Welspun Changes, But Keeps Focus On Line Pipe

March 2014, Vol. 241 No. 3

Jeff Share, Editor

Welspun, the India-based corporation, made a key decision to build a line pipe mill in the state of Arkansas during the midst of the Great Recession. It was a gamble, but one predicated on the belief that the American shale industry was about to boom and they would be centrally located.

Just as important was their understanding of what their commitment would mean to Arkansas and Little Rock, where local and state officials showed a willingness to provide incentives for the steel producer. But two other factors swept through the thoughts of Welspun officials: they would find dedicated employees, and they had given their word. On April 28, 2009 they celebrated the start-up of the $150 million pipe mill, the first Welspun manufacturing plant built outside of India. As Gov. Mike Beebe has acknowledged, Welspun has more than lived up to its commitment to the state.

Today, Welspun is indeed in the mix of a shale revolution continuing to create unprecedented demand for transmission line pipe. As Welspun thrives both in the U.S. and abroad, it is expanding in the U.S. with an ERW (electric resistance welded) plant amid a major restructuring of the corporation.

In this interview with P&GJ, Braja K. Mishra, managing director of Welspun, discusses Welspun’s business strategy and its effect on the pipe business. Mishra was first associated with Welspun from June 1996 to March 2009 and as general manager of marketing played a major role in developing its pipe and plate business. He rejoined Welspun in 2012. He is an MBA from Aligarh Muslim University with more than 25 years of experience in the oil/gas and steel pipe industry.Braja K. Mishra

P&GJ: Why did you feel it was necessary to restructure the corporation and what changes are being made in the pipes business?
The primary reason for restructuring of the pipe business was to create renewed focus and enhance value for the business. The reorganization was focused toward creating two distinct and focused companies namely – Welspun Corp. Ltd. solely focused on pipes and plates business, and Welspun Enterprises Ltd (“WEPL”) focused on steel, infrastructure, oil and gas exploration and energy businesses.

Under the previous structure, Welspun Corp. was a conglomerate with business interests spread across – Pipes (Pipes & Plates), Steel (DRI) and Infrastructure (Infra, O&G and Energy). Each of the businesses has different financial characteristics, their own sector cycle and stage of development and yet under the same umbrella. This demerger is aimed at maximizing long-term value creation and concentrating on core competencies of different businesses under different operational management. This will also allow greater flexibility for companies to pursue independent capital structures and to have closer alignment between business performance and management incentive plans.

P&GJ: How profitable has the pipes business been to the corporation, and has this exceeded expectations? You said you hoped to increase order books by 30% this year-is this on track?
The pipe business has always been the lion share contributor to the overall profitability for the company. In 2012, we achieved the coveted 1 million tons(metric) in sales, order book and production mark for the first time ever, despite turbulent global economic and market conditions. We hope to continue at the same pace.

P&GJ: Have you been pleased with the progress at the Little Rock plant since it began operations four years ago? What milestones have you achieved at the plant?
I have been very pleased and proud of what we did in Little Rock, being our first pipe manufacturing facility outside of India and on U.S. soil. We executed strategic projects like Ruby Pipeline, Keystone, Access Pipelines, Seaway Pipeline, etc. We have produced 2,517 miles of pipe from our facility as we speak and achieved highest production of 3.35 miles in a day from pipe manufacturing and 5.18 miles in a day from coating. We have a world-class infrastructure which includes 37,000 linear feet of rail spur looping around the facility which makes us capable of loading out one unit train a day. We can store more than 500 miles of pipes and can also store 150,000 metric tons of coils.

P&GJ: How has employment at the plant grown since it opened, and has it been easy or difficult to find skilled workers? Is the plant now working at maximum capacity?
Our initial commitment to the state was to create 300 jobs. On completion of our first year of operation we expanded and created another 230 jobs and then another 200 jobs on our third expansion on completion of our fourth year of operation, aggregating to almost 730 jobs. We have approximately 800 personnel working at Little Rock.

P&GJ: What prompted you to decide to build an ERW plant at the site and when do you expect it to be operational?
The rise in shale development across North America, especially the U.S. with the subsequent demand for OCTG and small-diameter line pipe for shale gas and natural gas liquids. presented an opportunity for Welspun to enter the HFIW (small diameter) line pipe business in the U.S. We see huge potential in North America, especially the U.S., which is going toward energy self sufficiency and future potential exports of natural gas and LNG.

We conducted a thorough market demand and supply assessment which reinforced our firm belief in the high potential of the North American market. We received great encouragement from Arkansas state officials which helped us achieve this milestone. The mill was put into operation in record time and started commercial production in June 2013.

P&GJ: What are some the physical details of the new plant and how will it complement the products provided by the spiral mill?
The new plant is capable of producing 175,000 metric tons per year of small-diameter pipes ranging from 6- to 20 inches with up to 0.627-inch wall thickness. With this expansion we can produce pipes for the oil and gas segment from 6- to 60 inches in diameter. Large-diameter pipes are mainly used for trunk pipelines and small-diameter pipes are mainly used for gathering pipe lines and/or distribution pipelines. This gives us the bandwidth to serve the entire market in each of the segments from cross country – interstate pipeline – distribution pipeline.

P&GJ: You have said the current market scenario for steel pipe looks sluggish. What is causing this situation and how long do you expect it to last?
The general global slowdown has had its effect on energy demand and steel consumption. These depressed conditions, coupled with overcapacity in many segments of the market, puts pressure on margins for the industry as a whole.

However, even in these market conditions, Welspun has achieved the highest ever sales, highest ever production and highest ever order booking – all over a million tons. This slowdown is actually helping the industry as it has prompted players to sharply focus on innovation and new product development so they remain cost-competitive as well as better suited to meet ever-challenging customer requirements. Market outlook for the next year certainly looks better and we expect to see good demand from North America, Europe and the Middle East. There are also some large projects in oil and gas and the water sector in India.

P&GJ: What has led to the overcapacity in the steel and pipe market, and is this the case in the U.S. as well as the rest of the world with the possible exception of China?
The pipe industry boom mainly happened post shale gas boom which has led to a demand boom for large-diameter transmission lines and small-diameter gathering lines. Apart from demand boom, other factors which mainly contributed to overcapacity, especially in the pipe business , is the relatively low barriers for entry in the market in terms of the amount of capex required to set up a pipe plant. From the customer side there have been changes in their buying behavior. A lot of pipe buying now happens through EPC (engineering, procurement and construction companies) instead of direct buying and many EPCs want to expand their supplier base and are ready to procure pipes from unproven mills to meet their cost/schedule criteria.

Many countries have local content or buy local policies in the oil and gas sector which have encouraged setting up local plants. Having said that, even today for many critical projects only a handful of pipe mills are invited to bid due to their technical superiority. Welspun takes pride from the fact that it has always been considered among the most elite pipe producers due to its track record of supplying pipes with very stringent technical requirements.

The pipe capacity boom is evident not only in the U.S., but in markets like Turkey, Mexico, India, and South Korea. Apart from China, even Europe, Japan and Russia have fairly significant pipe manufacturing capacity.

P&GJ: You mentioned the possibility of new greenfield projects in North America, particularly Canada. Can you elaborate on the needs you would be seeking to address?
We have a very positive view on the market as Canada will seek new geographies, especially Southeast Asia and India, to export LNG. There are potentially large pipelines in Canada which would transport oil to its starving eastern coast refineries. We are always looking to expand our footprint.

P&GJ: In your overview of the global pipeline business, where do you see the greatest opportunities, and what is Welspun involved with?
Welspun has a strong foothold in North American, Indian and Middle Eastern markets which form a lion’s share of the tonnage that we sell around the world. Our organization has been designed for a global footprint and we can offer competitive service customers anywhere in the world. Apart from demand for pipe for shale gas in the U.S., there is a huge replacement demand market in the U.S. which would be the next pipeline boom as most of the pipelines in the U.S. are more than 50 years old.

There is large production and consumption of NLG which is starting to reduce oil imports in the U.S. Apart from the U.S., Canada promises to be a big potential market with large demand for pipelines for future LNG terminals. Europe also promises to be a large potential market when projects like South Stream and Nord Stream come through. The Middle East will remain strong with demand from Saudi Arabia, UAE and even Iraq. There are some large gas and water projects expected in India. Hence, Welspun sees a very health market demand going forward.

P&GJ: What do you say to those who are skeptical that pipe can safely handle products such as dilbit?
With the advancement in steel making and pipe manufacturing and also stringent testing requirements to meet such applications, the pipes can handle these gas and petroleum products including dilbit safely.

P&GJ: You built your plant during the Great Recession when few others would have attempted such an undertaking, and are building another plant during this down cycle. What gives you the confidence to move forward like this, and have you ever had any second thoughts?
The U.S. had always been a strong market for us even before we decided to set up the plant. When we made that decision we had firm backing from our customers with orders in hand and hence the recession had no bearing. We firmly believed in the long-term potential and so despite the financial turmoil as we commissioned the plant, we continued and created jobs while most companies were shutting down.

Our unique success story in Arkansas has become a case study on how, through sheer determination, we have not only established a world-class patented spiral mill, but also contributed to the overall development of the community through job creation and other social outreach programs. The story with the HFIW mill is also similar where we saw large future demand potential so the short-term economic downturn was not a deterrent. We have received good support and response from the market for our new mill as well and we have already booked some very good project pipe orders.