The recent award of city gas distribution (CGD) licenses bodes well for steel pipe manufacturers in the country.
The implementation of the CGD licenses will be a huge boost for both electric resistance weld (ERW) as well as second, submerged arc welded & seamless (S&S) makers as the orders will require laying of 10,000-15,000 kms of pipelines per annum till 2029. The establishment of pipes envisages a business opportunity of Rs 5,000 crore each year for the steel pipe makers across the country. Welspun Corporation Ltd, Jindal Pipes Ltd, Jindal Industries Pvt Ltd, Ultra Pipes, JCO Gas Pipe Ltd, Surya Roshni, MSL, Man Steel and JRB Stripes Pvt Ltd are expected to profit from this measure.
As per a report by CRISIL, the demand growth for steel pipes is expected to accelerate to 7-8 per cent over the next five fiscal years compared with 4.5 per cent in the last five years. Growth is projected to be higher for the ERW segment at 8-10 per cent as against 5-6 per cent for S&S.
Demand drivers for ERW pipes include higher investments in water supply and sanitation, irrigation, and increased usage of structural pipes in infrastructure projects and other newer applications. Organised ERW pipe makers will continue to benefit from formalization of the economy post implementation of the Goods and Services Tax (GST). For S&S pipes, on the other hand, the main growth driver is the oil and gas sector.
Steel prices are inherently volatile, which leads to high variability in the operating profitability of steel producers. However, steel pipe manufacturers have exhibited higher resilience as their business model is different from steel producers. Generally, steel pipe makers work on conversion margins, which insulate them from price risk to a large extent. However, any sharp change in steel prices could expose pipe makers and will result in inventory losses as seen in Q3 of fiscal 2019 for some ERW manufacturers.
Most of the pipe makers have completed capital expenditure programmes in fiscal 2019 and have enough headroom in capacity utilisation.
In the ERW segment, the utilisation level is expected to be 63 per cent for fiscal 2019, compared with 59 per cent in fiscal 2018. We believe the next cycle of capex will start only when the existing capacities reach utilisation levels of 80-90 per cent, which may take two more years.
For S&S, there is scope of capex of Rs 600-800 crore in fiscal 2020 for balancing requirements and in value-added segments. Despite the Capex (Capital expenditure), utilisation levels are expected to increase to around 50 per cent in fiscal 2020, compared with 46 per cent in fiscal 2019.
Operating performance of steel pipe players will remain susceptible to any slowdown in end-user industries. For ERW players, any sharp movement in hot rolled (HR) coil prices will also be a key monitorable.
Steel pipes contribute around eight per cent to India’s steel consumption.
The Rs 50,000 crore steel pipes industry is split equally between the ERW and S&S segments in value terms. In volume terms, the domestic market is split 70:30 between the two segments.
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