We have completed “Threat of Substitute” in our earlier post, now let us try to understand how “Entry Barrier” could possibly be a source of profitability for the Steel Pipes & Tubes Segment. The reason for which we are performing Porter Analysis is to find: “will this business continue to remain economically profitable in future?” Business which are profitable and provide high E.P. attracts the highest number of competition. As number of competitors increase, the profitability reduces due to price war (and other reasons). Profitability reduces till the point it is no more attractive for new players to enter this business.

So to start with, what really is Entry Barrier?

“Entry Barrier = Starting New Business + Scaling it up + With Profitability maintained.”

Anyone can open a shop and start business, but it does not mean there exists competition. Competition exists when new entrant is able to start its shop, scale it up and take away market share and as well remain profitable to survive in long term. Hence, the point here we are analysing is whether Entry Barrier exists i.e. whether new entrant is able to start, scale up and remain profitable.

The most important aspect in Entry Barrier is Scale. Entrants into steel pipes & tubes should be able to scale up to possess a real threat to the existing players in industry. Because, when the scale increases, the market share of existing players are taken away. Losing market share is linked to losing revenue and profits, and it possesses real threat to existing player. Hence, stable market share is healthy sign for the industry, as no new entrant are able to scale up and competition is also not intense, driving the market shares. Therefore, in order to understand scalability, we need to analyse market share changes of each of the product segments i.e. ERW Pipes, SAW Pipes and Seamless Pipes.

• ERW Pipes & Tubes:

Look at above market share calculation of ERW Pipes & Tubes as on 2020. Only listed players were considered because the capacities with unlisted players are too small and irrelevant here. From the above table, we can see only two major companies emerge in ERW segment i.e. APL Apollo and Surya Roshni. These two companies form 76% of the whole market share and can be considered representative of whole market. When we include Tata Steel in to our calculation, three companies form 89% of the whole ERW market.

Note: For companies like SAIL, Hi-Tech Pipe, Suraj Limited and Rama Tubes, sales volume were not available. Hence, most logical approach i.e. Average Capacity Utilization of industry x Installed Capacity is done to find the sale volume.

Hence, from above it is clear that currently, only APL Apollo and Surya Roshni are major players in ERW Segment. These two companies, have over the year, grown significantly with robust capacity expansions and high utilizations. Have a look at the data:

Along with above, current capacities and production of other companies are not material w.r.t. the total industries capacity and production. Also, no other company have scaled up in recent past and their capacities have remained same (mostly) right from 2011.

Hence, major market share has been taken up by only two companies in ERW Pipes segment i.e. APL Apollo and Surya Roshni. Right from 2011, market share has risen for these companies on back of high volume growth and no other company have scaled up. It is suffice to conclude that: 1) new players have not entered in the market (or not able to scale up to snatch market share) 2) existing players have not expanded much and 3) only two players have emerged as market leaders over the years. This makes the market for ERW Pipes quite stable for these two major companies.

Therefore, from the above, it is probable that Entry Barrier in ERW segment could be high.

 Also management of APL Apollo have mentioned that unorganised market share is reducing giving away to organised sector due to reasons like Certified & Precision ERW requirement (AR 2013), Challenging market times (AR 2015), GST & Demonetization leading to difficult business for unorganized sector (AR 2015/AR 2016) and the COVID pandemic leading to cash crunch (Concall 2021).

Hence, all this indicates that market share of good players have been consistently on rise indicating stability. Barring two companies, no other players were able to “Scale Up” in market over the years.

Another extremely important point I want to mention here is that “Big Steel Players like SAIL, Tata Steel, JSW Steel, JSPL, etc. do not have significant capacities in ERW Pipes.” Where smaller companies like APL Apollo & Surya Roshni have robust growth stories (from sales of only 0.41MnTPA in 2011 to 2.12MnTPA in 2019), bigger companies have not really put their foot forward in ERW segment. There might be some hidden reason, but it also states that if these big players are not scaling in the ERW market, will it encourage new entrants to enter and scale up?

Hence, all the points above indicates that there is Possibly High Entry Barrier in ERW segment.

• SAW Pipes:

There are only four players in the whole segment making SAW Pipes. Since 2009, no new player have entered this business of SAW Pipes. Have a look at the volume sale data for these companies:

While we convert these numbers on basis of market share, we get:

Welspun Corp. has highest market share in SAW Pipes segment i.e. close to 50%-55%. When we closely look at the data, only Man Industries have lost their share whereas the market share of other companies are very stable. The possible reason why Man Industries went off-track might be due to company specific issues i.e. fight between two brothers. Historically, no other new players have entered the market of SAW Pipes.

Hence, market share in SAW Pipe category have been stable. No new players have entered the market over the years. Apart from the above, SAW Pipes are very complex to make and requires heavy CAPEX and very high engineering knowledge. Due to its usage in critical industries like Oil & Gas, the quality of products matter the most. For this reason, customers buy products only from companies which have requisite approvals and certification from relevant authorities. Obtaining special certifications from these authorities is not an easy job and also time consuming.

Therefore, combined all above, it is very difficult for new entrant to start business in SAW Pipe category. Hence as per understanding, Entry Barrier in SAW Pipe category is high.

• Seamless Pipes & Tubes:

There are very few companies in India making seamless pipes & tubes. In fact, majority of seamless pipes are imported from countries like China, Japan, Korea & Vietnam (Source: Scuttlebutt). Firstly, seamless pipes & tubes are also divided into different kind of alloy materials. Seamless Pipes & Tubes could be made of Carbon Steel, Stainless Steel and other alloy materials. Majority of the companies in India are only able to make seamless pipes & tubes of carbon steel. There are only 2-3 companies in India, who could make seamless pipes & tubes of Stainless Steel and Other Alloys.

Companies like Maharashtra Seamless, Jindal SAW, ISMT Limited, Suraj Limited, etc. are able to make seamless pipes & tubes only of carbon steel. Amongst these, only Jindal Saw and Maharashtra Seamless are market leaders in Carbon Steel Seamless Pipes & Tubes Category.

As far as Stainless Steel (SS) and Other Alloy Seamless Pipes & Tubes are considered, they are very difficult to make. Majority of products are imported into our country. Ratnamani Metals is only company in India which are able to make few grades of SS & Other Alloy Seamless Pipes & Tubes. Apart from this, only Welspun Speciality have such capacity of SS Pipes.

Production of Seamless Pipes & Tubes requires lot of expertise, technology and very high end machinery. Also, the capital requirement for seamless plant is huge. Seamless Pipes & Tubes are used in very high-end critical applications where failure of pipes could cause very adverse effects. Hence, customers demand very high quality and certified pipes. Certification takes a lot of time to obtain and it is not possible for any other company. This is the reason why there are only few players in the market to make seamless pipes & tubes. And over the years, no new players have entered this business and no new players have scaled up. Only these handful of few companies are in the market for very long time.

Market share of Ratnamani Metals have been as high as 40% in Stainless Steel Seamless Category and it has been on a rise. Also, Maharashtra Seamless have highest market share over the years in Carbon Steel Seamless category.

With stable market share, complexity of business, high capital requirement amongst other difficulties, there are very acute change for any new players to enter in the market and start production. Have a look at the glimpse of Capacity, Production and Utilization level for companies involved in making seamless pipes & tubes:

Hence, on market share and product complexity basis (amongst others), Entry Barrier is very high in Seamless Pipes & Tubes Category.

Apart from the above market share analysis, there are more points to focus on to understand completely whether entry barrier exists or not. For that, let us see few more aspects to entry barriers:

1. Location of Plant & Economies of Scale:

One of the major cost for any Pipe manufacturer is Freight Costs which is directly related to location of plant. Freight cost forms roughly 3%-6% of sales depending upon company’s plant location, product size, weight, etc. When you notice location of manufacturing plants for many companies, they are mostly situated near ports or market area. This strategic location is for economical transports & exports. But the problem is, when they want to deliver products within the country and especially far away areas from factories, they have to incur significant freight costs. Hence, companies with nearest plant to delivery location have major advantage with respect to costing and able to get order preference due to lower costing.

Let us therefore, look at the plant location of companies:

• Maharashtra Seamless: Raigad Plant, Maharashtra (Near Port).
• APL Apollo: 11 Plants (See Image Below)
• Surya Roshni: 4 Plants (See Image Below)
• Ratnamani Metals: Chhatral/Indrad/Bhimasar Plants, Gujarat (Approx. near Port).
• Welspun: 3 Plants across 3 regions (See Image Below)

The reason for companies to open their manufacturing plant either near port or at different strategic location (to cover multiple regions) is to provide pipes cost effective. This is also repeatedly mentioned in Annual Reports of companies by managements of Welspun Corp., Ratnamani, APL Apollo and Man Industries, etc. (You can observe in their respective annual report, the plant location).

Hence, location of plant is very important point of entry barrier. If new entrants are not able to open plants with location advantage, then it will be difficult for them to cope up with costing of other players. And here, the complexity of permission requirement from Environmental Clearance, Forest Clearance department is important. Generally, it takes lot of time for new player to buy land, make a plan, submit it to the requisite department, and get it approved. All these, being time consuming can discourage the new players to enter and start production.

2. Capital Requirement & Pay Back Period

Capital Requirement in Steel Pipes & Tubes segment depends on what category of products manufactured. ERW Pipes have relatively lower capital requirement when compared with SAW. Seamless Pipes requires very intense capital to start its production.

But, only starting production is not enough. Companies should poses high-end technologies, latest machinery, highly experienced engineers, huge land for warehouse and a lot of working capital to be able to stand in market. For example, APL Apollo is in manufacturing of ERW Pipes (comparatively low CAPEX) which has latest DFT Technology. Because of DFT, cost of production is reduced and quality of pipes have improved drastically. But, installation of these DFT costs very dearer. This is the reason that even with lower capital requirement for ERW companies (comparatively), to set up high-end plant with latest machinery, etc. is it expensive.

Setting up a plant blocks a lot of Capital in form of Fixed as well as working needs. Also, there is requirement of regular capital expenditure to maintain machinery, upgrade technology, etc. Hence, it is not fit-it and forget it to reap multi-year benefit type of machine, there is requirement of regular up-gradation both in technology part and process part.

There is no fixed amount of capital requirement as I said and it depends on company to company (due to technology, machinery, etc. differences), but I can provide you some rough estimates.

Have a look at the CAPEX into PP&E by following companies (simply difference of their PP&E):

Again, have a look at the amount of working capital blocked for these companies:

Let us try to analyse the working capital requirement of these companies’ w.r.t. volume sales/production levels:

From the above, we can observe that working capital requirement is very high. ERW companies W.C. per MT is comparatively lower then SAW Pipes and Seamless Pipe companies have highest blockage of W.C. Similar traits can be seen in above fixed working capital table.

Hence, from the above we can see high capital requirement to do steel pipe & tubes business, and it possibly makes the entry more difficult.

Also, what is more important to observe is the Pay Back Period of these investments. Typically for a Greenfield expansion of plant, it takes two years to acquire land, build necessary building and setup machinery. Thereafter, it takes another 6-8 months to get necessary approval from certified standard approvers like BIS Standard, API, ISI, etc. so that it can be sold to clients which go for high quality. So, for production to finally start, it takes about 3 years of capital blockage. Thereafter production starts and capacity utilization gradually increases.

But, what if cycles turn downwards while the plant still sets up? This is another added risk and a huge one. Hence, with higher PBP, higher Capital Requirement and Cyclicality of business, it is very difficult for anyone to get into this business and start earning profits immediately. This is again, according to me a very good point for possible entry barrier.

3. Certifications Requirement.

In the recent past, there have been instances that chemical factories have caught fire, leakage led to explosion, loss of lives due to harmful gases, etc. Majorly the cause of these damages were low quality steel products being used, which were not able to handle the internal pressure of chemicals and led to developing cracks. Because of this, many companies go for quality products especially for their critical applications. Also, many countries have made it compulsory for their companies to use products which are certified and meets certain quality standards.

Hence, recently many Steel Pipe buyers require certification from companies. Steel Pipes & Tube companies need to get into approved supplier list of their buyers (which they get on basis of certification obtained by them) before they can fill quotations and tenders. This is norm especially for bigger companies like Saudi Aramco, Oil India, GAIL, etc. These companies ask for various certifications like API, BIS, ASTM, UL, CE, ISI, etc. Different companies ask for different certifications. Usually, certification are directly provided by agencies backed by government of respective countries so that they can be assured of quality product imported.

Hence, for any new comer, it requires very high class facility along with quality product to get all this approvals and obtain certification. Also, obtaining certification & approvals is time consuming for new comers. This is very important point as Seamless and SAW companies do require these certifications because they are used in high end applications. Due to this, as pointed out above, the number of competitor in SAW and Seamless segment is very less.

The requirement of certifications by many companies and countries have made the entry of new comers more difficult.

 

4. General Points

We are in commodity type of business with cyclicality playing a role. Hence during sudden drop in demand, mounting inventories and low capacity utilization companies might sell at lower profits (or loss) to free up capital. There are indications that pipe companies keep a minimum profit and do not sell below that, but we still can’t be sure that companies will keep following this norm, as during adversity anything can happen.

Also, clients switching cost is very low as understood in Threat of Substitute, leading to price competition to lure customers. Along with that, many government companies work on tender basis where lowest cost bidder wins the contract. Hence, all this states that there is very less pricing power and mainly the final price of steel pipe is determined by keeping minimum profit and market determined final crude steel price. There have been occasional inventory write/offs due to lower steel prices as well. Hence, all this indicates good risk and uncertainty in business discouraging new entry in market.

All of the above adds complexity to business making it difficult for new entrant to start this, and “hence steel pipes & tubes business have a very high entry barrier”.

Let us now compile all the data explained above into a clean, neat table format for better understanding:

Sr. No.	Points	Current Situation	Future Outlook	Reasoning	Data Extraction
1	Location Specificity. / Asset Specificity.	Plant located near Port, Key Market Area, and Near Raw Material Supplier or at strategic places to be better off. Plant requires approval to get Certifications like API, BIS to be eligible to sell to certain companies/countries.	Continue to remain same as location of plant is important. With requirement of high quality products, this norm might be stricter in future.	APL’s continuous expansion all over India having 11 plants. Companies mentioning a lot about plant diversification across regions. Companies taking about taking certification for being able to reach export to new markets.	A.R., Concall, Management Interview, Investor Presentation, Earning Presentation.
2	Economies of Scale.	Very important. More production leads to spreading up of cost, leading to less cost per M.T., leading to higher profits.	Costing is very important for commodity type of business and hence this will continue.	Cost Drivers of Company.	Annual Report i.e. Financial Statements & Others.
3	Capital Requirement + Reinvestment Requirement.	Huge CAPEX Requirement for SAW/Seamless Pipes.   ERW have less Fixed CAPEX Requirement but high W.C.	With technological upgrade, amount blocked in W.C. is expected to reduce.	Man Industries analysis, other companies’ analysis showing Fixed Capital & Working Capital.	A.R. i.e. Financial Statements & Others.
4	Learning Curve Barriers.	Need expertise to set Seamless Pipes Plant.   Other products can be made with less expertise.	Expected to remain same, technological upgrade may require less expertise.	Concall, Number of competitors, Ground market review stating “We import because quality seamless material not made by India.”	Concall, I.P., A.R., Scuttlebutt.
5	Number of Competitors.	SAW/Seamless: Very handful of players.   ERW: Many unorganised players exists, but market majorly amongst few big players.	Market is moving towards organised segment with better cost advantage and liquidity.	Competitors’ analysis along with Market Share, Capacity, Production & its utilization.	Concall, A.R., I.P. and Google.
6	Stickiness of Customer/ Switching Cost	Commodity business hence very low switching cost.	Same, low cost producer emerge as winner.	Analysis done in “Threat to Substitute”	Concall, Scuttlebutt, A.R.
7	Anticipated Pay-off or Pay Back Period	5+ years PBP. Takes 2+/3+ years to start plant from scratch. Takes more years to get certification approvals. Takes more years to build name, trust and customer relationship.	PBP may take more time for new comers if existing customers sow roots deep in Indian markets.	Analysis of Man Industries along with CAPEX Requirement of all other companies.	A.R., Analysis, Concall, Financial Data.

Conclusion: Stable Market Share over the years, less number of competitors, High Requirement of Capital, Long Pay Back Periods, High expertise to start plant, Requirement of Certifications and advantage in Economies of Scale are all the points which collectively discourages new entrants to start new plant at ease. Apart from above, big players have not entered into this product line. All these points mentioned above, gives more conviction that “Entry Barrier is very HIGH” in Steel Pipes & Tubes Business.

Source: A comprehensive study containing financial data of all companies, other analytical data, scuttlebutt, etc. was conducted. All have been compiled only into one sheet for which the link is given. Link to the working.

 

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.