Russian Pipe Makers Show Competition The Door

09.10.2009 — Analysis

The Pipe Industry Development Fund is lobbying the bill that would privilege Russian manufacturers in supplying pipes for the Nord Stream and South Stream pipelines. This idea found understanding in the Committee on Industry of the State Duma and the Government of the RF. The RusBusinessNews observer has found out that Russian metal makers are attempting to restore the leadership role they once had in the pipe industry by employing protectionist tactics and borrowing foreign technologies.

In October JSC Pipe Metallurgical Company will start shipping oil pipes to the Serbian NAFTNA INDUSTRIJA SRBIJE (NIS), whose controlling interest is owned by Gazprom Neft. Russian have narrowed Austria's Voest Аlpine which does not happen very often. More often it is the other way around - EUROPIPE (Germany) is supplying up to 75% of large diameter pipes for the first train of the Nord Stream project. Manufacturers of medium diameter stainless pipes have all but surrendered the domestic market to pipe makers from China, France, Brazil, and Ukraine which forced the Russian Government to introduce the 28.1% duty in the end of September.

In September the Russian Ministry of Industry and Trade began examining the situation with imports of large diameter pipes. The request to start the inquiry was initiated by the Chelyabinsk Tube-Rolling Plant (ChTPZ Group), Vyksa Steel Works (United Metallurgical Company), Volzhsky Pipe Plant (Pipe Metallurgical Company). Three years ago, a similar inquiry ended with the introduction of the 8% duty for foreigners.

Aleksandr Deineko, the Director of the Pipe Industry Development Fund, explained that the Russians want to put all manufacturers in the world in equal conditions. The duties are there to level off the concessions given to the pipe makers by governments of China and Ukraine. The protection measures are bearing real fruit, imports of large diameter pipes in Russia has decreased eight times in 2006-2008. The RF Ministry of Industry and Trade claims it will continue to decrease this year, the volumes of shipments from Ukraine have reduced from 14.4 thousand tons to 3 thousand, and from China, including Taiwan - from 27.1 thousand to 0.1 thousand. The shipments from Japan and EU countries have increased, however, which has not reflected in the general trend - large diameter pipe imports are continuing to fall.

The situation with stainless pipes of medium and small diameter is, in Aleksandr Deineko's words, totally criminal. Customs machinations involving under-declaration of the price of products and bogus declarations led to the situation when only a quarter of Russian pipe plants' capacities is used. Law enforcement agencies are sorting out the situation with the imports.

The Director of the Pipe Industry Development Fund thinks it is a political mistake to give a carte blanche for the German EUROPIPE to supply pipes for Nord Stream. Usually the options to supply equipment for projects implemented by different countries are rigidly tied to the proportion of the share capital in the joint ventures. Gazprom holds controlling interest in all the projects being implemented. However, with the abolishment of the Production Sharing Agreement in which the Russian share was fixed at 70%, the orders for the domestic equipment have dropped rapidly, they have not exceeded 10% in the Sakhalin 2 project according to experts' estimates. A similar picture can be observed at other Gazprom's large scale projects; thus, pipe makers were forced to approach the RF Government with the proposal of fixing the proportion of domestic equipment supplied to the oil and gas sector. This, in Aleksandr Deineko's opinion, should be no lower than 51%.

Russian pipes' quality, the expert is convinced, is in no way lower than that of Japanese or American made pipes, they do withstand pressures up to 150 atmospheres today while the foreign pipes are designed to withstand only 120. The work on the quality of pipes is ongoing: Gazprom insists that the metal must withstand 250 atmospheres. This is due to the hard natural conditions in the areas where the pipeline will have to function. In Yamal and Eastern Siberia with the frozen soils thawing in the summer, aggressive environment and seismic activity the conditions are even worse than at the sea bed. Gazprom is toughening the requirements for the gas transportation system accordingly.

Domestic pipe makers, Aleksandr Deineko is certain, will manage to reach these targets. Metal makers have replaced practically all their equipment in recent years, having spent more than 3 billion dollars on production capacities for single seam large diameter pipes. A thick sheet mill at Magnitogorsk Iron & Steel Works for sheets as wide as 4.8 metres has been started up in the summer 2009. With the completion of the workshop for making single seam large diameter pipes with external and internal anticorrosion coating at the Chelyabinsk Tube Rolling Plant, Russia will, in Aleksandr Deineko's opinion, have the state of the art production capacity with which even the recently built Bao Steel combine would not be able to compete.

However, the statistics from the RF Ministry of Industry and Trade show that the domestic manufacturers in January - May 2009 have sold 39% less large diameter pipes in the domestic market than in 2008. The proportion of companies which instigated the Governmental inquiry has dropped by 16.5% in the domestic market. This is what forced them to resort to coming to authorities with the request of introducing prohibitive duties.

The experts point out that having the state of the art equipment alone can not guarantee broadening sales markets. It is impossible to make good quality pipes out of low quality metal. Evelina Grigoryeva, the Manager of the Public Relations Directorate of CJSC ChTPZ Group, pointed out that the problem with the quality of metal does exist, but did not go into details and advised talking to metallurgists about it.

Anatoly Filippenkov, the Director General of the Scientific and Production Enterprise "FAN", Doctor of Technical Sciences, explained that in order to make the working life of steel parts various additives are introduced into the metal; these are supplied by many different companies, including small ones. Not all of them adhere strictly to process cycles, which leads to whole smelts being rejected.

Aleksandr Bogatov, the Head of the Department of Metal Deformation Process of the Urals Technical University, thinks that the metals sector is continuing to fall apart altogether. Specialists over 60 leave and there is no one to replace them.

Purchases of the state of the art equipment are unlikely to alter the situation fast. You have to know how to use these new technological and technical capacities. The Pipe Metallurgical Company, for instance, sees the mastering of the equipment commissioned in recent years as a priority goal for the nearest future. It is obvious that this will not always go smoothly, judging by experience in related industries.

The shining example of this is the purchase of German equipment for making railway wheels by OJSC Nizhniy Tagil Iron and Steel Works. The Germans have installed the line and left, not having finely tuned the technological process. Now the company is carrying heavy losses: every fifth finished product is rejected, claims Mr. Bogatov. Russian specialist are still failing to rectify the situation, possibly due to the loss of the engineering academic schools.

The lack of production capacities in the eastern regions of the country complicates thing even further. Huge distances make the shipments of pipes for the Sakhalin-Khabarovsk-Vladivostok project from the Urals unprofitable. Russian manufacturers still cannot decide where a new plant should be built as the country's power generation strategy has not yet been finalised.

Everybody seems to understand that Gazprom is planning the modernization and expansion of the gas transportation network and the development of new fields. Metal makers are being told, "Be prepared, we will soon millions of tons of state-of-the-art pipes". The pipe makers are preparing: according to Aleksandr Deineko the capacities for the single seam pipe manufacturing today amount to 2.3 million tons. In 2010, with the commissioning of the workshop at ChTPZ, this will increase to 2.9 million tons. In the future Russia will make 6 million tons of large diameter pipes. 

The problem, however, is in that the pipe makers, working in anticipation, are creating excessive capacities. These capacities are not working because the pipes can not be shipped to the Far East for economic reasons. This is the possible cause for the Pipe Industry Development Fund's efforts to lobby the bill limiting the share of foreign pipe makers in Gazprom's projects.

In unofficial talks there is some information that the second train of the Nord Stream, as well as in all other Gazprom's projects, will already not be dominated by the foreign companies as the Russian President, allegedly, has asked the gas monopoly to place the orders with Russian manufacturers. In the meantime there is a rumour in the market that Gazprom has asked Tokyo for a loan for the implementation of the Far East project. The Japanese have promised to deliver, but only in exchange for the orders of their pipes.

Vladimir Terletski