Middle East offers opportunity for pipe manufacturers, but they need to be market-specific to cash in.
Chinese pipe manufacturers will become formidable players in the Middle East oil and gas sector. That's the message from oil and gas companies in the Gulf, which have started to turn to the Chinese market for a ready supply of affordable pipes, born out of the availability of relatively cheap, skilled labour and proximity to raw materials.
The Chinese pipe sector mainly serves the domestic market, but the country has aspirations of competing internationally, and the Middle East will be a target market. In the past China's market share of the global oil and gas sector was low compared with other commodities, but this has crept up in the last two years. Increased demand for pipes has created an opportunity for China to enter the market and secure the approval they need from producers to compete on a global scale.
"We are very aware of the Chinese - and the prices at which they can produce pipes," said Gareth McMurray, managing director of pipe manufacturer, TMK Middle East. "With its economical production methods, the country is producing quality product at unbeatable prices."
The building of new oil wells has created a surge in demand for pipes, as have projects to expand existing well capacity and further oil and gas exploration. Demand for line pipes is tagged to fluctuations in oil price, but with this hovering around the US $50-60 per barrel mark, as it has done since 2004, oil and gas companies have been able to invest more into transport (or pipeline) infrastructure.
But in many ways, Middle East pipe manufacturers have become victims of their own success, unable to meet pipe demand with domestic supply. This has led to a rise in imports. Chinese pipe and tube production capacities are growing thanks to European plant manufacturers, which have invested in the country's economically viable production methods.
"This has happened in the last few years, but we see the market stabilising in 2007," said Nazimuddin Mohammed, CEO of pipe stockist, Gerab. But even if the market does stabilise, China will pose a big threat for Europe and the Middle East. The high cost of manufacturing will soon cripple firms in these regions, limiting their production to thick-walled pipes.
"Everything else will go to China - the country will take over," added Mohammed. "Last year we had a difficult time reaching our quotas from European manufacturers because every vendor has its own approved manufacturer list. Most of these manufacturers are fully booked for the next year, and any space they do have will be allocated to companies from these lists. To meet the current demand, oil companies have started to realise they need to collaborate with Chinese manufacturers."
China has recently completed three seamless tube rolling mills. These will produce seamless pipes with diameters between 139.7 and 365.1 mm or 133 to 340 mm, yielding 500 000 tonnes of output. The country is now specialising in seamless tubes with diameters between 88.9 and 219.7 mm. These are produced by an Assel mill with a capacity of 121 000 tonnes per year. China will be able to boost production to 300 000 tonnes when its high-frequency tube welding line becomes available. This will be capable of producing API-pipelines in grades X80 and higher, as well as casing tubes in grades up to N80. In view of growing energy needs and sustainable economic growth in China, demand for oil and gas pipes will remain high in the future.
In the UAE, however, there are no producers of oil and gas pipes. In the Middle East, the only pipe manufacturers that will be able to compete with China are those that are heavily subsidised, or involved in some way with national oil companies, such as Saudi Aramco.
There is speculation in the industry that Aramco has placed a huge order for Chinese casing pipes, which it allegedly plans to ship to Europe and South America. This would give the Chinese a substantial segment of the market and fuels concerns that more companies are securing clandestine arrangements with Aramco and preventing other manufacturers from competing for contracts.
One advantage is the low custom duties in the Gulf region, but as these only make up 5% of an order, Chinese manufacturers will have no trouble competing. In the past this was as high as 20%, which benefited local manufacturers, but this is less of an issue now.
"We used to import 25 000 - 30 000 tonnes of pipes from one European company," said Mohammed. "But during 2006 we imported only 7 000 tonnes from the same company. We have our suspicions this is because they are increasing their business with the Chinese."
If Middle East manufacturers are to be reassured by anything, it is that the Far East advance won't happen overnight. Getting on the contractor lists of Middle East oil companies is no mean feat, and Chinese companies coming into the region will be subjected to a long process of audit testing and inspection before they can hope to gain a single contract, let alone substantial market share in the Gulf.
"Chinese manufacturers will only be able to enter the market after they have obtained a wide reference list, great experience in the market and reassured Middle East oil companies of their quality traditions," said Rostyslav Chudnovsk'yy, deputy director of Interpipe. "As it stands, Chinese manufacturers are only entering the Middle East market on a cost basis."
According to Mohammed, there are only two Chinese companies that are approved by oil companies in the Gulf, and without this approval, these firms will struggle to compete on the same scale as Europe and Japan. Chudnovsk'yy contends it is not simply a case of buying pipes from Chinese manufacturers because they produce cheaply. Despite the rise in piping standards, there is still plenty of legwork to be done before the Gulf will fully embrace China's quality assurance.
"Manufacturers are always guided by customer needs," he said. "Clients appreciate the quality of company product and accordance to internationally approved standards. The decision drivers for clients are reference lists and the services the supplier is able to provide. A flawless reputation in these areas is the most important asset."
"The competition will be for welded pipes only," added Mohammed. "There is no competition for seamless pipes in the Middle East. In the Gulf, pipe manufacturers are producing a higher steel grade, whereas many Chinese pipes do not meet API standards." This standard is recognised globally, making exporting far more easy.
McMurray says the region's only hope is to concentrate on improving the standard of materials used in the making of pipes. But this is easier said than done. TMK manufactures its pipes in Russia, which are then distributed to regional branches. This means production is undertaken according to Russian specifications, as most of the output serves the domestic market.
This is a familiar story for many piping companies in the Middle East: manufacturers have the demand at their disposal, but they are not tailoring production to the region's market needs. As Mohammed summises, "I can import world class pipes from Russia, but I wouldn't be able to sell them over here."
McMurray admits TMK needs to break away from Russian thinking if it has any hope of competing with the Chinese market. "The problem with our connections is that they are not tested worldwide, but tested specifically for Russian markets," he said. "We have to develop connections, we know that. We are seeing more and more requirements for a higher chroming content. We're working with our technical staff to cater for future demand. When you consider 75% of what we produce stays in Russia, it is sometimes difficult to convince our bosses to look to the future - which is pipes with higher chroming content. As well as coatings, we are looking to improve the grade of the steel in the first place, rather than what we can apply to it afterwards. We are also looking to develop connections of the pipe section to ensure the hermetic sealing is as tight as possible.
"Whether we do it on our own or with another company, that's what we've got to do. Some companies are using superior grades of steel so they can use a superior connection. That's where we want to be in the future."