Interpipe warns its volumes might plunge due to cheap oil and coronavirus

Pipe sales and production volumes at Ukraine’s largest
producer Interpipe (INTHOL) might plunge 30-50% in 2Q20-3Q20 due to the crash
in global oil prices and the coronavirus situation, Interfax-Ukraine reported
on Mar. 26, citing the company’s CEO Fadi Hraibi.

Interpipe anticipates a decline in pipe demand from
the oil and gas industry in the U.S., the Middle East and Ukraine, Hraibi said,
adding that demand for line pipes from the European economy is also expected to
drop.

Interpipe sees retaining its workers during these
difficult times as one of its tasks, but it is highly likely that unpopular
measures will have to be taken in order for the company to survive, Hraibi
said.

Dmytro Khoroshun: It is not
entirely clear which comparison base Hraibi meant when he provided the 30-50%
volume decrease estimate. Because Interpipe’s monthly pipe sales volume in January and February, 30.2 kt and 36.9 kt
respectively, were already 39% and 26% lower than the monthly average for 2019
(50 kt), we assume Hraibi did not mean yoy changes. Rather, it is likely his
comparison base was the volume for 1Q20, which should be around 35 kt per month.
In this case, the 30-50% expected drop should bring Interpipe’s pipe production
and sales volumes down to 18-25 kt per month in 2Q20-3Q20.

We note that the profitability of Interpipe’s pipe
division was already depressed in 3Q19 (EBITDA of
USD 3 mln, down 86% from the quarterly average for 1H19), and we expect this to remain the case in 4Q19. The
expected qoq drop in pipe sales volume might bring Interpipe’s pipe segment
EBITDA into the red in 2Q20-3Q20. On the other hand, hryvnia devaluation,
depressed energy costs and a likely drop in scrap and steel input prices might
improve Interpipe’s profitability during these difficult times.

We also note that Ukraine’s export prices for railway
products (wheels, wheelsets and axles), which had been growing from around USD
1,200/t in mid-2018 and throughout all of 2019, seem to have finally peaked at
USD 2,135/t in December and dropped to USD 2,046/t in January, according to our
analysis of UkrStat data. Therefore, the profitability of Interpipe’s railway product segment likely peaked in 2H19
(EBITDA of USD 63 mln in 3Q19, with USD 59 mln expected for 4Q19).

We continue to expect Interpipe will report by the end
of March net revenue of USD 1,112 mln
(a 4% yoy rise) and EBITDA of USD 277 mln (a 76% yoy jump) for 2019.