Impact of coronavirus on Indian building industry

Impact of coronavirus on Indian building industry

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Compressors imports (both for AC and refrigerators) from China account for nearly 3% of the total imports from that country and prolonged problem in operating the factories in that country will pose a problem for Indian manufacturers of air conditioners. Remember compressors constitute 35% of cost of an AC

China is hit by Novel Coronavirus which has already taken a toll of more than 1,500 lives (according to Chinese state release) and no one is sure about its exact impact on China and consequently on the whole world. In fact, it is this ignorance (about its impact) which is making everyone anxious and also nervous.

Many people say coronavirus is much deadlier than SARS both in terms of spread and impact. Rightly so – because casualties are more and the number of people impacted too are more this time. More importantly impact will be felt world over because Chinese economy has grown in stature in last 15 years or so.

Between 2003 (when SARS broke out) and 2020 the pie of Chinese economy has grown 4 times to 16.3% from 4.2% of world economy. The world economic growth could slowdown by 0.4% as per one estimate, if standstill in China continues. The trade between India & China has also grown in the same period to USD 87 billion in FY19, imports being the major component. India imports a large amount of raw materials & semi-finished good for sectors like Auto, Pharma (APIs), Consumer Durables and Electronics. Costs are likely to increase impacting the profitability. Revenue and Exports to China is limited, marginally to sectors like Agriculture, Auto, Aquaculture and Engineering.

Here is some brief analysis of the pandemic on Indian building material and other related products used in building sector:

Tiles & Ceramics

One positive impact of the coronavirus breakout could be on crude oil prices. China is  the 2nd largest consumer of oil and 3rd largest consumer of gas in the world. Crude oil prices are coming down which could be a blessing in disguise in the medium-term given our huge oil deficit. This will have a positive impact on industries like tiles manufacturing where natural gas cost accounts for nearly 30% of the material cost.

Home textiles

In the global market, China is one of the main competitors for Indian home textiles and any prolonged disruption in supply may force the buyers abroad, mainly in USA, to look for alternative sources of supply, including India. However, temporary disruption may not have much impact.

However, coronavirus pandemic in China, the depth and extent of which is still unknown, is having positive impact on cotton prices. Softer cotton price is a good news for the home textile makers and this benefit will be reaped by all the home textiles makers worldwide.

Air Conditioners

The size of India’s AC market is estimated to be 5.5mn units p.a. and most importantly it is growing very fast.

Compressors imports (both for AC and refrigerators) from China account for nearly 3% of the total imports from that country and prolonged problem in operating the factories in that country will pose a problem for Indian manufacturers of air conditioners. Remember compressors constitute 35% of cost of an AC.

Much to the delight of the AC manufacturers, compressor prices had declined by 7% in the first half of current financial year as compared to previous year due to  dumping of compressors by China’s companies owing to a shift in the energy efficiency table, and also due to introduction of new models with lower shell size with the same performance. However, prices may go up now due to possible shortage induced by coronavirus.

The AC compressor in India is manufactured by LG Electronics and primarily consumed in-house, and Highly, a China-based company with a capacity of 2.5mn units pa as on December 2019. Nearly 55% of the compressor requirements are imported.

According to our enquiry with the manufacturers, Inventory levels at the original equipment manufacturers (OEM) and AC companies in India will last until mid-March 2020. A further delay in opening up manufacturing in China may lead to loss of revenue for India’s firms, due to non-availability of goods and sharp uptick in AC prices short term.

Johnson Control Hitachi, Voltas, Daikin, Panasonic, Haier and Blue Star are the major clients of Highly and the regional players usually import their component requirements from China. Any disruption is supply, thus may have impact on the price of the final product in the short term.

Reports suggest that Chinese suppliers have started business operations and factories have opened while production is yet to resume. The companies have started to take workers in 14 days of quarantine to analyze their health condition. The way things are progressing now, production may start only from next month. Fortunately for AC (and other consumer durable) manufacturers, none of the component suppliers are located in Hubei.

Apart from some domestic suppliers, Thailand, Vietnam and Korea are some of the locations from where Indian manufacturers  can source their component requirements.

In the normal course of business, the lead time of component procurement from China to the final product is 45 days, while port congestion with heavy load at both Chinese and Indian ports could increase it by 10 days.

Positive side of coronavirus breakout is the softer commodity prices like that of copper and aluminium. Meanwhile, Indian AC makers are also worried that new season for them is fast approaching and any disruption in supply at this juncture may throw their calculations haywire.

Cement

Cement is a bulk building material and not much Exim takes place in this commodity. However, any reduction in fuel prices will impact the industry positively as it will help the industry to bring down its logistic costs.

The outbreak of coronavirus may send the global economy into a disarray in the short term by disrupting the supply chains across China. It’ll open up opportunities for Indian manufacturing and softening commodity prices will ease the pressure on many manufacturers. Still, nobody quite knows the extent to which China’s official figures on the spread of coronavirus can be believed.