Year 2018 – a tough year for ceramics manufacturers

Year 2018 – a tough year for ceramics manufacturers

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In an interesting development, due to intense competition in mass consumption products, market leaders like Kajaria and Somany started moving towards premiumisation of their portfolio. For them this strategy has two advantages. One, in case of premium products margins are higher as compared to other products. And secondly, competition is less in case of premium products when compared to mass products with nil presence of unorganised sector

Indian ceramics industry is passing through one of the toughest phases with stagnant demand, rising fuel costs and rapid increase in production capacity which in turn resulted in oversupply in the market.

There were some surprises in tiles market as well in 2018 in the form of relatively newcomers who have started snapping at the heels of market leaders. They are: Varmora, Simpolo, Qutone, Sunheart, Imerys. They are reportedly giving tough times to leading players through regular product innovation and manufacturing efficiency. Till recently their main focus was exports, however now they have started taking keen interest in domestic market.

Further, demand from North East states during last one year has seen a surge and most of the players were not able to explain the main reason for this strong demand. Further, demand from this region is for premium tiles which make the development even more interesting.

In an interesting development, due to intense competition in mass consumption products, market leaders like Kajaria and Somany started moving towards premiumisation of their portfolio. For them this strategy has two advantages. One, in case of premium products margins are higher as compared to other products. And secondly, competition is less in case of premium products when compared to mass products with nil presence of unorganised sector. Further, branding also plays an important role in case of premium products. Newer product lines which are still having higher margins are slim tiles, large format tiles and wall cladding tiles which may see new supply in coming years.

In June, Gujarat High Court’s issued an order directing the Gujarat Pollution Control Board (GPCB) to close ceramic manufacturing units using coal-based gasifiers located in Morbi within stipulated time limits. High Court’s direction came in when the gas price was globally on the way up making the life of Morbi tile manufacturers life miserable. At the time of HC order, 50% of Morbi units were equipped with coal gasifiers, 90% of them also had PNG connections. But most of them preferred to use coal gasifiers to reduce fuel costs. Most of the suppliers in unregulated market use coal gasifiers due to lower cost. Shifting to PNG will increase their cost of production thus, further levelling the playing field which is slowly becoming even post introduction of GST and e-way bill system.

In November, in a bold move Kajaria Ceramics surprised the market by taking a lead in hiking the prices of its products. Many in the market were expecting price hike in the beginning of next year but Kajaria effected 1.5% price hike in the ceramics segment and another 1.5% in the vitrified segment. While some of the other prominent players too followed the market leader in hiking the price, leading dealers say even Morbi manufacturers are emboldened by Kajaria’s price hike and are now contemplating similar action.

Prior to Kajaria’s price hike move, tile prices were in downward trend during last one year mainly due to oversupply conditions prevailing in the market which in turn was due to large number of new players entering the market. According to market players as many as 50-60 new tile making units had cropped up in Morbi area during the first half of the current calendar year. However, as the year progressed number of new units adding to capacity started abating and some units reportedly downed their shutters due to poor market conditions.

Gas cost account for 30-32% of tiles revenues for the ceramics’ companies. The gas prices are function of international Brent Crude and exchange rate (particularly RAS gas) and had seen significant increase in past 4 months. This has resulted into significant increase in power and fuel cost for ceramics manufacturers. However, the recent retreat in Brent Crude (from US$85 per barrel to less than US$60 per barrel as well as exchange rate appreciation should provide some respite to ceramics manufacturers.

Just as things were seeming to return to normalcy, Indian tiles industry was in for another setback. This time it was on the export front as the Gulf Cooperation Council (GCC), a political and economic union of Arab states and g Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates (UAE), was mulling a temporary anti-dumping duty on Indian tiles. GCC is likely to impose anti-dumping duty of 15% for six months on Indian tiles by 5th Jan’19. Morbi Ceramic Association has already represented to Director General of Trade Remedies (DGTR) to make a case for them in GCC. According to the figures available with the Commerce Ministry, the ceramic exports from Morbi cluster was to the tune of Rs 8000 crore in 2017-18 and Gulf countries accounted for around 35% of the exports. The antidumping duty by GCC will impact exports of Indian tiles to Gulf, part of which may be diverted to domestic market, putting supply glut in the market.

Thus, when things were getting back to normalcy for tiles manufacturer, anti-dumping duty by GCC may once again create oversupply scenario in the domestic market as part of the tiles meant for GCC will be diverted to Indian market. Thus, year 2019 is likely to start on a bad note for tiles makers in India.