I hope you already read my previous post of “Evolution of Industry”, because this force of Porter will touch upon many repetitive points from evolution. We understood what happened in past, Industry Evolves. In the past we have seen how plastic pipes have replaced steel pipes in plumbing. This keeps happening as time passes, better products with cheaper alternative evolve leading to end of inefficient and outdated products and technologies.

Our segment i.e. steel pipes & tubes has very well faced in the past such “Threats of Substitute”. Here in our study, we need to analyse many aspects from point of view of pricing, utility, performance, consumer behaviour, etc. to understand whether possible substitute which currently exist possess a threat or not.

Our Segment i.e. Steel Pipes and Tubes can be categorised into products as follows:

Here, Ductile Iron, as per our product category falls into Iron Producers Segment (See: Segmentation). Hence, Seamless and Welded are two major product categories. Welded further split into ERW and SAW. Question is, which substitutes possess a threat to these product categories? Let us check out on basis of each product category.

1) A Threat to ERW Pipes Category.

In the past, PVC and CPVC pipes have disrupted steel pipes market in plumbing category for all the similar reasons we saw for buckets i.e. easy handling, cheaper price, rust free, bendability, etc. giving same utility as steel pipes. Major ERW Pipes share for plumbing applications was taken by PVC & CPVC Pipes. And you could observe almost everywhere CPVC & PVC being used in upcoming residential & commercial projects. So, there was a better trade/off to use PVC as compared to ERW Pipes. Although, plastic pipes emerged, ERW Pipe makers were able to survive this shock by catering to newer industry and finding opportunities in newer segments. Have a look at what the M.D. of APL Apollo Tubes (Annual Report 2014) have to say on this:

Similar comments and presentation were observed in ERW Pipe maker Surya Roshni Limited. Hence, although Plastic Pipes are possessing a threat to Steel Pipes, but with newer opportunities like City Gas Distribution, Structural Steel, Airports, Infrastructure, etc. are itself much larger trigger to offset this threat in plumbing category.

However, still the threat of substitute do exist for ERW steel pipes going forward in future. With recent product development in Plastic Pipes Industry, which aims to extend its use to other applications and widen its reach. The question is, what opportunities does PVC pipes has to compete with ERW Pipes in future?  There is one major risk which exists i.e. Plastic Pipes reach may extend to irrigation and water segment as well.

In irrigation and water segment, water transmission is required from source i.e. canals, rivers, ponds to fields. When water is transmitted from its very source, large diameter & stronger pipes are required to transport water in bulk and handle the water pressure. As the water is distributed to different areas, smaller diameter pipes are required.

SAW Pipes, Large Diameter ERW Pipes and D.I. Pipes are used for bulk transportation from its source because they are stronger and can handle water pressure (Primary Pipeline). As the water requirement scatters, lesser diameter ERW pipes are used (Secondary Pipeline). The plastic pipe industry is looking to replace the ERW Pipes in these secondary pipelines uses. Hence, for secondary pipeline, Plastic Pipes do poses a threat of substitute to ERW Pipes. But, with recent widening of application of ERW Pipes, the trigger to grow more for ERW offsets this threat very well. Also, Plastic Pipes develop cracks, cannot handle much water pressure, careful handling requirement, etc. are disadvantages. But plastic pipes comes with cheaper rate as well. So, it really depends on user’s choice i.e. what to select for their secondary pipeline requirement i.e. ERW or Plastic.

Looking at annual reports of plastic pipe companies like Apollo Pipes Limited and Astral Poly Technik, it seems they have successfully developed pipeline for fields and farms usage. But, the fact that plumbing is already dominated by Plastic Pipe Industry and the use in fields and farms is similar to plumbing requirement, there is very little to give away to plastic pipe for ERW Pipe companies for the secondary pipelines.

Also, when we see Annual Reports, Investor Presentation & Conference Calls of D.I. Pipe companies and SAW Pipe companies for primary pipeline requirement, no one has explicitly mentioned Plastic Pipes as their possible threat (except: Tata Metaliks – see below). Hence, we get a hint/reason of why Plastic Pipes as of now are not a threat to D.I. Pipes and SAW Pipes for Primary Pipeline requirements.

Following companies were checked for detail mentioned in above paragraph:

Sr. No.	D.I Pipe Companies	SAW Pipe Companies
1	Tata Metaliks Limited	Man Industries Limited
2	Srikalahasthi Pipes Limited	Welspun Corporation Limited
3	Electro Steel Castings Limited	Jindal SAW Limited
4	Jindal SAW Limited	Ratnamani Metals & Tubes Limited

2) A Threat to SAW Pipe Category?

You might have realised through the above explanation that there is another substitute available for Primary Pipeline and is in direct competition with SAW Pipes i.e. D.I. Pipes. This according to me again, do possess a “Threat of Substitute” but it is not a serious concern currently. Firstly, check out major application of D.I. Pipes and SAW Pipes.

Major Applications of D.I Pipes: Portable Water & Sewage Transportation and Sanitation.
Major Applications of SAW Pipes: Oil & Gas, Petroleum, Refineries.

D.I Pipe has spreads its arm over Water & Sewage transportation due to many reasons. Firstly, its age is said to be as long as 100 years (Source: Tata Metaliks A.R. and Google), and with coating it can be used for water transportation without risk of water contamination. Also, D.I Pipe is cheaper alternative when compared to SAW Pipes.

So, as far as pipeline is considered for water and sewage segment, D.I. seems to be the first choice over SAW Pipes, BUT the threat of substitute is less. Yes, there is insufficient data to back my above statement but to show you, I have another very important data point. Have a look at the capacity utilization of top D.I. Pipes companies in India:

With the data point above, how much more demand do you think can D.I Pipe absorb? So, can we reasonable say that SAW Pipes share in market will be protected till the time new capacity for D.I companies starts its production?

Apart from above, I have another very important dataset to present you which will almost guarantee that SAW Pipes threat to D.I. Pipe is very acute. Firstly, 50% to 60% of total production of SAW & Seamless Pipes are used in industries like Oil, Gas & Power sector for transportation, drilling and exploration activities. Balance production of SAW pipes are used in water, sewage and other segments (Source: All A.R. and Government Sites).

This 50% to 60% i.e. major junk of SAW Pipes demand are “Protected”. How? Look at the snapshot below:

Petroleum and Natural Gas Regulatory Board (PNGRB) have issued a Notification dated 12^th Feb, 2016 making multiple regulations. Oil, Gas & Power segment requires pipes of high strength, pressure handling capabilities and chemical properties which should not react with elements passing inside. These requirement could not be met by D.I. Pipe and hence only SAW Pipes remain the sole option. Snapshot of same are given above, have a look for yourself, the notification here:
https://www.pngrb.gov.in/OurRegulation/ppp-GSR-Infra.html

Hence, Current overcapacities in D.I. Pipe segment might possible see the users to turn their orders forcefully to SAW pipe manufacturers. Along with this, there is advantage of special protection given to SAW Pipe in Oil, Gas and Power segment. This indicates that going ahead in near future, SAW Pipe is protected from threat of D.I Pipe as substitute.

Scuttlebutt was performed by me (Which is yet to get resolved). I have mailed SAW and D.I. Pipe companies directly asking for possible threat of substitute of D.I Pipe and SAW Pipe to each other. Have a look at my mail copy:

I will update this section once I receive positive reply from all the companies I mailed namely Ratnamani Metals, Welspun Corp., Man Ind., Jindal SAW, Tata Metaliks, Electro Steel Casting, and Srikalahasthi Pipe (I don’t think I will get any reply).

 

3) A Threat to Seamless Pipe Category?

The application of seamless pipe is very unique. It is used in extremely critical applications with highest pressure from the chemical elements. Due to this extreme pressure handling requirement, seamless pipe are only choice for its users. Seamless Pipes do not have any welds as they are hot extruded from steel bars & rods. Because of no welds, they are very strong and have very high capacity to handle pressure. They are used in industries like food processing, automobiles, aerospace, defence, power, and so on. As per my research and reading, currently, there is no such said substitute for seamless pipe categories of product. Simply, no threat of substitute from other industry. But, threats within industry do exists.

 

4) Threat of Substitute within Industry?

Seamless v/s Welded Pipes: Seamless Pipes are used where requirement for extreme pressure handling pipes and tubes are high. As said, seamless pipes do not have welds making them more preferred option over welded pipes. Plates and Coils are welded to form pipes. These welds are of many types. Submerged Arc Weld (SAW), Electrical Resistance Weld (ERW), HFi Weld (High Frequency Weld), etc. During the recent times, new technologies have developed enabling to weld pipes and coils with different techniques. These techniques have enabled welding more efficient and made the final pipe stronger.

Hence, technologies have developed in recent times where welded pipes are produced with more pressure handling capabilities. These produced welded pipes are prospect to directly replace seamless pipes & tubes where the application permits (depends on pressure requirement by client). Also, these pipes will readily be accepted by customers because the price of welded pipes are way lower then seamless pipes. So, with similar utility and price benefit, the switch to welded pipe will be faster. Hence, as far as within industry “threat of substitutes” are concerned, Welded pipes are finding its application to places where seamless pipes used to dominate.

SAW v/s ERW Pipes: SAW pipes come with very high sizes i.e. diameters. These sizes are required to transport elements in bulk quantities. But, again new technologies have enabled ERW Pipes to be manufactured with higher diameters. The diameter for ERW Pipes made with newer technologies goes as high that it overlaps the starting range in diameter of SAW Pipes. Obviously, for certain applications only SAW Pipes would be preferred, but ERW Pipes being made with high diameter is a direct threat to SAW Pipes existence. ERW Pipes are cheaper produce than the SAW Pipes, meaning their acceptability will be immediate.

Hence, ERW Pipes are again trying to take a share of SAW Pipes for few applications.

Have a look at the realization per tonne for each of the companies in our segment:

To guide you with an understanding for pricing (roughly), APL Apollo and Surya Roshni are ERW Pipe makes and have lowest realization per tonne. SAW Pipes are manufactured by Welspun Corp. and Man Industries where realizations are slightly higher. Maharashtra Seamless and Gandhi Special Tubes are seamless pipe makers with highest realizations per tonne. (Ratnamani Metals have blended realization of SAW, ERW and Seamless Pipes and hence not considered).

With the above, I hope we are clear regarding the possible “Threat of Substitutes” to our industry both from outside and within. Let us now have a look at the parameters, all in one table, regarding the possible existence of Threat of Substitute for Steel Pipes & Tubes Segment.

Sr. No.	Points	Current Analysis	Future Outlook	Resoning Parameters	Data Extraction
1	Price v/s Performance Trade/off.	1. Threat of DI Pipe being used in place of SAW/ERW Pipe. 2. Threat of PVC Pipe extending its use to more industry.	[Threat=Low] SAW are protected by notification of PNGRB. D.I. Pipe operating at full capacities.   PVC developing cracks and not suitable to handle pressure.	DI Pipe operating at overcapacities.	A.R. of D.I. Pipe companies.   Mail to D.I & SAW Companies. A.R., Concall, I.P. of PVC companies.
2	Price sensitivity of customer.	Very sensitive: PVC rates v/s Steel. Orders placed to cheapest seller i.e. Price sensitive within segment.	[Threat=High of PVC] Continue to remain same due to commodity type business. Buyer chases cheapest seller.	Highly competitive business.	A.R., I.P. and Conference calls along with Scuttlebutt with steel traders.
3	Price/Total Purchase.	For few sectors, very high proportion of expense is into Pipes & Tubes.	[Threat=High] Buyers find cheapest seller leading to high substitute within segment.	Ex: 8-10% of oil companies CAPEX goes into Pipes & Tubes.	A.R., Concall of Oil Companies & Pipe Companies.
4	Product Difference.	No Product differentiation, only grades within Pipes & Tubes differ.	Continue to remain same.	Commodity type business.	A.R, Concall and I.P of Pipe companies.
5	Switching Cost.	Same utility and commodity, so consumer chasing the cheapest seller.	Continue to remain Same.	Competitive markets & tender system.	A.R, Concall and I.P of Pipe companies.
6	Buyer’s Propensity to Substitute.	No such substitute of product (Except PVC). But buyer can easily switch to imports as utility is same.	Continue to remain same.	N.A.	A.R, Concall and I.P of Pipe companies.
7	Aggressiveness of competitors and number of competitors.	SAW/Seamless – Less companies i.e. total 4.   ERW – more companies with larger unorganised market.	Competitors not aggressive as price determined by Crude Steel Price and Input Prices.	Commodity type business with stressed margins.	A.R., Concall and Financial Data. (See Data Sheet)

Source of above: Annual Report, Concalls, Investor Presentation, Scuttlebutt, Own estimation, etc.

Conclusion:

PVC is possible replacement for Steel in irrigation segment but the possibility of this happening is very low. Along with that, D.I. Pipe also does not possess much threat. However, it is to be noted that substitute does not exists across industries (i.e. PVC v/s Steel v/s D.I.) but there is high deal of substitute within industries. Buyers almost switch very instantly to the low cost seller. Hence, substitute in form of other competitors exists.

“Threat of Substitute” for Industry as a whole is extremely low. But, threat of substitute within industry in form of other sellers (Including Imports) exists.

Hence, “My views: Threat of Substitute: Low” based on overall assertion and understanding of industry.

 

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.