Executive Summary

The growth constituents of global economy have seen a dramatic shift

in the past decade. i) The boom and bust of the global financial

markets, ii) economic downturn in western economies, iii) increased

instability in the Middle East, iv) growth and increase in the share of

Asian economies excluding Japan in the global GDP and v) the

unfaltering growth rate of Indian economy.

The buoyant Indian economy which had risen to the forefront saw a

flood of capital investments in the Indian SAW pipe industry resulting

in modernisation and capacity creation.

The boom in the global economy was expectedly followed by the bust

which led to the slump in crude prices, recession in the global oil &

gas industry, drying up of orders, low capacity utilisation and

eventually over leveraged balance sheets.

Nevertheless, the Rs 235 billion Indian Line Pipe industry which is

among the top three manufacturing hubs for SAW pipes and one of

the leading exporters was able to weather the gloom and is ready to

exploit the large growth potential in waiting.

With the uptick in global economy, the oil & gas industry continues to

offer larger opportunity for the pipe manufacturing companies over

medium to long term as close to USD 30 billion worth of pipeline

projects are currently under the planning & construction stage.

On the domestic front, low penetration of pipes coupled with

government’s thrust on setting up National Gas Grid and revamping

the water and sanitation infrastructure provides domestic business

opportunity of more than Rs.30,000 crore.

CARE Ratings expects capacity utilisation levels of domestic SAW pipe

players to improve gradually on back of 1) Government’s initiative to

increase gas pipeline network, 2) Investments planned in the Middle

East and North America.

August 31, 2017 I Ratings

INDIAN SAW PIPE INDUSTRY –

OPPORTUNITIES IN PIPELINE

Contact: Revati Kasture Senior Director revati.kasture@careratings.com 91-22-6754 3465

Pulkit Agarwal Associate Director pulkit.agarwal@careratings.com 91-22-6754 3505

Ankit Shah Deputy Manager ankit.s@careratings.com 91-22-6754 3645

Mradul Mishra (Media Contact) mradul.mishra@careratings.com 91-022-6754 3515

Disclaimer: This report is prepared by CARE Ratings Ltd. CARE Ratings has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Ratings is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE Ratings has no financial liability whatsoever to the user of this report

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Product Background

Submerged Arc Welded (SAW) pipes are large diameter steel pipes which find use in transportation of oil, gas and water

over long distance under high pressure conditions. SAW pipes are classified as Longitudinal Submerged Arc Welded Pipes

(LSAW) and Helical Submerged Arc Welded Pipes (HSAW). The differentiating factors between LSAW and HSAW are:

Table 1 – Product Summary

Particulars LSAW HSAW

Size 16" to 60" diameter 20" to 140" diameter

Key Raw Material Steel Plates Steel Hot Rolled Coils

Manufacturing Process Longitudinally submerged arc welding of steel

plates Spirally Welding HR Coils

Key Difference

High Pressure conditions Low Pressure conditions

Demand is directly related to Oil & Gas Sector Demand is directly related to Oil & Gas Sector,

Water and Sanitation Sector

Application Oil & Gas Transportation Oil & Gas/Water Transportation

Key Players Welspun Corp, Jindal Saw, Man Industries PSL, Welspun Corp, Man Industries, Jindal Saw

International Demand Drivers

The growth constituents of global economy have seen a dramatic shift in the last decade. i) The boom and bust of the

global financial markets, ii) economic downturn in western economies, iii) increased instability in the Middle East, iv)

growth and increase in the share of Asian economies excluding Japan in the global GDP and v) the unfaltering growth rate

of Indian economy.

In recent years, there has been a gradual deceleration in global energy consumption as the huge boost experienced from

globalisation and Chinese industrialisation has started subsiding. The slowdown in consumption growth is compounded by

continuing weakness in the global economy. As a result, global primary energy consumption grew by just 1.3% in 2016,

marginally higher than the rate of growth seen in 2015, but slower than the average (1.7%) seen over the past decade.

Much of this weakness is driven by China, where energy consumption grew at its slowest rate in almost 17 years. Even so,

China remained the world’s largest market for energy for the eighth consecutive year.

Oil and Natural Gas industry, however continues to offer larger opportunities for the pipe manufacturing companies. The

global demand for energy is estimated to grow at a CAGR of 1.4% to reach 17,157 mtoe (million tonnes of oil equivalent) by

2035. China will continue as the largest consumer of energy as its requirements are estimated to grow at a CAGR of 1.7% to

reach 4,425 mtoe by 2035 followed by U.S.A. (2,312 mtoe). India’s energy requirement is estimated to grow the fastest in

the world at a CAGR of 4.3% to reach 1,603 mtoe by 2035 and is poised to be the third-largest consumer of primary energy.

Ratings I Indian SAW Pipe Industry – Opportunities in Pipeline

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Limited reserves of crude oil and increase in production of natural gas, a cheap and cleaner alternative to crude has led to

increase in consumption of the latter to 3,543 bcm (billion cubic metres) in 2016.

As more than two-thirds of oil & gas reserves are found in Middle East and Eurasia, transportation of gas to deficit regions

of Asia and Europe entails huge demand for steel pipes.

Oil

Global oil production grew by 0.5% to 4,382mnt in 2016 vis-à-vis 2015, slower than the five year average growth of 1.8%.

The decrease was primarily driven by Non-OPEC countries. Over the longer term oil production is estimated to grow at an

average of 0.4% to reach 4,768 mnt by 2035.

Oil consumption in 2016 grew by 1.8% over 2015, outstripping the oil production and the five year average consumption

growth of 1.4%. Asia Pacific (3.4%) and Europe (2.2%) were the major contributors of this growth. As per BP Energy

Outlook, by 2035, the consumption is estimated to touch 5,022 mnt growing at an average of 0.7%, outstripping the

production growth.

Chart 1 – Global Crude Oil Production and Consumption

Source: BP Statistical Review of World Energy, 2017 and CARE Ratings

Higher crude prices during 2010-12 facilitated investments in the exploration activities which led to production growing at

an average of 2.1% till 2015, outstripping consumption which grew at an average of 1.2% during the same period. The

uncertain global environment post the financial crisis and rationalisation of manufacturing capacities by China led to

surplus crude inventories during 2015 for the first time in the past decade causing the crude prices to crash. Crude prices

bottomed out during the start of 2016 to USD30.70/bbl however prices have been making a steady recovery from the

second half of 2016.

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Chart 2 – Crude Oil Price movement vis-à-vis Inventory Levels

Source: BP Statistical Review of World Energy, 2017, EIA and CARE Ratings

Natural Gas

Global natural gas production grew by 0.6% in 2016 to 3,552bcm, slower than its five year average of 1.5%. Middle East

(3.6%) and Asia Pacific (3.2%) recorded the largest growth increment. As per BP Energy Outlook, 2017, going ahead, natural

gas production is estimated to grow at an average rate of 1.6% to reach 4,805bcm by 2035.

Global natural gas consumption grew by 1.8% in 2016 to 3,543bcm, at par with its five year average of 1.8%. As with oil,

natural gas consumption growth was driven by Asia Pacific (3.0%) and Middle East (3.8%). Going ahead by 2035, the

consumption growth is estimated to be at par with the production and grow at an average rate of 1.6% to 4,798bcm.

Chart 3 – Global Natural Gas Production and Consumption

Source: BP Statistical Review of World Energy, 2017 and CARE Ratings

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Global Pipeline Projects

The investments in the oil & gas sector are directly proportional to the crude oil prices. Active rotary rig counts are one of

the best indicators to gauge the ongoing exploration & production activities.

Chart 4 – Average Rigs Deployed

Source: Baker Hughes, EIA and CARE Ratings

From the highs of 3,494 average rigs deployed during 2011-2014, with the peak in 2014, the average rig counts slumped to

1,594 on account of falling crude prices globally during 2015-2016. However, with the recovery in crude prices in 2017 by

22.5% over 2016, the average rig counts till July 2017 have also increased proportionally by 24.8% to 1,990.

As a corollary, the demand for steel pipes is directly proportional to the investments made in the oil & gas sector and

therefore is highly vulnerable to the fluctuations in oil prices. Lower oil prices reduce the demand for pipes as many

projects get postponed or cancelled. Welded tube/pipe production (ex-China) as well as planned pipeline projects has

moved in tandem with the crude prices albeit with a lag effect.

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Chart 5 – Welded Tubes Production vis-à-vis Crude Oil Price

Source: World Steel Association, EIA and CARE Ratings

Chart 6 – Movement of planned pipeline projects vis-à-vis Crude Oil Price

Source: Pipeline & Gas Journal, EIA and CARE Ratings

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As per Pipeline & Gas Journal, more than 130,000km of oil & gas pipeline is expected to be laid over the next 2-3 years,

presenting an opportunity of close to USD 30bn to the steel pipe manufacturers. Of the 134,866 km, 61,783km are in

engineering and design construction phase whereas 73,084km are in the construction stage.

Table 2 – Pipelines Planned and Under Construction

Region Length (km) Tonnage (mnt) Investments (USD bn)

North America 51,200 10.2 11.3

South/Central America 7,532 1.5 1.7

Africa 6,412 1.3 1.4

Asia Pacific 31,926 6.4 7.0

Former Soviet Union 20,448 4.1 4.5

Middle East 14,833 3.0 3.3

Western Europe 2,515 0.5 0.6

Total 134,866 27.0 29.7

Source: Pipeline & Gas Journal and CARE Ratings

North America, one of the largest consumers of Indian pipes is expected to lay down 51,200 km of pipeline involving

10.2mnt of steel pipes over the next 2-3 years providing investment opportunities worth USD11.3 bn. Apart from the

above, in USA more than 1.0 mn km of large diameter pipelines have been laid prior to 1975. These pipes have outlived

their economic lives of 30 years and due to few accidents, there has been a pressing need to replace these pipes. The

replacement pipe demand in USA is pegged at USD275 bn. With steel pipes accounting for 40% of the demand pie, it

provides steel pipe manufacturers with a business opportunity of more than USD110 bn over the next 15 years. The

demand arising due to replacement of old pipes in USA is also expected to increase the opportunities for Indian players.

While in the Asia Pacific region, close to 32,000 km of pipeline is expected to be laid involving 6.4 mn tonnes of steel pipes

over the next 2-3 years, representing investments worth USD 7.0 bn. Investments worth USD3.3 bn in the pipe industry are

expected in the Middle East. Being in close proximity to the Middle East, Indian companies have a competitive edge over

Japan and Europe as they are able to save on freight costs.

India being one of the largest manufacturers and a leading exporter of SAW pipes, its exports are directly influenced by the

price movements of international crude oil prices albeit with a lag effect.

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Chart 7 – India’s welded pipe exports

Source: Ministry of Commerce, EIA and CARE Ratings

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Domestic Scenario

The Indian Pipe Industry is among the top three manufacturing hubs after Japan and Europe. However, the penetration

level of pipelines in oil & gas transportation is quite low at 32% in India as compared to 59% in USA and 79% globally. The

low penetration of pipes in the domestic market provides a huge business opportunity. The Indian line pipe industry is

pegged at Rs.235 bn.

Pipelines are the most economical mode of transport as compared to roads and rail. The capital cost of laying down a

pipeline is Rs.4-5 crore/km whereas the operating cost is as low as Rs.0.5-0.6/tonne/km. The Indian government is

encouraging the use of pipes as this will reduce the costs of transportation and assist the Oil Marketing Companies (OMCs)

like HPCL, BPCL, IOC etc. to trim their under recoveries and the government will save in the form of lesser subsidy outgo.

In India as of January 2017, more than 42,000 km of pipeline has been laid for transporting crude, petroleum products and

gas. During recent years, the constitution of Petroleum and Natural Gas Regulatory Board (PNGRB), paving way for

implementation of National Gas Grid and thrust on City Gas Distribution have provided a shot in the arm to the line pipe

manufacturing industry.

Table 3 – Existing Oil & Gas Pipeline Network

Product Length (km) Unit Capacity

Crude Oil 10,215 mmtpa 139.20

Petroleum Product 16,080 mmtpa 104.50

Gas 16,121 mmscmd 383.80

Source: MoPNG

Natural Gas and Water/Sanitation sectors are expected to be the next growth drivers for domestic line pipe companies.

Natural Gas

In lieu of the increasing demand the government is seeking to expand its existing gas pipeline network under the National

Gas Grid project from 16,121 km to almost 30,000 km and the transmission capacity by 2.4 times from 383.8 mmscmd to

935.6 mmscmd over the next couple of years.

The increase in gas demand is aided by demand from user industries such as power generation, city gas distribution and

industrial requirements. As per PNGRB, the gas availability from domestic sources and imports is expected to increase at an

annual growth rate of 7.2% to 474 mmscmd by FY30 whereas the realistic demand for Natural Gas is expected to increase

at an annual growth of 6.83% to 746.0 mmscmd during the same period. Even as supply is expected to increase at a faster

pace, it will still lag the total realistic demand thereby further widening the demand-supply gap. In order to address the

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supply shortfall, the government will have to 1) increase investments in the exploration activities and/or 2) increase

imports through cross border pipelines. Both these options augur well for line pipe companies.

Chart 8 – Domestic Gas availability vis-à-vis demand

Source: MoPNG and CARE Ratings

Many domestic players such as GAIL, GSPC and IOC among others have undertaken expansion plans to increase their

pipeline network. At present 12 projects with total length of 13,821km are under the planning stage, providing an

opportunity to the Indian steel pipe manufacturers to supply more than 1.8 mnt of steel pipes worth more than Rs.11,500

crore.

Table 4 – Planned domestic pipeline projects

Entity Length (km) Capacity (mmscmd) Tonnes Value (Rs Cr)

GAIL (India) Ltd 1,063 16.00 119,588 777

GAIL (India) Ltd 315 16.00 53,156 346

GAIL (India) Ltd 2,112 74.81 343,200 2,231

GAIL (India) Ltd 2,539 16.00 253,900 1,650

GSPC India Transco Ltd 2,042 78.25 344,588 2,240

GSPC India Gasnet Ltd 2,052 77.11 288,563 1,876

GSPC India Gasnet Ltd 725 42.42 54,375 353

AP Gas Distribution Co. 391 90.00 32,991 214

Reliance Gas Pipelines Ltd 312 3.50 31,200 203

Gas Transmission India Pvt. Ltd. 250 36.00 32,813 213

Indian Oil Corporation Limited 1,385 84.67 155,813 1,013

H‐Energy Pvt. Ltd. 635 17.00 95,250 619

Total 13,821 551.76 1,805,434 11,735

Source: MoPNG and CARE Ratings

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Apart from the announced projects of 13,821 km, the government’s Hydrocarbon Vision 2030 for North East India entails

setting up another 6,894 km of pipeline network, which is currently under the feasibility phase, with an investment of over

Rs.8,000 crore. The government’s total capital outlay for the midstream segment in North East India is pegged at Rs.20,000

crore, to be invested by 2030.

Water/Sanitation Sector

With the government’s increased thrust on improved water supply & sanitation infrastructure, the line pipe demand in

India is expected to remain robust in the coming 3-5 years. The projects funded by the World Bank and Asian Development

Banks are scheduled to be completed by 2020.

Table 5 – Water/Sanitation projects

World Bank Projects USD (mn)

Shimla Water Supply and Sewerage Project 102

Assam Inland Water Transport Project 150

Uttarakhand Water Supply Program for Peri Urban Areas 150

Tamil Nadu Irrigated Agriculture Modernization Project 454

Rural Water Supply and Sanitation Project for Low Income States 500

Maharashtra Rural Water Supply and Sanitation Program 1,440

Water Sector Improvement Project 989

Total 3,785

Asian Development Bank Projects USD (mn)

Orissa Integrated Irrigated Agriculture and Water Management Investment Program 66

Sustainable Coastal Protection and Management Investment Program 63

Assam Integrated Flood and River-bank Erosion Risk Management Investment Program 120

Integrated and Sustainable Water Resources Management Investment Program 48

Total 297

Source: World Bank, Asian Development Bank and CARE Ratings

These projects are beneficial to the HSAW pipe players as these pipes are used in water distribution.

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Domestic Trends and Outlook

Indian steel pipe production has grown at an average rate of 2.1% over the past five years to 2.6mnt in 2015-16. Declining

investments in the oil & gas industry globally and increasing opportunities in the domestic sector led to increase in

domestic consumption at a faster pace of 11.0% over the same period to 2.1mnt.

Chart 9 – Production vis-à-vis Domestic Consumption

Source: CMIE and CARE Ratings

CARE Ratings expects challenges to continue in the medium term on account of subdued order inflows and excess

capacities by the domestic manufacturers. However, over the long term, the outlook of the industry is expected to remain

stable as capacity utilisation levels of domestic SAW pipe players are expected to improve gradually driven by 1)

Government’s initiative to increase gas pipeline network, 2) Hydrocarbon Vision 2030 for North East India and 3)

Investments planned in the Middle East and North America. Furthermore, realisations are expected to improve in FY18 on

the back of increase in steel prices during FY17.

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