With this note we revise our investment case for Russian pipe producers TMK and Vyksa Steel Works. High oil prices are supporting drilling activity in the global oil and gas sector, generating demand for OCTG pipes, while the ongoing construction of large-scale pipelines in Russia by Gazprom and Transneft is bolstering demand for large diameter pipes (LDP). At the same time, the unresolved European debt crisis combined with weak economic data could signal a slump in the eurozone in 2012, with a negative read-through for the Russian economy. We therefore maintain a cautious outlook on the pipe industry: industry participants forecast a 13% YoY decline in pipe consumption in Russia in 2012. We maintain our HOLD rating on TMK but cut our target price to $13.3/GDR (down from $23.6), while for Vyksa we cut our target price to $1,159/share (vs $2,471 previously) and downgrade our rating from Buy to SELL.
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