By SHUBHAM RAI
Pipes & tubes players pin hopes on city gas & water distribution projects & rural demand
In 2019, India’s steel industry set two records. In terms of steel consumption, it surpassed the United States and also crossed the mark of 100 million tonnes (MnT), according to the World Steel Association (worldsteel). But when we look at the steel pipes and tubes sector, even though it helps in transporting most essential goods to us, including cooking gas and water, its share is only around 8% in the overall steel consumption basket.
India’s steel pipes and tubes production capacity stands at around 21.5 MnT, which can be further divided into three categories, ie, welded, seamless, and casted pipes. The production capacity of welded pipes and tubes is at around 16.3 MnT, for seamless pipes and tubes it stands at around 1.5 MnT, and for casted pipes, at around 3.70 MnT.
India’s structural pipes and tubes production capacity is about 9.5 MnT. The major states that contribute to this capacity are Chhattisgarh at 1.78 MnT followed by Uttar Pradesh at 1.76 MnT.
The production capacity of the Indian submerged arc welded (SAW) pipe, which is a seamless product, stands at around 8.3 MnT and the major states where these manufacturing units are located are Gujarat with production capacity at 5.15 MnT, followed by Karnataka at 1.30 MnT and Maharashtra at 1.50 MnT.
As per a 2019 CRISIL report, the sector can be broadly categorised into two segments, the electric resistance welded (ERW) and the submerged arc welded (SAW) and seamless (S&S). Demand is expected to grow 7-8% over the next five years (from 2019) compared to a growth of 4-5% of the last 4-5 years. In value terms, the INR 50,000-crore steel pipes industry is split equally between ERW and S&S while in volume terms the ratio is 70:30 respectively, the study indicates.
As per Ujjal Chakraborti, Executive- in-Charge, Tata Steel Tubes Division, the market size of the pipes and tubes segment in FY2020 is ~10% of the total steel consumption. India has a per capita tubes consumption of ~less than 10 kg, whereas China’s per capita consumption is ~55-60 kg against the global ~21-22kg.
“In terms of per capita tubes consumption, India’s is less than half of the global standard and about one-fifth compared to China’s. So, there is a lot to proceed for, going forward,” stresses Chakraborti.
In a broader sense, demand for steel and ductile pipes and tubes is high. Under steel pipes and tubes, ERW, seamless, and SAW enjoy the most demand. Tata Steel and Tata Steel BSL Ltd combined have a presence in the ERW segment while Tata Metaliks has a presence in the ductile iron pipes and tubes space.
In Q1, the market saw demand fall by 25%. Will Q2 see a recovery?
Yogesh Kumar Bhatia, Head, Tube Mills, P P Rolling Mills Mfg Co Pvt Ltd, India, says: “The Indian government has been announcing that the steel production capacity of the country is increasing every year. A few days ago, the government also said in a webinar that by 2025, it has a target of going to 250 MnT, but I don’t think that will be possible. The world standard says that 10% of the steel produced gets consumed in the tubes industry – it is used in making tubes. So, if India is going anywhere near, say 200 MnT of steel production, we will be looking at a tube making capacity of nearly 20 MnT….”
But, as per Bhatia, about 12-13 MnT is actually being used or produced at present.
Bhatia observes that in the next five years, demand for pipes and tubes will increase as the government has announced various projects irrespective of COVID. He says, “Many projects have slowed down for the initial three months because there was a virtual lockdown, but the industry players have woken up and want to cover the ground within the balance nine months available with them.”
“Typically, the last four or five years have shown that every year, including the medium-sized tubes mills, about 1.2- 1.3 MnT of capacity is being added in the country and this growth will continue at least for the next 10 years as the government has plans to increase capacity to 300 MnT by 2030. There is no reason why tube making capacity will not increase,” he adds.
That apart, a lot of demand is coming in from the gas pipeline and water distribution sector in cities. “The only hindrance I see is that 40-50% of the total production capacity comprises very low productivity mills that do not have the technology being used in Europe or other developed countries. We feel there is a lot of scope for replacing the existing low productivity mills. The organised sector, comprising of high productivity mills, is going to replace the existing low production mills,” he insists.
Bhatia says: “I have been hearing for the last 30 years that the pipes and tube industry’s growth is not much and prospects are not good either, but this industry is growing. I am certain it will follow a similar path over the next 10 years as well.”
Will the segment see a similar capacity addition of 1.2- 1.3 MnT, that had been happening every year, this year too?
In spite of the COVID pandemic, the mills are hopeful they will definitely touch last year’s sales turnover and further improve upon that.
“We see a lot of new projects in the discussions and negotiations phases. Some of the projects are being held up amid travel restrictions, but we are in touch with our customers. Once travel restrictions are lifted, we will move further with those projects,” Bhatia says.
“When we supply a project, especially turnkey projects, our teams need to travel. Even during the pandemic, we have been carrying out our erection and commissioning, not only in India but globally. Our employees are working in Africa and neighbouring countries. Even during this COVID period we commissioned a tube mill in Chhattisgarh,” he informs.
P P Rolling Mills started three years back in collaboration with a German company, and has done about 10 lines and another five are in the pipeline. It just launched its line in an African market, where it sees huge scope in being an alternative to the European suppliers.
Echoing similar sentiments, Sudhir Goyal, Managing Director, Madhav KRG Limited, India informs that COVID has definitely dented demand across the sector, and that too when there are talks that the pandemic is yet to reach its peak in India. At the same time, he is quite hopeful that demand will recover in the early part of next year, say from January 2021 onwards, and at a very fast pace, “as we have seen six to nine months of a lull period in demand or no growth. I am quite hopeful that next year, we should get very good demand growth,” stresses Goyal.
Subscribing to the same view Renil Antony, Senior Manager, Metal One Corporation, India, informs that initially when the pandemic started, not only in oil and gas pipeline space, but throughout sectors, steel, automobile etc, everyone was affected and it was difficult to get used to this new normal. But now people are moving on positively.
“Particularly for the oil and gas pipeline industry, I would say, it is not only COVID which has affected business but also the oil prices. We are still not very clear, but feel, by early next year, at least, oil prices should recover…,” Antony avers.
“If the scenario remains like this, then all the big oil and gas companies will keep suffering and all the pipeline projects will be put on hold or may get postponed,” he warns.
With respect to Indian gas pipelines, some tenders were recently floated by GAIL. There is expectation that many more pipelines tenders would be floated in the coming months. The industry is seeing a positive momentum at present and expects sentiments to improve further and demand to be back to normal by early next year, with the recovery in oil prices.
Steel Pipes & Tubes Versus Patra
In the rural-urban flip flop, demand in the former is gaining ground, at say 60% now. Amidst the pandemic, low-cost patra-based manufacturers possibly catered to the rural demand, posing a big challenge to pipes and tubes manufacturers since the price-sensitive rural population would likely opt more for patra-based products.
However, Anubhav Gupta, Chief Strategy Officer, APL Apollo Group, India, informs that patra has been present for ages, and the HR coil-based steel tubes industry has grown over the last 15-20 years in a big way despite patra.
“This market was always present, but over the last 5 to 10 years, even the rural consumer wants to have a solid structure. Whether he’s building a house or for commercial use, he does not want to compromise on quality. Ultimately, that structure is going to be used by his family or self,” he reasons.
So, many agree, if consumers want good quality, they are opting for HR coil-based steel tubes against patra. But they feel, yes, around 2-3% of demand might get disrupted due to patra but not beyond that, basis the Indian consumer is going for better quality products. “In fact, our market share in the last four or five months has increased to 50% which was 40% in March this calendar and this is because of our aggressive sales strategy in the rural markets,” Gupta informs.
There is a feeling that there would be a huge upturn in the rural economy over the next 6-9 months after the massive reverse migration to tier 2 and 3 towns and thus many mills aggressively marketed their products in the hinterland.
“The benefits are visible. The patra market has always been present but the tubes companies in India have grown despite it,” reveals Gupta.
Will patra prices dent the market?
Chakraborti says, “A good monsoon has given spending power to rural and small-town economies. When it’s about rural, I also mean semi-urban.”
Since COVID has led to a primarily work-from-home scenario, people actually migrated back from big cities to their homes in semi-urban and rural locations. Three factors are driving demand for good quality pipes and tubes. One is that the good monsoon has increased spending power and second, the growing aspiration of people living in these areas. Thirdly, schemes like Pradhan Mantri Awas Yojana, which has given a fillip to affordable housing, has also increased demand for pipes and tubes in a bottom-of-the pyramid approach.
Goyal of Madhav KRG says, he is hopeful that demand from the rural segment will be higher than in urban. “HR coil pipes and tubes product demand is increasing gradually as quality consciousness and awareness is increasing, particularly in the rural segment,” he observes.
Will Govt Projects Get Delayed Further?
According to sources, many government projects have been delayed because of COVID and economic slowdown. Godfrey John, Director & Business Unit Head, India, APAC & EMENA, Welspun Corp Limited, says, “We did go through some rough times, as we saw COVID and the crude meltdown. Yes, of course, it affected oil and gas pipeline construction. But the public sector undertakings in the country regrouped and got back on track …the direction was shown by oil companies like Indian Oil, BPCL and GAIL.”
The government, on its part, has taken initiatives on infrastructure development. About INR 73,000 crore of investment in laying of gas and crude pipelines is planned and stress is being put on development of the north-eastern corridor, the eastern states etc.
Welspun is looking at multiple projects from GAIL for gas lines and from Indian Oil for LPG lines which are all in the construction phase. Even if there was a slowdown in the domestic market a couple of years back, going by the way the ministry has been initiating action, Welspun feels around “a million tonnes every year would be a reality for us and that’s going to be a huge plus for oil and gas pipelines,” he forecastes.
COVID was a reason for the crude meltdown because consumption was out. Oil companies in global markets withdrew their capex for this year but the same is in a process of coming back on stream. “Some of the projects which were up for bidding were withdrawn from the market but a few months down the line, they are coming back. Most of the international projects will come back on the drawing board and that’s where the market will firm up again,” John explains.
Future Of Commercial, API Grades Imports
Where specifically the oil and gas segment is concerned, there is an increased dependence on domestic steel mills. John says Welspun has been developing a special grade of steel for its oil and gas pipelines.
The government is stressing on indigenous production even in the case of pipes. Many agree that steel pipes and tubes user industries must definitely depend on the domestic products first and, if required, opt for imports.
SAW pipes face a threat of substitution in sewage and sanitation from ductile iron pipes.
The oil and gas sector is the main driver of S&S pipes. Investments in oil and gas depend largely on the overall economic scenario and crude prices.
Any sharp or sudden fall in raw material prices leads to inventory loss for ERW players as raw material cost accounts for almost 80% of their total revenues. For instance, an 8-10% fall in HR coils prices in the third quarter of 2018-19 saw majority of the ERW players booking losses.
However, ERW pipe manufacturers have an inverse correlation with steel prices. This is because changes in the prices of raw materials are passed on with a bit of a lag, the CRISIL report states.