Tubos de Acero de Mexico, S.A. (TAMSA)

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Tubos de Acero de Mexico, S.A. (TAMSA)

Edificio Parque Reforma
Campos Eliseos 400, Piso 17
Mexico City, D.F. 11560
Mexico
Telephone: (52)5 282 9900
Fax: (52)5 282 9962
Web site: http://www.tamsa.com.mx

Public Company
Incorporated: 1952
Employees: 2,731
Sales: 4.24 billion pesos (US$443.91 million)(1999)
Stock Exchanges: Mexico City American
Ticker Symbols: TAMSA TAM
NAIC: 331111 Iron and Steel Mills; 33121 Iron and Steel Pipes and Tubes Manufacturing from Purchased Steel

Tubos de Acero de Mexico, S.A., which is generally referred to by its acronym TAMSA, is one of the world’s leading producers of seamless steel pipes and the only one in Mexico, manufacturing them at a plant in Tejería, Veracruz. This product, widely used in the petroleum and natural-gas industries, is manufactured in a wide range of widths, lengths, thicknesses, finishings, and grades. The company also produces steel ingots and bars as the material used to make the pipe. The raw materials to make the ingots and bars are purchased from domestic and foreign sources. A controlling share of TAMSA is held by a group that also controls producers of steel pipe in Argentina and Italy.

Prospering with PEMEX: 1952–83

TAMSA was founded in 1952 by Bruno Paglia, an Italian-born entrepreneur who emigrated to Mexico after first living in the United States. Some 50 million pesos (US$4.32 million) was originally pledged to the enterprise by Mexicans of Italian origin and foreign investors. Paglia received one-fifth of the shares. Another fifth went to Axel Wenner Gren, a Swedish industrialist. It was later learned that Miguel Alemán Valdês, president of Mexico (1946–52), also received shares, as did the widow of the previous president, Manuel Avila Camacho. Nacional Financiera, a government agency, provided 20 percent of the capital and took 30 percent of the shares in 1954. Government backing was essential to the enterprise, because it needed a secure market in the form of Petróleos Mexicanos (PEMEX), the government monopoly responsible for all oil production in Mexico. PEMEX also supplied TAMSA with its energy needs. In return, TAMSA became the chief source of seamless steel pipes for PEMEX, which previously had to import this product.

TAMSA began production during 1954 and made its initial public offering on the Mexican stock exchange in 1956. Exports to the United States began after the pipe received approval from the American Petroleum Institute in 1955. The company’s pipes were also used for irrigation and by installations of electric power. Originally, pipe was purchased semifinished from other firms. In 1959 TAMSA began to make its own steel ingots in an electric furnace, using imported scrap iron as the raw material. Production reached 42,352 metric tons of pipe in 1956, with a value of 50.86 million pesos (US$4.07 million). The company took a stake in 1961 in Metales de Veracruz, S.A., which made reinforced pipe and high-pressure bottles and tanks.

In 1963 TAMSA produced 195,740 metric tons of pipe but was still importing 85 percent of its scrap iron. To free itself from such dependence, the company began making its own raw material in 1966, after signing a pact with the Mexican steelmaker Hojalata y Laminas, S.A. (HYLSA), giving it the right to use HYLSA’s direct-reduction HyL process to convert iron ore into a substance (sponge iron) suitable for steelmaking. TAMSA took a one-sixth share the following year in a consortium to mine iron ore in the states of Colima and Jalisco for this purpose. The company added to its facilities in 1973–74 a mill to make special round and square steel bars. Company sales came to 1.71 billion pesos (US$136.8 million) in 1975. The sales figure was 5.96 billion pesos (about US$260 million) in 1980, when TAMSA’s output came to 241,820 tons. TAMSA took a 48-percent share in 1982 of Aerramientas y Tricones, S.A. de C.V., a producer of drill bits. The following year—shortly after a precipitous fall in oil prices touched off an economic crisis—TAMSA suffered its first strike, which, according to the company, cost it 600 million pesos (perhaps US$5 million). An internal union dispute paralyzed the company’s operations for 14 days in 1984.

Seeking New Customers: 1984–92

TAMSA opened its second plant, for manufacturing flat steel, in 1983. This raised its annual production capacity to 760,000 metric tons of pipe a year, but production in 1984 rose only to 325,810 tons a year, roughly one-third above the 1980 level. The following year, production dropped to only 296,740 tons. Sales of 128.38 billion pesos (about US$210 million) in 1986 compared poorly with the company’s debt of $550 million. Consequently, TAMSA was employing 1,200 fewer workers than the 6,500 in 1983. Because of the economic crisis, PEMEX had cut back on its orders, and exports became a major factor for TAMSA for the first time. In 1982 the company sold only 2,975 metric tons abroad to two countries, but its exports reached 25 percent of sales in 1984 and 1985. However, this gave rise in the United States to antidumping charges that resulted in a “voluntary” limit on exports of tubular goods until 1992.

Despite these problems, TAMSA registered a profit every year in this period except 1986 and 1987. The debt, however, had reached at least $734 million by the time creditor banks reduced it to $280 million in late 1989. The company was now placing its hopes on the international markets, exporting, in 1990, 70 percent of its output to 42 countries. This was an impressive performance considering that, as TAMSA’s export director explained to the Wall Street Journal “Customers didn’t think such a technical product could come out of Mexico.” However, the typical overseas sale was at a price inferior to that paid by PEMEX. Another hurdle to overcome was corruption at the port of Veracruz, raising costs so high that shippers were routing cargo to sites as distant as Houston. Seeking new sources of profit, the company even took a 20-percent stake in a cellular phone venture that held the franchise in two Mexican states.

After a profitable 1991, TAMSA’s sales fell 37 percent the following year, and extraordinary charges led to a net loss despite an operating profit. PEMEX cut its purchases by 30 percent, and foreign orders fell by 49 percent in 1992. The recent demise of the Soviet Union was a particular blow, since this country—now broken into fragments and in desperate economic straits—had been TAMSA’s chief customer abroad. And ominously, steel pipes were being replaced in some cases by plastic ones of high density and resistance. TAMSA closed the older of its two plants in 1992, reducing its labor force from 4,516 to 2,023.

Under New Management: 1993–99

TAMSA’s stock, once trading as high as $25 a share, was selling at little more than $5 a share—less than half book value—in 1993, when the Rocca family of Milan, who were among the original investors in the enterprise, took a controlling share by paying the company’s managers $67.1 million in cash. The Roccas also controlled Siderca S.A.I.C., an Argentine company, that, combined with TAMSA, held about one-fourth of the world’s seamless steel-pipe market. But the two were selling their products at or near a loss, and TAMSA again lost money in 1993 (before a tax-related one-time gain) on sales that dropped 24 percent in value. In order to make ends meet, the company sold mining interests, land, and offices, withdrew from the cellular phone consortium, and dismissed another 5 percent of its labor force. Nearly half its debt of $492 million was short-term. In order to market a $65-million, five-year bond offering in 1994, it had to extend investors an annual interest rate of 13.5 percent—a junk-bond level. Almost immediately after TAMSA floated this loan, capital flight forced Mexico to devalue its peso, resulting in a new economic crisis.

Paolo Rocca, TAMSA’s new chairman, and his team of Italian managers sought to change some of the company’s business practices. For example, TAMSA was importing narrow-diameter pipe rather than producing it because the company was still gearing its production to PEMEX’s needs, and PEMEX generally bought only large-diameter pipe. TAMSA also was importing rather than producing high-resistance pipe because of its own technical limitations. No immediate solution was found for these shortcomings, but the company formed a useful alliance with PEMEX—still its chief customer—to cut the costs of both by converting to just-in-time shipping. This required TAMSA to build three distribution centers near PEMEX exploration and drilling operations, but it strengthened the links between the two enterprises. The new management also reduced expenses by cutting its staff in Mexico City, the site of corporate headquarters, and selling the company airplane.

On an international level, the Roccas were seeking global synergy, employing TAMSA, Siderca, and Dalmine, S.p.A., an Italian company they founded in 1996 to specialize in industrial pipe. Each would seek business on its own but would be linked by communications satellite and the Internet, complementing periodic face-to-face meetings between the technicians and sales representatives of the three units, whose initials formed the letters of a parent organization named Grupo DST.

TAMSA’s pipe production rose each year, peaking at 618,000 metric tons in 1997 as Venezuela became a major customer, purchasing more than 200,000 tons and employing TAMSA’s just-in-time expertise. Meanwhile, TAMSA’s production per employee rose from 101 tons in 1992 to 260 in 1997. Net sales rose to a peak of 7.84 billion pesos (about US$827 million) and net income to 2.57 billion pesos (about US$270 million) in 1996. Profits partially accrued from tax benefits arising from the company’s losses in prior years. Long-term debt fell from 3.27 billion pesos (about US$345 million) in 1995 to 554.01 million pesos (about US$58 million) in 1998. (Peso figures for 1995–98 are in constant pesos with purchasing power at the end of 1999.)The company was even able to pay an annual dividend.

Company Perspectives:

Our common mission is to continue being world leaders in the manufacture of seamless steel pipes, extending to our clients excellent service, keeping our costs at low levels, and seeking technological advances that allow us to remain in the vanguard of our industry.

In 1997 the Venezuelan government decided to sell CVG Siderurgica del Orinoco, C.A. (Sidor), its steel company. Among the five companies that paid $1.2 billion for a 70-percent share of Sidor (through Consorcio Siderurgia Amazonia, Ltd.) were Siderca and TAMSA. It was a questionable decision, for the sudden decline in world oil prices in 1998 to a level as low as $7 a barrel impacted TAMSA’s sales to both of its chief markets, PEMEX and the Venezuelan oil industry. Sales to the United States were again being restrained by an antidumping ruling in 1995 that imposed an annual review for five years. As a result, TAMSA’s pipe production fell to 565,000 metric tons in 1998 and 406,000 tons in 1999. The percentage of production exported fell from 80 percent in 1995 to 62 percent in 1999. Production of steel ingots and bars for use in making pipe fell from 744,000 metric tons in 1997 to 500,000 tons in 1999. Sidor was reported in 1998 to be about $40 million behind in payments to its creditors because of low world prices for steel and a deep recession in Venezuela. Nevertheless, that year TAMSA and a state-owned Venezuelan company, Cia. Venezolana de Guayana, entered an alliance to form CVG Tubos Industriales y Petroleros, in which TAMSA took a 70-percent stake. Renamed Complejo Siderurgico de Guayana C.A., this enterprise met TAMSA’s requirements for hot briquetted iron—a raw material for the production of steel—in 1999.

TAMSA had net sales of 6.88 billion pesos (about US$726 million) in 1998 and 4.24 billion pesos (US$443.91 million) in 1999. It had net income of 1.63 billion pesos (about US$171 million) in 1998 but lost 77.23 million pesos (US$8.08 million) in 1999. The company eliminated its long-term debt, however, in the latter year. Siderca held a 41-percent stake in TAMSA through a Dutch-based affiliate.

Because of the prior closing of its older plant, TAMSA was obtaining its requirements for steel scrap, pig iron, sponge iron, and ferroalloys in both national and international markets. These raw materials were converted into the steel ingots and bars needed to make seamless steel pipe. The petroleum industry was using TAMSA’s coated pipe to support the walls of oil and gas wells during and after drilling. Production pipe was then used to extract crude oil and natural gas. Conduction pipe was employed to transport oil and gas from the wells to refineries and storage tanks, and then to loading and distribution centers. The company also had the capacity to produce 7,500 metric tons of cold-drawn pipe with the diameter and wall thickness required for use in boilers, superheaters, condensers, heat exchanges, automobile production, and several other industrial applications.

TAMSA’s engineers were, in 1999, working on the development of nonconventional pipes of high capacity with diverse applications, such as used by the auto industry and for the conduction of energy. The purpose was to find profitable business segments, such as the supply of special pipe—hard or flexible, as required by circumstances—and of different sizes. It was calculated that industrial pipe not related to energy could provide the company with 20 percent of its sales in the near future. The company even felt it could employ the technical and commercial resources of Grupo DST to aid companies seeking to drill wells in geologically difficult maritime zones where high-resistance but flexible pipe would be needed to make corrections in the route of evacuation. Experts said that the Gulf of Mexico contained zones with these characteristics, and that sooner or later they would be exploited.

Principal Competitors

Maverick Tube Corp.; Nippon Steel Corp.; Oregon Steel Mills Inc.

Key Dates:

1952:: TAMSA is founded to furnish seamless steel pipesfor PEMEX, Mexico’s oil monopoly.
1966:: TAMSA begins making sponge iron to convert into steel products.
1983:: A second TAMSA steel plant opens just as Mexico falls into an economic crisis.
1989:: An agreement with creditor banks reduces TAMSA’s crushing debt.
1992:: Again in difficulty, TAMSA closes the older of its two plants.
1993:: TAMSA comes under the control of investors who also control an Argentine competitor.
1997:: TAMSA’s pipe production reaches a record 618,000 metric tons.