Memo from Moscow

Russian tube and pipe sector

1st September 2010 Report

General review of tubular pipe sector in Russia

Russia is the world's third-largest manufacturer of tubular steel products. According to Rosstat, tube output in 2009 amounted to ~6.6mt, which is ~1mt less than the 2008 output of ~7.67mt. From the 2009 total, seamless pipe production was around ~2.2mt and welded pipe output was ~4.4mt.

On 2009 results, the supply share of main players in the Russian pipe market was approx. TMK 30%, United Metallurgical Company 19%, ChTPZ Group 15%, Severstal 10%, others 17%.

TMK's total 2009 pipe sales decreased by 14.2% to 2.77mt, including ~1.65mt of seamless pipes. Sales to customers outside Russia amounted to 0.916mt. Revenue fell by 39.2% to ~USD 3.46 billion as a result of a severe demand contraction across all key markets and because of unfavourable pricing in the seamless and welded pipe segments. Gross profit amounted to USD 556 million, a decline of 61.3% compared to 2008 as a result of lower capacity utilization rates and poor price levels. EBITDA fell by ~69% to USD 328 million.

Russian tubes and pipe consumption decreased in 2009 by 16% to 6.2mt (from 7.4mt in 2008). Imports amounted ~9 % (mostly from Interpipe of Ukraine - against which trade a customs duty of 8% was introduced). Exports increased by ~17% up to 1.58mt. Vyksa of OMK in 2009 produced ~1.5 mt of pipes, including 967,000 tonnes of large diameter pipe. In 2010, the Russian steel tubes and pipes market is likelt to expand to about 6.4mt.

The basic consumers of steel pipe and tube in Russia are the oil and gas sector (about 70 % of demand); the building industry (about 25 %); and mechanical and power engineering (about 5 %). Oil and gas demand therefore dominates by far. The greatest volume of pipes is consumed by the two big customers who are Gazprom and Transneft.

According to Rosstat data for the seven months of 2010, the volume of steel pipe production in Russia attained ~5.04 mt (138.5 % of the 2009 level). The Volzhsky plant (TMK) grew production by 2.1 times; Vyksa (OMK), Chelyabinsk and Pervouralsk pipe plants (ChTPZ Group) grew production by 31.5%, 32.7% and 33.2% respectively. The growth dynamics by main types of pipes for this period were electro-welded large diameter pipe (LDP) 176%, seamless pipes 131%, drill pipes 169%, well casing 133%, oil-products pipeline seamless 152% and oil-products welded pipe 124%.

In a recently updated Government report entitled 'Development strategy of the iron and steel industry of Russia to 2020', Russian pipe production is planned to increase 1.5-fold by 2020, with import falling 4-fold and export volumes rising 1.3-fold. The 2020 requirement for pipes by industry sector is envisaged at 6.9mt for the oil and gas industry, 2.7mt for the building sector and ~1.35mt for engineering applications.

Large-diameter Pipes sector

The last few years in Russia witnessed very strong development of LDP production; with one important aim being LDP import displacement. Readers should note that almost 100% of Russian LDP was imported a decade ago, with the main suppliers of 1420mm diameter LDP including Germany and Japan. The recent development of the LDP sector in Russia has seen the following.

• April 2005 saw the start-up in Vyksa (at the Vyksa Steel Works of ???) of the first Russian production line of 508-1420 mm diameter LDP (a production line supplied by SMS Meer with initial capacity of 450,000 tpy; current capacity ~900,000 tpy)
  
• In 2006, a new shop at the Izhora pipe plant (ITZ 'Severstal') for manufacture of 610-1420mm diameter LDP with capacity of 600,000 tpy was put on-stream, bases on in-house Soviet Heavy Plate Mill 5000 plate supply.
  
• In 2008 at the Volzhsky pipe plant (??? Group), additional start-up took place of spiral-seam 530-2520 mm diameter LDP. This plant was supplied by Haeusler of Switzerland, and has ~650,000 tpy annual capacity.
  
• In July 2010, the Chelyabinsk Tube and Pipe Rolling Mill of the ChTPZ Group saw start-up of the latest pipe shop. Named 'Height 239', this facility will produce single longitudinal-seam LDP with external and internal anticorrosive polymeric coatings. With construction started in 2008, the cost of this new facility is estimated at ~$700m for 600,000 tpy of 508-1420 mm, 48mm thickness and X100-grade capable capacity. As of July 2009, the Magnitogorsk heavy plate mill under a strategic partnership agreement is the main supplier of plates for production of pipes at the 'Height 239' facility.
  

All Russian LDP manufacturers have API Spec 5L, ISO 3183, Det Norske Veritas (DNV) certificates. DNV submarine pipeline systems certification enhances the ability of these pipemakers to participate in offshore pipeline projects; and Gazprom use DNV certified product as standard. Today, Russian tube and pipe companies supply high-quality tubular pipe to the Eastern oil pipeline (VSTO-2) project, and for the North Stream, South Stream, Sakhalin-Khabarovsk-Vladivostok, Shtockman and other trunk oil and gas pipeline projects.

Main gas and oil pipelines projects

Russian demand for LDP has increased steadily of late, driven by the construction of major Gazprom gas pipelines such as the Sakhalin-Khabarovsk-Vladivostok and Pochinki-Gryazovets projects; and by Transneft's VSTO-2 and BTS-2 projects. Today, Russian consumption of LDP is at a peak. Looking-ahead, given that Russia has about 150,000 km of existing pipelines (50,000 km of Gazprom; 20,000 km of Transneft; and about 80,000 km of other pipe) with 5% of the existing stock requiring replacement each year, the domestic demand forecast is therefore favourable. The export program of Gazprom also provides by 2025 for export of gas to Europe and Turkey at a volume of ~215 billion cubic m; with export to China via the 'Altai' gas pipeline of a further 30 billion cubic m. These plans will require additional LDP consumption of perhaps 25mt over the next five years. Since end-2008, whilst Gazprom buys all steel products including steel pipes on the basis of open tender, priority is given to delivery from Russian enterprises where possible. This bodes well for Russian producers of LDP as long as their cost competitiveness stays under control, for supply of 1420mm gas pipe to:

• Nord Stream (path length of 1,200 km start-up in 2011; with a second pipe length commencing in 2012)
  
• Bovanenkovo - Ukhta (1,074 km)
  
• Ukhta-Torzhok (2,500 km start-up in 2011)
  
• South Stream (900 km)
  
• Murmansk-Volkhov (1,300 km start-up in 2013)
  
• Altai (2,800 km)

in addition to 1220mm diameter oil pipeline supply opportunities which include BTS, VSTO to China (4,770 km) and the Sakhalin-Habarovsk-Vladivostok pipeline project (1,836 km start-up in 2011).

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