US shale gas boom may lift steel cos

Shale gas boom in the US, a big positive for the world’s largest economy in energy, jobs and industrial growth sweepstakes, may bring good tidings for Indian steel pipemakers.

Chhabi Singh, consultant with CRU Group, explains: “The shale gas market has been growing for the past few years and orders are flowing in, but the business is very cyclical. Initially, there was tremendous growth with OCTG (oil country tubular goods which refer to pipes, tubes and joints used in gas drilling) demand. Now, that drilling is translating into demand for line pipes.”

Players like Welspun Corp and JSW Steel, which have pipes and plates mills, are the ones in particular that are likely to gain. The shale gas boom refers to a sharp rise in US output of natural gas and crude oil. The gas is a found in the gaps within layers of shale, a sedimentary rock formed deep underground from deposits of silt and clay. “Shale gas has revolutionised the gas prices in the US. Today, the long-term gas is available at $3.5-$4. In India, such gas is available at $15-17. That’s the reason why a lot of new investments are being talked about,” said Akhil Jindal, director of Welspun Corp.

He further said the low-pressure gas has created a lot of opportunities especially for small diameter pipelines (six inch to sixteen inch) which will be used for transportation and distribution after the drilling stage gets over. In fact, to make the most of the growing demand, Welspun Corp has set up a high frequency induction welding or electric resistance welded pipe capacity of 1,75,000 tonne per annum at its Little Rock unit in Arkansas in the US. The company has invested close to $80 million in the facility, which was commissioned in the first quarter this fiscal.

Man Industries is another saw pipemaker that does not want to miss the bus, but is unsure of the potential for Indian players without any presence in the US. “It’s certainly an opportunity, but it is difficult to tell how big it is for Indian Pipes mills based in India because there are many mills in the USA to cater to the demand. We plan to participate in the tenders. We will be supplying bare pipes and coating will be done by any existing coating mill in the US. We are already in talks with a couple of such mills there,” KG Mantri, director, Man Industries, told dna.

An e-mail query sent to JSW Steel went unreplied. However, Seshagiri Rao, Group CFO, in the last earnings conference had hinted that the company is expecting better times for its US pipe and plates mill following a rising demand for the energy sector on higher shale gas findings.

Orders for such saw pipes are expected to start flowing primarily from the next fiscal. Jindal said his company has already started receiving initial inquiries and small orders as well and is currently busy getting accreditation from customers. He expects opportunities driven by shale gas to contribute 20-25% of the total revenue by 2014-15.

While Singh agrees that players such as JSW and Welspun would definitely have an advantage due to local assets and shorter lead times than pipe mills dependent on foreign facilities, she added that players like Evraz, which have significant local presence in the US, would be most competitive and will be “an obvious choice”.

Mantri counters, saying: “Any mill in the US enjoys advantage of only proximity with customers. Due to significantly high cost of manufacturing in the US, there is no advantage as such. Indian mills will pay higher freight and US mills will pay higher cost of production. Therefore, at a net level, there is no cost advantage for the US-based mills. It’s only locational preference that may be helpful to US mills.”

Exports by Indian companies, especially of high grade pipelines used in the energy sector, may pick up going forward as supply of pipelines is expected to overshoot demand. “However, the same cannot be firmly stated for the current environment since opportunity exists within the country and there exists a tumultuous trade equation with demand centres such as the US,” said Ashima Tyagi, senior consultant with Research Company Infraline Research.