In this week’s Finshots Markets, we talk about steel pipes and how an interesting theme might have failed to play out as most people imagined.
The Story
About two years ago, we wrote a rather elaborate exposition on a theme very few people had heard of at the time — Steel pipes. And it went something like this
“There is an active discourse surrounding clean energy. And multiple countries are trying to make this transition as seamless as possible. While it might take several decades before we completely ween off fossil fuels, it’s likely that they will adopt more eco-friendly alternatives during this time.”
What might those alternatives be? you ask.
Natural Gas — It burns clean. It isn’t terribly expensive and people are already using it for a wide variety of applications.
For instance, speaking during the inauguration of the City Gas Distribution (CGD) Project back in 2019, the Minister of Petroleum and Natural Gas, Dharmendra Pradhan had announced that the Government was focused on building a gas-based economy that could propel India’s dreams in the future. After all, the share of natural gas in the energy mix is under 10% right now. The government intends to take this to 15% by 2020. So it was quite reasonable to presume that the state would spend massive resources in upping its game.
But what exactly would this endeavour entail? Where would the government invest its resources?
Think about gas distribution — an enterprise that involves transportation and distribution of natural gas to consumers in domestic or commercial settings. The current prominent method of delivery i.e. delivering gas through cylinders is energy-intensive and tedious because of the needless involvement of intermediaries including gas agencies, distributors etc. However, if you have a network of pipes connecting the producers and the consumers directly, then that would be a godsend no? Bottom line — Piped supply is more efficient, accessible and useful in applications where you might need round the clock supply. And the government was intent on pushing this initiative.
As we wrote in our story back in the day —
“There is direct evidence to suggest that city gas distribution ought to be the next big downstream expansion in India i.e. we are likely to see the benefits of this program trickle down and profit several players who could potentially be involved in this massive project of getting natural gas directly to the homes of consumers. Also, the last two bidding rounds (where the government invites bids from qualified contractors to lay the pipelines ) saw more contracts awarded than ever before i.e. the number of projects awarded during the last 12 months was higher than all the previous 8 bidding rounds combined. And although there are multiple stakeholders in the entire value chain who are likely to be benefited by all of this, we will focus on steel pipe manufacturers, that ultimately facilitate gas distribution.”
This was the Steel pipe story and to further solidify this thesis we pointed out how four companies might benefit from this initiative — Maharashtra Seamless, Man Industries, Ratnamani Metals and Welspun Corp.
However, two years on, their fortunes are diverging. For starters, the government hasn’t awarded new contracts after concluding the last bidding round. So these pipe manufacturers have had to rely on alternative sources of revenue — water supply, irrigation, and other infrastructure projects. More importantly, the pandemic completely crippled the growth story since most manufacturing companies were asked to cease operations.
Between April and June 2020, companies saw their revenue drop 20–40%. Surprisingly, however, they still managed to eke out a profit. How? You ask. Well, most of these companies already had a robust order book. They had projects that they were supposed to execute. And by May, these companies were getting through some of this backlog. This way they could recognize revenue. However, as other industries continued to struggle, the order book started depleting rather quickly. For instance, oil companies ceased all exploration activities during the pandemic and since these people lap up a lot of these steel pipes, companies relying on them had to struggle in tandem.
For instance, during the first quarter revenues remained stable for Welspun Corp (a large company), but then it tumbled 50% in the subsequent quarters. Similarly, Ratnamani Metals, saw a 2% decline in its revenue during the first quarter but by December their revenues had tumbled 42%. Of course, that’s not to say that everybody suffered the same fate. Depending on the kind of pipes you manufactured, your prospects might have differed. However, for most companies betting on the elusive gas distribution theme, it wasn’t exactly a stellar year.
The only saving grace, however, was the steep decline in the prices of steel. And while this softened the blow for a while, it wasn’t good enough to fully alleviate the financial concerns because steel prices are also seeing a rebound now. So where does that leave the steel pipes story? Well, the government is still focused on building distribution. In fact, back in December 2020, Dharmendra Pradhan announced that the government would spend around $60 billion for developing the gas infrastructure in the country. In addition, some of these players are now slowly building back their order book. So yeah, the story might still play out. But considering you just saw how things change in a matter of two years, you should be wary of betting your life on moonshot ideas. Hopefully, this story serves as a somber reminder.
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Until then…
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