How a Chinese company targeted by US tariffs for the last 10 years has adapted and thrived

South China Morning Post Dipublikasikan 04.05, 19/05/2019
How a Chinese company targeted by US tariffs for the last 10 years has adapted and thrived

Hilong Holding, the world's second largest supplier of steel pipes used in oil and gas drilling experienced in adapting to US tariffs by turning exports to leasing, says diversification is key to dealing with the US-China trade war.

Drill pipes, which connect the surface drilling equipment to the drill bit, are made with so-called seamless steel that does not have a weld-joint thanks to a unique production method. They must be strong enough to withstand pressure differences inside and outside the tube and to transfer drilling torque thousands of metres down into the Earth's crust.

The global market, worth around US$1 billion a year, is dominated by four players led by a US firm.

"Hilong has been subject to US anti-dumping duties on Chinese seamless steel pipes since 2009, so it has not been a major market for us for a while," said Tang Qiyan, senior assistant to the chairman. "In recent years we have changed most of our US business from sales to leasing."

Now the Hong Kong-listed company is tapping opportunities opened up by Chinese President Xi Jinping's Belt and Road Initiative. It has also seen growing demand from Chinese state oil giants after they were urged by Xi to prioritise development of domestic resources to curb growing dependence on foreign oil and gas.

Just before Washington slapped 25 per cent tariffs in July last year on steel imports from many nations, Hilong had stocked up on imported drill pipes, allowing it to meet US demand after rivals had to abruptly exit the market as they were unable to compete.

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The steel tariff was part of a series of duties imposed by the Trump administration before it dragged China into a trade war, which also affected aluminium, solar panels and washing machines in most nations.

Drill pipes are also on the list of US$300 billion of Chinese products on which the Trump administration threatened to slap tariffs of up to 25 per cent earlier this month.

Tang said Hilong does not expect the proposed 25 per cent to be added to the 25 per cent anti-dumping duty already in force.

Even if our modest US revenue drops to zero, we will have plenty of other markets to keep our workshops highly occupiedTang Qiyan, senior assistant to the chairman at Hilong Holding

Hilong says it has a 30 per cent market share in Russia after Texas-based rival National Oilwell Varco (NOV) was forced to pare its business because of US sanctions on Russia.

Tang expects the company's modest US leasing revenue to rise further this year after having doubled in 2018 from a year earlier.

"Even if our modest US revenue drops to zero, we will have plenty of other markets to keep our workshops highly occupied," he said.

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Tang said the firm has already developed a solid presence in Russia, thanks to the Belt and Road Initiative.

Hilong's share of revenue from Russia, Central Asia and East Europe share grew to 28.5 per cent last year from 11 per cent five years earlier, while those from North and South America fell to 12.4 per cent from 35 per cent in the same period.

The sharp depreciation of the rouble in 2014 and 2015 soon after the US imposed economic sanctions on Moscow and rising sales volume in the country spurred Hilong to set up production facilities in Russia, which now accounts for 60 per cent of its total.

In China, the company saw major sales declines in 2016 and 2017. Cost-cutting induced by lower oil price and a change in top management saw main customers PetroChina and Sinopec implement a lowest-bid-wins procurement strategy.

After the oil and gas giants changed tack last year to resume taking quality and reliability seriously, Hilong saw sales surge five-fold in last year's second-half compared to the first half.

Last August Xi ordered the energy giants to boost domestic output, forcing them to tackle higher-cost and technically more challenging fields. This has provided a boost to Hilong which specialises in high-end products in its home market.

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"It is not that they can ignore project economics and proceed with loss-making projects," Tang said. "It is just that now, when faced with capital allocation decisions of domestic production versus overseas production and importing, they have to consider the need to boost domestic production on top of profitability considerations."

In March, Dai Houliang, chairman of Sinopec, sought to allay concerns it was putting an order by Beijing to raise domestic output ahead of profitability. "One of the central government's requirements for economic reforms is that market forces must play a decisive role when deciding resources allocation," he said soon after the company had raised the 2019 exploration and production budget by 41 per cent.

Hilong could see a 12.5 per cent sales growth to 3.6 billion yuan (US$523 million) and a 63 per cent rise in net profit to 243 million yuan this year, SWS Research analyst Vincent Yu projected.

He said this will be driven by its oilfield and pipeline services operations, partly because of a major offshore pipeline construction contract.

China International Capital Corporation's analysts said the firm's "unique" pipeline inspection capability and industry changes brought about by the impending restructuring of the nation's oil and gas logistics sector, means Hilong is expected to see "breakthrough" development in the field.

Tang said the firm last year succeeded in developing and obtaining quality certification for its own pipeline inspection robot, after serving its Chinese clients with equipment made with technology licensed from a German firm for six years.

Its new robot is capable of moving six metres per second to scan pipelines and identify potential safety issues, and is accompanied by in-house inspection data analytics software.

"We will no longer have to send data to Germany for analysis," Tang said, adding when Beijing's plan to merge all of the nation's long distance pipelines into a new state-owned national entity, Hilong will be able to market its service to only one instead of a large number of pipeline owners.

"There is huge growth potential as we are far from reaching Beijing's target for all pipelines to be checked once every three to five years," he added.

The company commanded a 31 per cent share of the global drill pipes market, behind NOV's 33 per cent, according to a 2017 report on the global oilfield equipment and services industry by Spears & Associates.

NOV is valued at US$9.5 billion in the stock market, compared to Hilong's HK$1.5 billion (US$194 million).

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