Pipe Price Fixing
Atkore (ATKR), Otter Tail (OTTR), Westlake (WLK), Core & Main (CNM)
Executive Summary (download presentation for detail)
We believe PVC pipe manufacturers and distributors are fixing prices by coordinating pricing actions via an industry newsletter
PVC pipe manufacturers (“converters”) in the electrical conduit and municipal water pipe markets appear to be coordinating pricing actions via an industry newsletter called OPIS – a paid resources that we believe few, if any, end customers have access to.
For example, on 6/21/24, OPIS reported “converters conceded they need to figure out how to push prices higher. The consensus this week was for a single price increase that would take prices up by about 5% over the current market level, with another percentage added to account for the discount. Then, if that works, do it again and again until it stops working. Conduit converters have been successful with this strategy in the past.” Then the following week on 6/28/24 OPIS reported “converters lost no time in starting a price increase effort” and detailed how 6 electrical conduit converters issued effectively identical price sheets in every region.
We believe the apparent price fixing has resulted in massively inflated pipe prices and converter margins. These prices appear to defy economic logic, remaining at extremely elevated levels despite normalized supply chains, normalized input costs (resin), and weak demand. Today, PVC municipal and conduit pipe prices remain 4.7x and 2.7x above pre-Covid levels, respectively, according to OPIS.
Price inflation has driven converter (ATKR, OTTR, WLK) and distributor (CNM) profits to never-before-seen levels. We believe these companies are materially over-earning.
OTTR’s core pipe segment EBIT grew 9x from 2019 to 2023 (100% organic) as reported price increased +198% and margins expanded to 61% from 14% long term average (2013-2019)
ATKR’s core electrical segment EBITDA grew 3.4x from 2019 to 2023 (majority organic) as reported price increased +86% and margins expanded from 20% to 38%
WLK’s building products and pipe segment EBITDA grew 3.7x from 2019 to 2023 (we estimate >2.5x on an organic basis) as reported price increased +74% and margins expanded from 13.5% to 22.5%
CNM’s total EBITDA grew 3.2x from 2019 to 2023 (majority organic) as reported price increased +56% and margins expanded from 8.3% to 13.5%
The North American pipe and fittings market is estimated at $36 billion by WLK, a leading PVC pipe manufacturer. The severe inflation impacts contractors, municipalities, and ultimately consumers who pay for it in the form of higher construction costs and utility bills.
Regulators are focused on this type of price fixing. The DOJ is actively looking for post-Covid collusive pricing behavior (link). The FTC is focused on the use of intermediaries, similar to OPIS, to facilitate price fixing (link). The CA Attorney General is focused on price fixing via OPIS itself (link).
The municipal pipe industry is consolidated and has a history of FTC enforcement action for collusion. In 2016, Fortiline, the 3rd largest distributor of municipal water pipe in the US today, settled FTC charges for inviting a competitor to raise and fix prices (link). In 2012, three pipe companies settled FTC charges of collusion (link).
ATKR, OTTR, WLK and CNM have material downside if pipe prices normalize, before any impact from fines or damages