Houston, We Have A [Steel] Problem
Underneath the surface of the Energy Crisis, a new problem lies in wait…
I seem to be addicted to the chase of greater understanding. There’s just something that pulls me, like a gravity well, towards achieving greater and greater heights of enlightenment into how our world operates. And as of late, that gravity well has been pulling me towards… energy. Including the infrastructure that supports and allows for the production of the perma-necessary aspect of life; politik and economik.
- For this particular engagement, I’ve been keeping an ear to the ground as best I can… considering I do not have extensive experience within this sector, it should be understood that everything I bring up is to be taken with a phat grain of salt — by everybody.
The Rub
It seems that some E&P firms (that’s Exploration and Production) in the O&G industry have been running into difficulties with sourcing of steel, and steel products, to be capable of facilitating projects in this 2H2022 but are also forecasting significant difficulties going into 2023. Listening to a few men on the ground via Twitter Spaces conversations has been a massive boon to improving my understanding a visibility on the difficulties of these men & women working in an industry that has effectively fallen away from public limelight and into “fly-over country” with regards to the health of an economy; current and future. Anecdotally, as I do not have access to recordings of these conversations, a few of these individuals are claiming that, within Canada, there is a shortage of quality drill pipe for current operations. This forecast understandably makes looking forward to next year even worse, with one individual claiming that they are short materials to facilitate even ~50% of their projects in ‘23.
Now, let me stop here. As I can hear you from here, “but Mike, this is all so anecdotal and essentially baseless without concurrent data to justify these worries or claims.” You would be correct. This is why I did a little digging myself. Those that know me well know that I doubt myself, almost to a fault, when it comes to my grasping and understanding… of really everything. SO, I work to confirm.
Below confirms these fears, if not exacerbates them.
Confirmation
While I’ve been able to find “small”-er reports of international regions running into issues with production & sourcing of crude steel like Korea, the real warning comes from Sheryl Groeneweg, Vice-Chair of the OECD Steel Committee.
“The global steel market recovery from the COVID-19 downturn was unfortunately short-lived. While market conditions improved in 2021, a significant turn for the worse has occurred during the course of 2022, particularly as a consequence of the ongoing war in Ukraine. Global steel consumption has contracted significantly in the first half of this year due to the rapidly deteriorating economic environment.”
As Peter Zeihan has described in his latest publication: a globalized world, while enabling scores of countries to urbanize and industrialize, also invites significant fragility when the capability of free trade is taken away. Like a war, for example. Like a war involving a major supplier of energy to an entire continent, and community of countries and cultures, being forcibly “cut-off” from said energy supply. Whether the reader believes one side is to blame over the other is irrelevant to this discussion and environment. The point is that free trade has been interrupted, and from that interruption we get ripples that make their way around the proverbial pond.
What makes matters even worse, however, is that before our harmonious world of free trade was interrupted, the ESG ideology has placed a significant number of developed nations into a (silly) position of energy insecurity. Whether the desire was to virtue-signal, or simply due to ignorance of realities, billions and billions dollars have been poured into the development and implementation of diffuse & intermittent energy sources such as wind & solar, vs high density & consistent sources like nuclear and natural gas.
This has resulted in a weakness that is reminiscent of a particular ventilation shaft of a certain space station that rhymes with “breath bar,” and was mistaken for a natural body. Once energy security is violated, the gears of industrialization (and downstream to urbanization) slip dramatically. Without dense, reliable energy it’s awfully difficult to acquire raw materials, refine said materials into a product, and be capable of shipping them to buyers. Let alone be capable of testing out new methods for producing better materials — you think making folded steel could’ve been possible without developing methodologies to produce consistent heat & pressure (two forms of energy) in a reliable-enough manner to deploy the scientific method?
That was rhetorical, for the love of God don’t answer that, it only increases the likelihood of you being embarrassingly wrong.
We aren’t done with what Sheryl had to say…
“Steel producers’ profitability is coming under considerable strain along with sharply declining steel prices and surging energy costs driven by the impacts of the war in Ukraine, where many steel plants and related infrastructure have been destroyed by the war and/or taken offline. Lingering effects of the COVID-19 pandemic are also contributing to weakness in market conditions.”
Oh look at that, “surging energy costs,” I wonder what could’ve made those costs surge? outside of a war. Makes you think.
Okay, we continue.
“Additional negative factors for international markets include the sharp and prolonged downturn in China’s real estate sector, which is depressing steel consumption in an economy that accounts for more than half of global steel demand.”
It’s funny (not really) how the Evergrande situation continues to rear its ugly head. I remember back to the summer of 2021 when I came across a particular article discussing the Evergrande situation at the time, and turning to my friends and family stating “this is going to be such a huge problem,” meanwhile my online peers all stated that it was a nothing-burger. History has shown us that they were only slightly incorrect. Here we see that the RE crisis within China couldn’t have popped at a worse time…. Where the cost of energy has gone up across the board; what started as a punch to the gut has been followed-up with a kick to the groin, with some (seemingly imminent) heel stomps to come — after falling to the ground and recoiling in the fetal position.
Interestingly enough there are also excesses in capacity, being enabled by subsidization projects of particular jurisdictions, that may be producing more steel cheaply, but bring into doubt the quality of the product.
The Committee continued;
“Adding to the over-supply pressures has been sustained and rapid growth in new crude steelmaking capacity in other parts of the world. Much of the world’s capacity growth in recent years has been concentrated in the Middle East, South Asia, and Southeast Asia. Many of the new installations in Asia have been focussed on the coal-intensive steel production process.”
And then…
“With excess capacity expected to increase in the coming years, delegates discussed the need to refrain from measures that would exacerbate over-supply pressures in markets, including subsidies and other support measures that stimulate steel production, production and capacity targets that will likely overshoot demand prospects, and restrictive trade policies on raw materials that artificially lower the costs of steel production.”
So… how many times do you have to be pointed towards China, without saying the word “China” in order to come to the conclusion that the point of the topic is, in-fact: China. Which, harkening back to anecdote again, the individuals of the Spaces conversations I referenced earlier, brought up this particular concern; E&P firms do not want Chinese steel because they do not trust its quality. Poor quality drill pipes can result in not only delays of operations, but wasting of time & resources in order to recover damaged materials before being replaced with new product.
Possibly even more important is that operations that are flooding the global steel market with cheap, potentially poor quality steel, that is produced by companies that are maintained via subsidies (rather than those whom have excelled in an environment of free market competition), only serve to increase costs across the board for all other market participants. Not only by way of what we elaborated on in the above paragraph, but also because free markets incentivize entities to seek the most efficient methods of production & sale as possible, in order to maximize returns on sales. Companies that are propped-up via government subsidies do not.
The 2008 Global Financial Crisis is calling, they’re on hold on Line 1, they mentioned something about ‘bailouts and zombie companies.’
Now For the Really Important Part
Our world is in the midst of dealing with an Energy Crisis that will likely kick off increasingly more painful food and water crises going into 2023. With ripples likely being felt for the remainder of the 2020s. This is being exacerbated by nationalistic moves by certain countries banning exporting of fertilizer inputs during 2021, before the Ukraine War had even begun. The thing about fertilizers is, some of the prior year’s fertilizer deployment can remain in the soil for the following year, but once you get beyond that immediate year follow-up… yields begin to get impacted pretty substantially. And thanks to our reliance (what I would argue is an over-reliance) on industrialized monocropping: fertilizer, herbicide, and pesticide inputs are a virtual requirement in order to meet yield quotas for farmers.
- Which I wrote a brief bit about for Bitcoin Magazine — if you don’t like the whole BTC topic, I get it. Just know that I don’t even really get into that discussion until after all of the important farming information. So I would personally recommend reading what I had to say, which can be found here.
What’s one of the major inputs to these products that our farmers (unfortunately) rely on? Natural gas. Which has taken center stage of the Energy Crisis due to its desirability for providing consistent, clean energy.
And what does a metric buttload of natural gas also come with (both associated and non-)? Oil. Which is absolutely necessary for quite literally every product that you use in modern society on a minute-by-minute basis.
And what is necessary to produce the goods & services to support industries and build-out infrastructure in order to alleviate these crises in Energy, Food and Water? Oil. And gas.
And what material do we need in order to produce the infrastructure necessary to increase our yields of oil and gas? Steel. High quality, reliable steel.
Without that, we can’t even get enough E&P going in order to yield the hydrocarbons we need to fix our set of problems we are faced with now. And none of that can occur in the United States of America without either weakening the EPA’s control over waste gas flaring for operations that are not large enough to support piping gas, or liquifying it. OR it can be done through the use of datacenters to consume said waste gas, and provide an additional stream of income for hydrocarbon producers, and reductions in emission profiles.
