Rivalry exists in many forms. It could be a Price Rivalry, Rivalry to provide best service, Rivalry to provide best experience and so on. However, one of the major rivalry which has proven to disrupt the profitability is Price Competition. There are other forms of rivalry, but not all rivalry is bad for industry. Rivalry by way of superior service, better facilities, better features, etc. All other factors (except pricing) can bring out the best in Industry which is beneficial for whole society.

Both the factors i.e. price war and non-price war exists in our segment of Steel Pipes and Tubes. The very first competition exists is with PVC Pipes and D.I. Pipes as discussed in “Threat of Substitutes”. The constant efforts to prove that SAW Pipes are better than D.I. Pipes leads to competition in front of quality of product produced, service, life of product, etc. This brings better and high standard products for our government and in turn benefit the people indirectly. But, pricing of products of steel pipes are higher than PVC & D.I. Pipes, hence steel pipes compete in form of better products and usability.

However, when we check the pricing competition within our industry, there is lot of competition. Switching cost of consumer is very low in our segment, they almost switch for even Rs. 1 per kilo benefit (Source: Scuttlebutt). In commodity type of business, there is no product differentiation and there are many application where good quality steel pipes does not even matter much like using pipes for Pole, Fencing, etc. Hence, even a rupee price difference can play a role in buying preference of customer.

Therefore, selling very basic commodity attracts price competition for sure. Slabs, Sheets, Coils, Wires etc. are very basic steel and attracts price competition. Even in ERW pipes, the price war is high resulting into low margins. Similar point here, the application of ERW Pipes in most cases does not warrant the use of good quality steel pipes. And, there are many unorganised player in market for ERW Pipes who sell at lower prices to compete in the market. This leads to harsh price war and acute profitability. Company like APL Apollo and Surya Roshni are not able to enjoy comfortable EBITDA per Tonne levels historically.

Companies like Ratnamani (for SAW Pipes) and APL Apollo have indicated in Concall that they are keeping a minimum margin at every orders and not willing to sell below that even if there is some loss of sales. And this is quite logical as in business of commodity, economies of scale (to be done) do matter but at least there is a requirement for a minimum profitability to generate enough cash for business to get going. This shows there is price war, but despite that companies take risk to sell at minimum margins and are ready to lose on certain orders.

When we talk about individual product categories, ERW Pipes and SAW Pipes have competition, which exists only in very basic pipes. A few value addition to the product pipeline bring in better margins. Man Industries in 2015 have started new CWC (Cement Wet Coating) as a value addition for their SAW pipes and they indicate in their Annual Report that realization and profitability have improved (Source: Excel Link). Similarly, SAW pipe of very high diameter and pressure handling capability leads to better profits like the case in Welspun Corp. Companies like Maharashtra Seamless, Gandhi Special Tubes and Ratnamani serve to niche category and with value added products and so they enjoy very higher profitability in terms of EBITDA per ton.

But, it is not the difference of value added product or basic products that brings in possible competition. There is one more important aspect and that is growth rate, demand and costing which affects the competition.

When industry is experiencing good growth, usually everyone enjoys the growth momentum and do not try to interfere others to capture market share. In fast growing industry, everyone enjoys their piece of pie. On overall basis, capacity utilization goes higher, realization goes higher, profit margins increases and average costing goes down. Hence, when these positive development happens, the competitors enjoy and continue their own path and does not interfere with one another. Companies enjoy improving sales or profit or both, and this happens because industry grows. Hence, everything overall is at peace and the need to compete goes low.

Let us check out the growth rates of our segment company wise:

A lot of variability is seen. SAW companies have not experienced good growths in the past. ERW segment is growing very rapidly, mainly on back of aggressive marketing and efforts of capturing market share by APL Apollo along with development of new product serving many new industries. Similarly is the case of Surya Roshni. As far as Ratnamani is concerned, the growth has been pretty good and the main reason for this is their niche markets of titanium and special alloy products.

Looking at the growth, it is not very encouraging for SAW and Seamless Company, and hence they might go for individual company’s growth by taking away market share of other peers through aggressive selling leading to possible competition. But the story seems different if we look at capacity utilizations for recent years:

Have a look at recent developments. For 2017, 2018 & 2019, capacity utilizations have increased pretty sharply as compared to past years. Also, new capacities have been added by companies like APL Apollo, Surya Roshni and Welspun Corp, still the capacity utilization have gone higher suggesting good demand traction. Not only that, with increase in capacity utilization we also see a jump in EBITDA margins per ton. So, demand is coming for the pipes and tubes company leading to better capacity utilizations and higher profit.

But one needs to be careful in cyclical business. The rise in demand for recent years might indicate that cycle is turning upwards, but these observation is to be noted year on year to check for possible cyclical turns. When cycles turn down, capacity utilization decreases, growth rates became negative and companies are not even able to cover their cost. A lot of capital is blocked in the business of Steel Pipes & Tubes. Hence, working on minimum optimum capital utilization level becomes very important to at least breakeven the expenses. Hence, when Fixed Cost as % of total cost is very high, often to cover the costs selling aggressively is the option chosen by the companies. So, at such times, competition goes higher leading to less profitability and realisation. (All this aspect will be covered under “Cost Driver and Costing Analysis” in the coming blog post).  

Also, one needs to further understand that during bad times when companies are not able to survive by generating enough profits. They look for reducing their existing capacities or close their business. Now, in Steel Pipe & Tube business, nature of capital intensive with lots of plants, machinery and other assets, closing down business is no easy task. Recent trends have shown that one way to get out of business is to be acquired by a bigger company. But during bad times, acquisition happens very less. Hence, the only way for company to get going is to sell product aggressively and generate any cash they could. And this leads to further intense competition.

All above were the scenarios explained exists when business times i.e. cycles are not in favour or in downturn.  As of now, for short to medium term vision, the growth rates, high profit, high demand and better capacity utilization gives a good sign.

Recent times, as explained above, shows that possibly the growth and profit rates have picked up. So, with higher growth rates and less number of players in the market, every company will logically enjoy the current scenarios and sit back tight doing their part and not getting aggressive on selling. Hence, competition in near term looks pretty low and increased growth rates and profitability supports the stance.

So far we understood how intense competition can be very bad for any industry. Seeing recent trends in steel pipes & tubes segment, it indicates that competition will be muted for certain periods of time. Hence, let us compile the points understood above to discuss into a shorter table format:

Sr. No.	Points	Current Situation	Future Outlook	Reasoning	Data Extraction
1	Price Competition. A) Customer switching cost. B) High FC and low margin. C) Perishable Goods	Limited Price competition in ERW/SAW category.   Companies demand for minimum profit below which they are not willing to sell.	Expected to remain same.	Commodity type business, hence price competition leads to loss. So, they might work out to generate better profits.	A.R., Concall, Scuttlebutt, etc.
2	Overall Growth Rate of industry.	Currently high growth rates experienced. Hence competition might be lower.	Cyclical in nature and expected to reverse. But, good demand seen in short to medium term.	Analysis of recent capacity utilization, sales and profitability.	A.R., Financial data, Management discussion.
3	Industry Concentration and Fragmentation.	Concentrated players in SAW & Seamless.   ERW has few players but they are unorganised.	Due to better costing, ERW segment expected to concentrate into few players.	Analysis of number of players and recent trends of unorganised sector in ERW segment.	A.R., Concall, Google search.
5	Fixed Cost.	High fixed cost, profitability depends on capacity utilization.	Expected to remain same.	Look “Costing Analysis” for explanations.	Financial Data through A.R.
6	Value Added Product.	VAP exists amongst few companies leading to higher profit and less competition.	The VAP gap will widen as mature companies develop more product mix of VAP.	Understanding historical product mix development of our segment companies.	A.R., Concall, I.P., etc.
7	Informational Complexity	Basic product have no complexity. VAP and Alloy product have complexity.	Basic producers are getting into VAP category slowly and gradually.	Companies like APL Apollo, Man Industries are expanding their product mix to VAP from Basic.	A.R., Concall, Management Interviews, etc.
8	Exit Barriers.	Exit barriers are seen only through some one acquiring your company. Or else very less exit barrier due to high CAPEX business.	Expected to remain same.	Historically in steel business, only bankruptcy and acquisition case have been seen.   Scaled up business faces high exit barriers.	A.R., Concall, Analysis.

Conclusion: There is competition in basic commodity products but to a limited extend, and depends on business cycles. For basic commodity business minimum profit is still maintained. Recent trends shows good demand, capacity utilization and higher profitability and hence when industry is growing nicely, the threat of high competition is low. Also few companies cater to niche category with Value Added Product leading to better profits. Hence, with all the above scenario, there is indication that competition going forward will be limited and companies will look to capture whatever opportunities they get and don’t be aggressive to take away market share of others.

Source: Link of Excel File containing all calculations.

 

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.