Steel pipe makers to gain as city gas distribution licenses favour welders

A Crisil report says CGD orders will need at least 10,000-15,000 km a year of pipes through fiscal 2029, entailing an opportunity of over Rs 5,000 cr a year over 10 years

Steel pipe makers in the country will benefit from the implementation of the recently awarded city gas distribution (CGD) licenses. The award of licenses is set to offer a big fillip to makers of electric resistance welded (ERW) and submerged arc welded & seamless (S&S) segments.

A report by Crisil estimates that CGD orders will require at least 10,000-15,000 kilometres per annum of pipes through fiscal 2029, entailing an opportunity of over Rs 5,000 crore per annum over 10 years.

Terming the CGD orders to be potential game changers, the report says over 10 rounds of bids for CGD orders for 228 geographical areas are expected to generate an investment of over Rs one trillion (more than 80 per cent still to be incurred).

In order to increase domestic output and cut imports, the Union government has offered 23 more oil and gas and CBM (Coal Bed Methane) blocks, covering over 31,000 square kilometres (km), for bidding in the third round of Open Acreage Licensing Policy (OALP). So far, more than 120,000 sq. km has already been made available for exploration under the three rounds.

The country’s steel production is estimated to be in excess of 100 million tonnes (mt) in 2019-20. Almost the whole of this crude steel output is anticipated to be consumed in the country.

Steel pipes have eight per cent share in the domestic steel consumption. Estimated at Rs 50,000 crore by value, the steel pipe industry is split equally between ERW and S&S segments. In volume terms, the domestic market is split between ERW and S&S in the ratio of 70:30.

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 capital expenditure (Capex) of Rs 600-800 crore in fiscal 2020 for balancing requirements and in value-added segments. Despite the capex, utilisation levels are expected to increase to around 50 per cent in fiscal 2020, compared with 46 per cent in fiscal 2019.

Domestic demand for steel pipes has logged a steady 4.5 per cent compound annual growth rate (CAGR) in the past five years. In the next five years, this is expected to improve to seven to eight per cent (higher for ERW vis-à-vis S&S), driven by investment in water supply and sanitation projects, irrigation, CGD projects and increased usage of structural pipes in infrastructure projects, the report by Crisil noted.