Declining investments in the oil and gas industry globally and increasing opportunities in the domestic sector have led to increase in domestic consumption of HSAW pipes at a faster pace. However, challenges are expected to continue in the medium term on account of subdued order inflows and excess capacities by the domestic manufacturers. Over the long term, though, the outlook of the industry is expected to remain stable as capacity utilisation levels of domestic SAW pipe players are expected to improve gradually. Furthermore, realisations are expected to improve in FY18 on the back of increase in steel prices during FY17. EPC&I take a peek at the India Saw Pipe Industry.

Despite the present economic pressures post-implementation of GST and banks tightening loan disbursals, the balance has tilted towards India. Foreign Direct Investment (FDI) received in Construction Development sector from April 2000 to March 2017 stood at US$24.3-billion, according to the Department of Industrial Policy and Promotion (DIPP). And, one of the sectors that has seen growing interest is the Pipes industry, which has seen a flood of capital investments, resulting in modernisation and capacity creation.
The government, in the Union Budget for 2017-18, increased the allocation for the Ministry of Water Resources from `4,756-crore (in FY17) to `6,887-crore for FY18. There has been a major investment in natural gas grid by the Ministry of Petroleum and Natural Gas. India is also seeking to double its existing gas pipeline infrastructure of 15,000 km, as the government aims to provide a clean energy source to consumers.
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 US$30-billion worth of pipeline projects are currently under the planning and construction stage. On the domestic front, the Prime Minister’s north-east policy offers immense potential in infrastructure development, which includes transportation of gas and water. This alone, say industry experts, is set to boost demand of steel pipes in the next few years. In fact, the turnaround time has started with the implementation of ‘Urja Ganga’ project by the Gas Authority of India Ltd., which has floated a tender for 547,000 tonnes of steel pipe requirement for FY 2017-18.
Moreover, the government’s focus with regards to creation of infrastructure, especially in energy sector with its proposed 15,000 km national gas grid planned for implementation in phases in coming years has come as a boost for the pipes industry. This too, say industry experts, will further drive demand up in the next few years for pipes as expansion of national gas grid and new water projects across the country would mean higher domestic orders and revenues over the next two years at least. Huge demand for large diameter pipes is expected in the months to follow, with states like Telangana, Andhra Pradesh, Gujarat, and Madhya Pradesh being the major drivers for 2017-18, say industry experts.
Until recently, imports from China were a major challenge for local manufacturers. But, that seems to be a closed chapter for now, with the government addressing the issue in a recently announced policy, mandating to provide preference to domestic products in government procurement. Imported steel must undergo a minimum prescribed value addition of 15 percent in order to be eligible for procurement by government departments.
Nevertheless, low penetration of pipes coupled with the various initiatives taken by the government – setting up National Gas Grid and revamping the water and sanitation infrastructure – provides domestic business opportunity of more than `30,000-crore. One of the main beneficiaries of this is the `235-billion Indian Line Pipe industry, which is among the top three manufacturing hubs for SAW pipes.

International Demand Drivers for SAW Pipes
According to a recent report by CARE Ratings, 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 percent in 2016, marginally higher than the rate of growth seen in 2015, but slower than the average (1.7 percent) seen over the past decade.
Much of this weakness, the CARE Ratings report suggests, 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. And, so, Oil and Natural Gas industry continue to offer larger opportunities for the pipe manufacturing companies.
The global demand for energy is estimated to grow at a CAGR of 1.4 percent to reach 17,157 mtoe (million tonnes of oil equivalent) by 2035. China will continue to be the largest consumer of energy as its requirements are estimated to grow at a CAGR of 1.7 percent to reach 4,425 mtoe by 2035. This, the report suggests, will be 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 percent – to reach 1,603 mtoe by 2035, and is poised to be the third-largest consumer of primary energy. 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. And, since more than two-thirds of oil and gas reserves are found in the 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 percent to 4,382mnt in 2016 vis-à-vis 2015, slower than the five year average growth of 1.8 percent. 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 percent to reach 4,768 mnt by 2035.
Oil consumption in 2016 grew by 1.8 percent over 2015, outstripping the oil production and the five year average consumption growth of 1.4 percent. Asia Pacific (3.4 percent) and Europe (2.2 percent) were the major contributors of this growth.
According to a recent Platts survey, OPEC’s 14 members saw their collective September output rise to 32.66 million b/d from 32.65 million b/d in August. As per BP Energy Outlook, by 2035, the consumption is estimated to touch 5,022 mnt growing at an average of 0.7 percent, outstripping the production growth.

Natural Gas
Global natural gas production grew by 0.6 percent in 2016 to 3,552bcm, slower than its five year average of 1.5 percent. Middle East (3.6 percent) and Asia Pacific (3.2 percent) 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 percent to reach 4,805bcm by 2035.
Global natural gas consumption grew by 1.8 percent in 2016 to 3,543bcm, at par with its five year average of 1.8 percent. As with oil, natural gas consumption growth was driven by Asia Pacific (3.0 percent) and Middle East (3.8 percent). Going ahead, according to the research report, by 2035, the consumption growth is estimated to be at par with the production and grow at an average rate of 1.6 percent to 4,798bcm.

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 and production activities.
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 percent over 2016, the average rig counts until July 2017 have also increased proportionally by 24.8 percent to 1,990.
According to the report, the demand for steel pipes is directly proportional to the investments made in the oil and 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.
As per Pipeline & Gas Journal, more than 130,000km of oil and gas pipeline is expected to be laid over the next 2-3 years, presenting an opportunity of close to US$30-bn to the steel pipe manufacturers. Of the 134,866 km, 61,783km are in engineering and design construction phase, whereas 73,084 km are in the construction stage. 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, thus providing investment opportunities worth US$11.3-bn.
Apart from this, 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 US$275-bn.
With steel pipes accounting for 40 percent of the demand pie, it provides steel pipe manufacturers with a business opportunity of more than US$110-bn over the next 15 years. The demand arising due to replacement of old pipes in USA is largely 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 US$7.0-bn. Investments worth US$3.3-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.

Domestic Scenario
The domestic Pipe Industry is among the top three manufacturing hubs after Japan and Europe. However, the penetration level of pipelines in oil and gas transportation is quite low at 32 percent in India as compared to 59 percent in USA and 79 percent globally. It is this low penetration of pipes in the domestic market that provides a huge business opportunity.
The Indian line pipe industry is pegged at `235-bn, according to CARE Research report. Pipelines are the most economical mode of transport as compared to roads and rail. The capital cost of laying down a pipeline is `4-5-crore/km, whereas the operating cost is as low as `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 valuable currency 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.
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 percent to 474 mmscmd by FY30, whereas the realistic demand for Natural Gas is expected to increase at an annual growth of 6.83 percent 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 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.
Many domestic players, such as GAIL, GSPC and IOC, have already undertaken expansion plans to increase their pipeline network. At present, 12 projects with total length of 13,821 km 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 `11,500-crore.
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, with an investment of over `8,000-crore. This proposal is currently under the feasibility phase. The government’s total capital outlay for the midstream segment in North East India is pegged at `20,000-crore, to be invested by 2030.

Water/Sanitation Sector
With the government’s increased thrust on improved water supply and 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. These projects are beneficial to the HSAW pipe players as these pipes are used in water distribution.

Domestic Trends and Outlook
Indian steel pipe production has grown at an average rate of 2.1 percent over the past five years – to 2.6mnt in 2015-16. Declining investments in the oil and gas industry globally and increasing opportunities in the domestic sector led to increase in domestic consumption at a faster pace of 11 percent over the same period to 2.1mnt.
According to CARE Ratings report, challenges are expected 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.