“Change is only Constant thing in life”, a powerful quote and very true. Welcome to yet another post and this is very interesting one.

I have taken lots of efforts in studying Annual Reports, Investor Presentation, Concalls, and many other sources to present you this very important data which I call “Change”. It is very important to study what has changed over the past and what change is currently happening which will shape up the future of Steel Pipes & Tubes. An analysis of data from 2011 to 2021 (10 year) will be very helpful for us to understand how our segment i.e. Steel Pipes & Tubes have evolved over many years. It will help us in categorizing what changes are continuously happening and what are permanent things in market which had never changed over historic past. And, our focus should be on what things are changing because as said “it will shape up the future of this segment.”

Let us start understanding, interpreting and analysing the segments evolution in structured manner:

• Change in Product Mix.

Steel Pipes and Tubes segment are further segmented into 3 product categories. They include SAW Pipes, Seamless Pipes and ERW Pipes. Have a look at the chart below: (Note D.I Pipe forms part of Iron Segment and not steel segment, see Segmentation).

SAW and ERW segment are most basic commodity product which has no or hardly any product differentiation. Hence, being a commodity with least product difference, the margins are expected to be quite low. However, in the recent past, companies like Welspun Corporation and APL Apollo have falsified this logic of basic commodity. A pure commodity type ERW & SAW Pipes are made with more innovation to serve to very specific requirement of customers and thus enabling them to cater to Value Added Category.

SAW Pipes are majorly used in Oil, Gas and Power sectors. They generally come in limited diameter sizes and making sizes beyond certain diameters is very difficult task. But, Welspun Corp. saw this as an opportunity and emerged as one of the top 3 companies in the world to produce high diameter and high pressure SAW Pipes. With continuous R&D in product development, they are able to make SAW pipeline especially for applications like high altitude requirements, high diameter requirements, long distance pipeline, undersea pipeline, extreme temperatures, etc.

Similar to SAW Pipe, companies like APL Apollo are able to make ERW Pipes with greater precision and custom requirement at lower costs. Product innovations led APL Apollo to register about 9 patents for itself for ERW Pipes in structural steel. Continuous product innovation and proper inventory management have helped APL Apollo to get into many newer industries like building materials, residential infrastructure, home improvement applications, etc. The entry into end consumer segment (residential & home improvement) have also led to branding exercise, which is new norm (i.e. branding) in this industry.

Companies in Pipes & Tubes segment have continuously evolved through better technology, greater product innovation and its marketing to take up the opportunity to make Value Added Products for higher profitability and better product mix. Ratnamani Metals have improved its manufacturing capabilities which led to supply of VAP like titanium welded tubes, heat exchanger tubes, special alloy products like Inconel, Monel, etc. Not only these products are very critically required for certain applications but also they are import substitute. Similarly, Man Industries have started Cement Wet Coating i.e. CWC SAW Pipes enabling them to enter to VAP category.

With the above development, it can be said that Steel Pipes & Tubes Companies in India have continuously tried to add product innovation to improve their product mix and they are successful to certain extend.

• Change in Operating Areas & expanding Market Opportunities.

This is again very important development which you see especially in case of APL Apollo and Surya Roshni. From single location plants to multi location plants. Form single location delivery to multi locational delivery. These are the strategic changes which are very impressive and leads to robust expansion and capacity utilization. APL, in the year 2011 had 5 plants and 175 distributors. Today, it has 11 plants located at different regions and over 800+ distributors. Freight cost is very high because of which newer plants have come up in different regions. This saves transportation costs which leads to lower selling prices and higher market share. Concentration of plant at single location to expansion into multi location, even Ratnamani have indicated in their latest Concall their intention to set up new plant at different location then Gujarat. To save on transportation costs, companies also want their plant to be located near port for cheaper exports around globe.

When we talk about expanding market opportunities, you will be surprised to know how ERW Pipes and Seamless Pipes & Tubes have been able to cater to variety of newer industries. The use of long products like Angles, Channels, etc. are now being replaced by ERW Pipes Hollow Sections for structural steel applications. Other applications like airports, infrastructure development, residential complex, commercial complex, door entrance, fencing, etc. are being replaced by fabricated ERW Pipes indicating entry of steel pipes into newer segments. Also, due to recent tougher developments like GST, Demonetization, COVID-19, etc. have helped in shifting the business more towards organized segment. All these have helped ERW Pipes to grow nicely over the years.

Similarly, when we talk about seamless pipes & alloy pipes. Products like Heat exchanger tubes, Instrumentation Tubes, Welded Titanium Pipes, Duplex & Super-Duplex Pipes, etc. are extending its reach to new sectors like thermal plants, distillation plants, defence, aerospace, missiles, and so on. Companies especially Ratnamani Metals are able to make very high quality competitive VAP to cater to niche market around the world.

Hence, the evolution is tilting towards betterment of Steel Pipes & tubes segment. Extension of product usage into different application industry is very positive sign as the opportunity size keeps on increasing. Also, with companies like Ratnamani makes product which are import substitute, it gives very healthy sign of new opportunities opening up for Indian manufacturers.

So, whereas on product front there is drastic improvement, there is also continuous product development to cater to newer markets within country and across the globe which leads to good industry prospects in coming future.

• Technological upgrade.

The most common thing which a company always experiences across years. Companies have continuously improved their technology of machinery, automation, etc. This has led to very critical benefits. Debottlenecking has led to immense capacity expansion and the introduction of new machinery like DFT Technology, SMS Rotary, etc. have not only reduced production time, but reduced costing as well as led to higher outputs in least time.

Advantage can be seen in area of high input to output ratio, less wastages, better quality, more automation, less environmental issues and so on. Hence, continuous upgrading of technology is very normal norms leading to small efficiencies in process leading to higher output and quality.

• Control on Costing.

Costing is again the aspect where companies have been improving continuously. Reducing the cost for higher profitability is prime efforts in commodity type businesses. Recently, reducing power and fuel cost (Major expense as % of sales) is very first choice by companies. Use of natural gas instead of oil, installation of wind mill and solar plant for captive energy are lately followed by many companies in this industry. This has led to saving in cost of as high as 1.5 – 2%, which directly adds on to higher profitability.

Also, with companies expanding their plant across regions in India, freight cost as % of sale has reduced considerably leading to cost savings for companies like APL Apollo and Surya Roshni. This is commodity business and hence cost plays a very important role. Hence, we see many companies working on costing front for better profitability on a low margin, high competition commodity business like Pipes & Tubes.

• Government support and political scenario.

Government has been on continuous support for local producers. It was in 2011 where China started dumping its products at cheap rates across world. High inventory levels in China and some political instability led to this havoc. This forced a tactical move by government across world. Firstly, due to dumping products, many countries like Germany, U.K, started imposing anti-dumping duty for imports from China. And later on, even Indian government in 2015 imposed anti-dumping duty for many products imported from China. This was a major tailwind for the Indian industry. With back of government support and Indian producers being a competitive cost producers in world market, our share of exports increased. Also, average realisations have started improving since then. The major advantage of this move was especially to seamless pipes manufacturers in India because of higher imports of seamless pipes in India from countries like China.

Also, government aims to reach capacity of 300 Million TPA of crude steel by 2030 through its National Steel Policy, 2017. This move will bring greater push for steel demand in India. The launch of Smart Cities, Gas Pipeline Grid, National Pipeline Infrastructure Plan, Nal se Jal, etc. initiatives have improved the demand for steel and other pipe products. Apart from this, there are political US-China trade tensions. This again was helpful for Indian manufacturers as our share of exports to US have increased.

But, the picture have not always been rosy. There has been history of tailwind as well as headwinds for steel producers. Steel prices are majorly driven by market forces i.e. demand- supply and world outlook. Time and again, political instability, trade tensions, sudden duty imposition, etc. have emerged making the steel business very risk prone. Pipes are majorly used in Oil and Gas industries, Oil have high volatility. Higher Oil prices or stable oil prices leads to huge CAPEX by major oil companies which bring demand for Pipes. But, oil itself have been very volatile from 2015 onwards. From $80/- per barrel to as low as $20/- and currently hovering around $40/- is volatile enough to keep additional CAPEX at bay by oil companies. This in turns leads to lower pipes demand.

So, lots of risk and opportunities have emerged for Steel Pipes & Tubes business and it impacts the business. Hence, when evolution of industry is considered, only one thing which I find constant is the regular tail and headwinds in industry. Also, the cyclical nature of business adds on to the risk of owning this business.

• Substitute Threats.

In the past, ERW segment specially G.I Pipe segment have been at risk. The emergence of new plastic pipeline i.e. PVC and CPVC product have completely replaced the plumbing market in ERW segment. Where Plumbing market was majorly dependent on Steel pipes, but now, PVC & CPVC pipes rule the plumbing industry. In the past, substitutes have emerged and they have often been at lower price and better utility leading to replacement of steel as product. Hence, industry have been on continuous evolution in product front and there might come a risk in future where plastic will be used in place of steel at many applications. However, major application of pipes & tubes i.e. Oil, Gas and Power require high strength and pressure pipes. Hence, this segment is not expected to see any replacement for steel products.

With all the information above, I hope you are clear with an overview of Evolution of Industry. Industry have evolved pretty well finding new opportunities to expand its addressable market, technological upgrade for better production, low costing efforts, developing VAP in product mix, etc. Hence, it is very important to keep tracking these developments as this will likely change the course of industry going ahead.

This link will help you understand and ascertain at your level. The source of the information presented above is disclosed in excel sheet provided in the link.

Thank you for hanging on to this post so long!

 

Disclaimer: Views are personal and presented through independent research. By no means there is any stock advice. Also, presented content is for learning purpose only. I might be wrong in presenting data and inaccurate data, let me know if you find any discrepancies.