No, the pipe doesn't have a hole in it at all. The pipe is about 1" smaller than the chamber in the forge. It shelters the blade from direct contact with the corrosive flame, and it spreads the heat out more evenly via conduction. I only do this for heat-treating. When I'm forging, I use the flame straight up. :)
The ITC-100 is a refractory coating that will make the forge more efficient and durable. It's not related to the pipe suggestion. :)
Josh