Financial Times: TMK aims to double production as it cuts Russian workforce

By Peter Marsh
Published: June 7 2007 03:00 | Last updated: June 7 2007 03:00

TMK, the Russian maker of specialist steel pipe that floated on the London stock exchange last year, intends to cut its mainly Russia-based workforce bya third as part of an effortto increase efficiency, according to Konstantin Semerikov, the company’s chief executive.

TMK, which has a market capitalisation of $7.9bn, is among a trio of little-known steel companies operating in a sector niche that, because of a surge in demand from oil companies for their pipes, have become stock market stars over the past 18 months.

Mr Semerikov told the Financial Times that TMK was considering plans for acquisitions in an effort to become more global,but he distanced himself from speculation that the company might be interested in a bid for Vallourec of France, one of its main competitors.

“I cannot imagine that we would do this [take over Vallourec],” Mr Semerikov said in an interview.

The other big company in the sector – and the market leader – is Buenos Aires-based Tenaris.

While Tenaris has a market capitalisation of $28.3bn, the market value of Vallourec is $16.4bn.

Since the beginning of 2006, Tenaris’s share price has doubled while that of Vallourec has trebled.

Shares in Vallourec have been in particular demand because of suggestions that the company could become a bid target with Arcelor Mittal, the world’s biggest steelmaker, mentioned as a potential buyer.

The Luxembourg business is thought to be keen to maintain its run of acquisitions, particularly in specialist fields of the steel sector.

Last year, according to TMK’s first results since it listed in late October, the company increased pre-tax profit by 76.7 per cent to $618.5m on sales 15.2 per cent ahead at $3.38bn. Since its listing, the shares have risen from $21 to over $36.

TMK has embarked on a $1.4bn investment programme to expand its plants, which are mainly in Russia, apart from a small operation in Romania. It aims to boost its production from 3m tonnes last year to nearly 6m tonnes in 2010.

While doing this, it intends to reduce total employment from about 49,000 to about 35,000, mainly through outsourcing activities such as servicing and catering.

TMK thinks it can make its operating procedures more compatible with those of other international steelmakers, giving it a greater potential to boost profit,particularly if the industry were to hit a downturn.

TMK’s main product is seamless pipe sold to oil and gas companies. It is used, for instance, in drilling for new sources of energy and linking oil and gas wells with processing installations.

The pipe has to be made in many different grades to suit specific operating conditions, in such a way that it resists corrosion and can withstand forces under the ground equivalent to 200 times atmospheric pressure.

Of the 15m tonnes of this kind of pipe likely to be sold this year, TMK is expected to account for about 12 per cent with Vallourec taking a share of about 14 per cent and Tenaris accounting for about a fifth.

Tianjin, a Chinese company, and US Steel have shares in this business estimated at about 10 per cent each.

Intense demand from energy companies for new pipes to help in the drilling of new wells in the past three years has been spurred by rising oil prices and fears about shortages.

This has helped pushpipe prices higher, in some cases to more than $10,000a tonne, or more than 10 times the price of ordinary steel sheet.

Last year, two-thirds of TMK’s total sales of pipe – which apart from the energy industry also goes to industrial and contracting companies – went to customers in Russia, including energy giants Shell, Gazprom and BP.

The amount that finished up in western Europe and the US was only 100,000 tonnes and 75,000 tonnes, respectively.

“We are already a global player in a global industry but we need to do more to build up sales in Europe and the US,” Mr Semerikov said.

Copyright The Financial Times Limited 2007

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