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Since the start of this year, the pipe industry had experienced a number of changes. First of all – some serious changes influenced industry’s general offer and demand. Russian production of 1Q 2008 dropped -7.3% versus similar term of 2007. Though primary drop influenced the oil & gas segment, excluding the drilling pipes, which production growth rate sort of pulled off the general picture. Given changes are related to reduction of demand by existing oil & gas deposits, pipelines in pipes, and growth of drilling works on par with development of new deposits of oil & gas.

Secondly – the pipe industry encountered the expansion of price for the primary commodity – in just half of 2008 the prices of steel added an average of +30% versus similar term of past year. Given decision had seriously worsened the picture of financials for most of the pipe rolling companies. Almost all of them had dropped effectiveness, whereas half of the companies have suffered from the decreased sales volumes. The growth of steel cost and worsened financial state of industry’s enterprises will lead to a hike of pipe prices, which is likely to become obvious within financial reports by sector companies later on, after they draw up their results of 1H 2008.

Given factors, especially at the back of an unstable macroeconomic environment throughout the world become the reason of pipe industry falling behind Russia’s general stock market. Due to this, after the review of our models, even despite of weak results of early 2008 demonstrated by companies, some significant growth potential have appeared over some companies. For example, many pipe rolling plants had their EV/S ratios below 1, which indicates a significant underestimation of company’s stock versus companies of given sector. Hence the recommendations on most of the sector companies have been upgraded. TMK stocks are now recommended “ACCUMULATE”, CTRP and PNTZ issued with “BUY. ATZ, Sinarsky Pipe Plant, Seversky Pipe Plant, TMZ and VMZ are now recommended “SPECULATIVE BUY”. For the first company this recommendation is related to high risks, due to latest changes in company’s report, even though they are generally positive. And the rest of the companies owe their recommendations to low free-float and a chance of redemption in the future.

Pipe industry: Is it really that bad around the industry? - July 10, 2008 (PDF)

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