our tubular market, there's a million tons of capacity coming onto the market in the next few years," he says. "That's what we're going to be up against."

(Editing by Patricia Kranz and Claudia Parsons)

(This story was refiled to say: U.S. Steel says plant manager misspoke and meant to say "million," not "billion" , in the last paragraph following an official correction)

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Comments (17)
OneOfTheSheep wrote:
“Even a manufacturing renaissance won’t require the same headcount per unit of output as we had 20 or 30 years ago. If it did require that, the renaissance would never happen.” “In a sign of how the labor supply is far exceeding demand, Vallourec Star got more than 20,000 applications when it solicited applications for its 350 openings online.”

Since the sixties and seventies positions of countless millions of American production workers, Clerks, Girls Friday, Secretaries, Executive Assistants, lower management, supervisors, draftspersons, project coordinators, railroad workers, etc. have disappeared as greater and greater efficiency has become possible through countless inexpensive computers and software.

All these “middle class positions” are not only gone, but gone FOREVER! Fewer and fewer people are needed to do what our society NEEDS done or produced. The above two quotes tell the “whole story”!

Production jobs that are easy for humans to learn are today offshored to “emerging economies” or illegal aliens (think drywallers and roofers). Jobs that are more complex are today being “redefined” into simpler “dead end” tasks anyone warm and breathing that can read and do simple math can do 95-100% in two weeks by part time employees. No overtime, no benefits, no future when there more and more seeking fewer and fewer jobs. What are these people’s children going to do for a “living”?

Any increase in the minimum wage will only accelerate the automation of more and more jobs. Computer guided automatons already build much of our cars, planes, computers, etc. Much of the “brain work” of design is now computer-assisted imagination.

Production is increasingly be structured with robotic capabilities in mind. Robots don’t need health care, get overtime, get sick, take vacations, have family expenses and related problems, expect raises, earn pensions, or consume finite natural resources at the rate an exploding human population does.

The only problem is that robots don’t buy stuff either.

Jun 14, 2013 2:54am EDT  --  Report as abuse
cammanchee wrote:
I agree with you OneOfTheSheep. With this way of thinking by corporations in regards to manufacturing or providing services, you really do have to wonder what people are going to be able to do for a living. The other part of this article that was of no surprise as well is the part about the pay for those jobs keeps going down and not up, well, I’m sure it is going up quite nicely if you are one of the upper managers of those companies. In the ever expanding search to “boost profits” in any way possible, it is sad to see them constantly trying to find ways to automate something or be able to produce it by way of robot or with the new 3d printing technology they keep improving.

But don’t forget, everyone’s argument is that a person just needs to go to college so they can obtain a skill that is needed. But then you get the problem I’ve heard with many career fields is that so many people hear career x, y, or z is going to grow and grow, and then all of the sudden they say they have too many people in those careers and it becomes another field over-saturated with workers and jobs become hard to find and the pay is kept down because their is a large pool to draw from.

So with articles like this and many others, it just amazes me that the Central Banks and Governments around the world can’t figure out why the global economies seem to just barely be sputtering along with all the money they keep pumping into the system. I believe it is starting to get to a point where they are starting to have a hard time moving all their products and services since a vast portion of the population lacks the necessary expendable income to grow the economy as much as they would like to. But hey, I guess the 5.4 trillion dollars that the world’s richest 1,426 people currently hold will “trickle down” to everyone else, ha ha. I guess those people will be able to buy enough cars, homes, clothes, food, and everything else to support the worlds economies.

Jun 14, 2013 4:03am EDT  --  Report as abuse
totherepublic wrote:
You can not expect a “French-Japanese joint venture called Vallourec Star” to be at all concerned with the American labor market or the American people. That is just stupid. All the “French-Japanese joint venture called Vallourec Star” wants to do is suck as much money and resources as they possible can out of the stupid Amricans’ economy and country and when the have sucked it dry leave. And we Americans are still stupid enough to let them, and a far left liberal president that does not care either, do it. Or are we?

Jun 14, 2013 1:35pm EDT  --  Report as abuse
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