Pipemakers go out-of-the-box

MUMBAI:  The cost of shipping steel pipes to the United States has risen by almost $50 per tonne, or Rs 2 per kg, in the last three years.

The price of steel, the most important input for the pipe industry, has risen 45% in the same period.

It’s a situation that required Indian pipemakers to think out-of-the-box. They did, and came to a simple solution — set up plants in the US.

Not only does this help thwart rising freight costs, but it also makes sense to be in the thick of a market that is exploding.

Arvind Jain, analyst with Religare Securities, said the cost of exporting steel pipes to the US is tantamount to 10% of the expenditure incurred by a company towards product development.

“Freight rates to US are currently hovering between $110 and $130 per tonne. Setting up plants saves the money. Local companies also attract more orders in the US. Plus, you eliminate the foreign currency risk,” Jain said.

But Kamlesh Kotak, analyst with Asian Markets Securities, said it’s not so much freight cost as pricier raw materials that have made the difference.

“Margins of pipemakers have shrunk quite significantly because of higher input costs,” he said.

In a report on August 2, Kotak said with plants in the US, Indian companies would not only enjoy cost competitiveness, they also save on lead time.

No wonder, Indian companies are moving to set up plants. Welspun Gujarat, which exports almost 80% of its produce to the US, is also setting up a 300,000 tonne unit in Little Rock, Arkansas in the United States. This pipe mill is expected to be commissioned by mid-2008.

Says Akhil Jindal, director of Welspun Gujarat: “The US is the largest pipe market in the world. The demand there is unbelievable. A plant in the US makes eminent sense.”
A local company, says Jindal, gives confidence and satisfaction to buyers. R C
Mansukhani, chairman of Man Industries, a Welspun rival, said the US and Middle East constitute a major portion of current overseas demand.

Man is conducting a feasibility study for a plant in the US and a decision on this is expected in a week. Another sector major, PSL, along with US-based A&L Group, is setting up a Rs 240 crore pipe mill project in St Louis, Mississippi.

It will be commissioned in May 2008 and will have a capacity of 300,000 tonnes per annum. Man’s Mansukhani said, in the next three years, US would require around 20,000 kms of pipes. “This can go up to 65,000 kms by the end of five years,” he said.
Current capacities in the US are not enough to meet rising demand.

Archit Kumar, of Religare Securities said a capital expenditure of $21 billion will be needed in the US in the next five years to feed demand.  “The demand in Middle East was even higher, but because of its proximity to India, the spend on logistics is not very high. So it can be fed from here,” Kumar said.

Analysts Nitin Bhasin and Augustya Somani of Kotak Institutional Equities, in an August 2 report, said US would also lead demand for large-diameter line pipes through the next couple of years.

They said global demand for large diameter line pipes would reach 74 million tonnes between 2007 and 2012, with the peak of the demand cycle expected somewhere during 2009. The going seems so good, companies are sitting on order books that are twice or thrice their current revenues.

Kotak and Sharma of Asian Market Securities expect the industry to grow sales at 30% CAGR and profits at 40% CAGR in the next three years. Indeed, a very promising pipeline, if there was one.