A growing preference for ?procuring supplies from local US companies?, coupled with a ?delay in capex by US oil & gas firms?, has threatened to hit several Indian manufacturers of steel pipes, who are betting big on the US steel pipes replacement market.

Although the actual size of the opportunity cannot be ascertained, the US alone has pipelines running into 1.5 million miles, 65% of which have been laid in the 1960s and 70s. Since most pipes have an economic life of 30 years, there is a pressing need to replace them. This would have opened up an opportunity worth billions of dollars to steel pipe makers, including companies like Welspun Gujarat Stahl Rohren Ltd (WGSRL), Man Industries and PSL Limited from India but protectionist measures and capex delays by companies have dampened these prospects.

According to an SBICap Securities research report, ?More than 300,000 kms of global pipeline projects would be undertaken over the next 4-5 years. These projects are worth $109 billion and Indian pipe manufacturers are expected to garner at least 15% of the total pie. Another growth driver is the replacement of old pipes in the US?. The US, South Asia and the Middle East are considered to be key volume drivers for Indian companies in the pipe-making segment. Industry sources say steel pipe manufacturers, who had recently started their operations in the US, are finding it difficult to sustain the business. JSW Steel, which had acquired a plate and pipe mill in the US, even thought of mothballing it a few months back. The plant is now working at 10-15% of its capacity, and while JSW Steel sees a revival in demand, it is by a small percentage.

Meanwhile, another pipe manufacturer, Man Industries, had postponed its $200 million investment to set up a pipe mill in the US. ?There are a lot of new capacities being added in the US. However, in the current economic slowdown, preference is given to local companies in the US, which makes competition tough. We have also put our US investments on hold due to these developments. However, we are closely watching the situation and the investment climate and may revive the project at an appropriate, opportune time,? said a spokesperson from Man Industries. The company had posted net sales of Rs 1183.42 crore for FY 2008-09. However, players like WGSRL and PSL Ltd, who have recently set up their new plants in US, say there is definitely a sentiment for local manufacturing but they are not much impacted since they have their own plants in the US. Says Akhil Jindal, director of WGSRL, which had a net sales of Rs 5,739 crore for FY 2008-09, ?We believe that oil & gas companies will find it difficult to postpone replacement any longer considering the age and health of pipes. Further in the near future, if any government regulation is enacted, it may lead to speedy replacement thereby creating huge pipe requirements in the developed economies?. Declining to comment on the order book position of its US plant, Jindal did say, ?The current outstanding order book position of over Rs. 6,800 crore also includes orders bagged for the US facility?.

WGSRL and the Rs 3,649-crore PSL Ltd had recently set up their new pipe manufacturing facility in US. With an investment of $100 million, PSL Ltd had in October last year set up a new pipe manufacturing facility in Mississippi, USA and has an order book till June next year. Whereas, WGSRL had in February 2009 completed its pipe making facility in Arkansas, USA with an investment of $150 million.

It is also understood that the huge ?order book position? of the players has shrunk in just one year. Analysts say discussion is currently on between the oil and gas manufacturers and the regulators in US to set the programme for the replacement of pipes but it may take at least 2-3 years time. Moody?s, in its recent report, believes that any sustained recovery in the metal and mining sector is unlikely until demand in major economies of the U.S., Europe, and Japan recovers.