Research Notes

According to the State Statistics Service, Russia's production of steel pipes surged to 7.88 mln tons, up 17.7% y-o-y. This spike is largely attributable to the fact that a number of large-scale projects, including those aimed at building trunk pipelines, were kicked off in 2006. Transneft has laid the first pipes of the Eastern Pipeline (VSTO) and Gazprom of the North-European Gas Pipeline (NEGP).

We expect that the Russian pipe segment will continue to expand and will turn out over 8.5 mln tons in 2007. Overall, pipe production is expected to peak during the next two years, since by that time construction projects of major oil and gas pipelines will have come on stream. Along with the energy sector, the housing development companies are likely to drive up demand for pipe products over the next two years.

While, on the one hand, the prospects associated with major pipeline construction projects have already been priced into the stock valuations of key Russian pipe makers, some companies in the sector still hold strong upside potential. A favorable price environment on the pipe market and declining costs (see our Flash Note dated October 26, 2006) could help the companies lift revenues and improve margins, which, in turn, could shore up their share prices.

We revised our estimates for Russian pipe makers based on updated current and forecast financial figures. We added TMK to our valuations and took note of ChTPZ's consolidated financials.

Our top picks in the industry are the pipe assets of ChTPZ Group, precisely, ChTPZ and PNTZ, whose stock valuations could be additionally bolstered by IPO plans.

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Nataly Kocheshkova

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