Industry Risks

Dependence on the oil and gas industry

The oil and gas industry is the principal consumer of steel pipe products worldwide and accounts for most of TMK sales, in particular sales of OCTG, line pipes and large diameter welded pipes. In 2010, sales volumes of pipes used in oil and gas industry (mainly OCTG, line pipes and large diameter pipes) accounted for approximately 75% of the Company’s produced tubular products. The oil and gas industry has historically been volatile and downturns in the oil and gas markets can adversely affect demand for our products which largely depends on the number of oil and gas wells being drilled, completed and reworked, the depth and drilling conditions of wells and on the construction of oil and gas pipelines. The level of such industry specific activities in turn depends on the level of capital spending by major oil and gas companies. The level of investment activities of oil and gas companies, which are largely driven by prevailing prices for oil and natural gas and their stability, significantly affects the level of consumption of TMK products. In case of significant and/or sustained decline in oil and natural gas prices energy companies could reduce their levels of expenditures. As a result, the demand for oil and gas pipes can substantially decrease, which also leads to tightening of competition and a possible decrease of market prices for tubular products. Thus, the decline in oil and gas exploration, drilling and production activities and in prices for energy commodities could have a negative impact on the Company’s results of operations and financial position.

Increases in the cost of raw materials

The Company requires substantial quantities of raw materials to produce steel pipes. The principal raw materials used in production processes include scrap, pig iron, ferroalloys and refractories for use in steelmaking operations, steel billets used for the production of seamless pipes and steel coils and plates for the production of welded pipes. The demand for the principal raw materials we utilise is generally correlated with macroeconomic fluctuations, which are in turn affected by global economic conditions.

In 2010, the costs of raw materials and consumables accounted for 68% of total cost of production. The prices for raw materials and supplies are one of the main factors affecting TMK results of operations. These prices are influenced by many factors, including oil and gas prices, worldwide production capacity, capacity utilisation rates, inflation, exchange rates, trade barriers and improvements in steelmaking processes. After a considerable decline in prices on the back of decreased demand in 2009, prices for principal raw materials increased during 2010 as compared to 2009 with the return of market demand. Prices for certain types of raw materials and supplies varied depending on the region. In 2010 at Russian division, the average purchase cost of metal scrap increased by 16%, average price for coils increased by 28% and the average purchase price for pig iron increased by 57% as compared to 2009. The average purchase cost of metal scrap and coils at American division increased by 59% and 28%, respectively, as compared to 2009. Average purchase costs for metal scrap at European division were higher by 53% in 2010 than those in 2009. As a result of both increases in prices for raw materials and increased sales volumes, our costs of raw materials and consumables increased from U.S.$1,660 million in 2009 to U.S.$2,972 in 2010.

The price for raw materials continue to have a key influence on the production costs of the Company. The increase in prices for scrap, coils and other raw materials, if not passed on to customers in a timely fashion, can adversely affect TMK profit margins and results of operations.

TMK plants also consume significant quantities of energy, particularly electricity and gas. In 2010, energy costs amounted to 8% of the cost of production. The Russian electricity market was further liberalised in 2010, which resulted in an increase in electricity tariffs. Average natural gas tariffs in Russia, although remaining significantly below Western European levels, also increased in 2010. At the same time, natural gas consumption has been decreasing recently as the Company has replaced most of open hearth furnaces with EAFs. Further price increases for energy resources will increase TMK costs of production and could have an adverse effect on results of operations and financial results.

Dependence on a small group of customers

As the Company focuses on supplying the oil and gas industry, TMK largest customers are oil and gas companies. In 2010, our five largest customers were Gazprom (excluding Gazprom Neft), Transneft, Rosneft, Surgutneftegas and TNK BP, which together accounted for 32% of total pipe sales. A high proportion of sales to a limited number of companies indicates a strong business relationship with key customers, and the Company expects this concentration of customers in Russia to continue for the foreseeable future. Nevertheless, the increased dependence of pipe sales on a single large customer bears the risk of an adverse effect on TMK results of operations in the event that our relationship with any of these major customers deteriorated. In the United States, TMK IPSCO cooperates with a wide range of distributors in North America, each of whose share in total TMK sales is not significant.

TMK large diameter welded pipe business is largely dependent on one of our largest customers, Gazprom, and is subject to increasing competitive pressures. Gazprom is one of the Company’s largest customers for 1,420 mm diameter welded pipes used for construction of gas trunk pipelines. Increased competition in the supply of largediameter pipes or a change in relationships with Gazprom could negatively affect TMK competitive position in the 1,420 mm diameter pipe market, resulting in decreased revenues from sales of these products and adversely affecting the Company’s business, financial position and results of operations. Additionally, large diameter welded pipe business depends significantly upon the level of construction of new oil and gas pipelines in Russia and the CIS. The delay, cancellation or other changes in the scale or scope of significant pipeline projects, or the selection by the sponsors of such projects of other suppliers could have an adverse effect on TMK sales of large diameter welded pipes, and thus on the Company’s results of operations and financial position.


The global market for steel pipe products, particularly in the oil and gas sector, is highly competitive and primarily based on compliance with technical requirements, price, quality and related services. In the Russian and CIS markets, TMK faces competition primarily from ChTPZ, which produces both welded and seamless pipes, OMK, which produces welded pipes, and Ukrainian pipe producers. Outside Russia and the CIS, we compete against a limited number of producers of premium-quality principally seamless steel pipe products, including Tenaris, Vallourec, Sumitomo and a limited number of Chinese producers, including Baosteel and TPCO. In the United States, TMK IPSCO faces competition primarily from Tenaris, U.S. Steel and V&M Star, a subsidiary of Vallourec, as well as from imported OCTG and line pipe products, principally from Asia, Canada and Mexico. In 2010, several TMK key competitors added new capacities and started their ramp-up, which is expected to increase competition we face in the market for large-diameter welded pipes in Russian and CIS and in the international seamless pipe markets.

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