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March 2016 | Stainless Steels


Tubacex hit by oil and gas sector slowdown

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Mention the Spanish stainless steel industry and one is likely to think first and foremost of Acerinox, one of the world’s largest stainless steelmakers with production facilities not only in Spain, but also in Malaysia, South Africa, and the USA.

Spain is also home to another world leader when it comes to stainless steel products, however. That company is Tubacex, the focus of this article and the world’s largest producer of stainless steel seamless tubes.

The company, based in Spain’s northern Basque region, produces a variety of tubular products, primarily destined for consumers in the oil and gas industry, but also to consumers in downstream petrochemical industries and to those in the power generation industry.

It operates in a much smaller environment than the likes of Acerinox. Indeed, the global market for stainless steel seamless tubes only amounts to around 500-600 thousand tonnes. This compares to the 42 million tonnes accounted for by all stainless steel products – Acerinox alone produced almost 2.5 million tonnes of stainless steel last year.

In any case, the specialist focus of Tubacex has served it well in recent years, with its high-value niche products generating decent margins for the company, above and beyond those generated by Acerinox for example.

But the specialist nature of the company has seen it suffer over the past year, in line with the many companies exposed to the oil & gas sector. Profit margins have taken a severe hit, with Q4 2015 resulting in losses beyond those seen in the more commoditized stainless steel sector.

One of the more extreme examples of a company badly hit by the collapse in investment by the oil & gas sector in recent years has been that of one of Tubacex’s competitors, Vallourec. As in the case of Tubacex, high profit margins have given way to losses as of late, although in the case of Vallourec they have been much more severe.

Indeed, Vallourec has posted such large losses recently that it is in the process of slashing its European production capacity by 50% and cutting thousands of jobs as part of a widespread company rationalization. Large cutbacks and job losses are not solely reserved for the more commoditized steel producers such as Tata Steel.

Tubacex is likely to escape such a dire scenario, however.

The source of Vallourec’s problems can largely be traced back to aggressive expansion efforts undertaken by the company back in 2011 as it bet on oil prices remaining high and ever-growing investment by the oil & gas sector in more complex projects, in turn requiring premium products. Such expansions contributed to net debt at the company increasing by more than five times between 2010 and 2012.

Tubacex, meanwhile, has generally been more conservative in its expansion efforts and perhaps has exercised better timing with its purchases too, having bought majority shares in Italian company IBF and the stainless steel seamless tube division of India’s Prakash in the past couple of years, a time during which the oil & gas industry was already in decline. This is in contrast with 2011 when oil prices were still at high levels and investment by the sector remained high. For sure, Tubacex’s net debt has increased as a result of their acquisitions too but by nowhere near to the same extent as occurred at Vallourec.

The recent acquisitions by Tubacex were also part of an effort to strengthen its presence in sectors other than the oil & gas industry, as the company hopes to generate more business from customers in the power generation industry for example.

But with a large part of the company’s sales still heading to the oil & gas industry, Tubacex is likely to see margins continue to be squeezed over the coming quarters, and perhaps years, as oil prices and industry investment are both expected to remain low.

Growth in product offerings and a slight shift in focus toward the power generation sector as a result of recent acquisitions may help somewhat but even this is fraught with risk, being heavily exposed to political decisions in China and India in particular.

Tubacex may thus actually come to envy Spanish counterpart Acerinox over the coming years given its focus on sales to end-use consumers in less cyclical consumer goods markets.

Robert Cartman

rcartman@metalbulletinresearch.com