This is a year of mixed fortunes for boards and laminates manufacturers with things slightly skewed towards negative which may continue to remain so in the short to medium term. Within the sector, there are some segments which are doing well while others are taking much longer time than expected to stabilise.
For plywood industry, things are returning to normalcy after the disruption caused by the introduction of GST and subsequently the e-way bill system. According to industry majors, GST has been able to give a level playing field though things didn’t happen overnight but took much longer time to materialise. As a result, plywood manufacturers in the organised segment are seeing increased volume.
Plywood segment is seeing growth in mid-segment and volume growth is seen mainly in tier-2 and tier-3 cities. So, some of the manufacturers have started focusing on this segment and are becoming more active in smaller cities. For example, Century Ply has introduced Sainik 710 (a low price point product) and forayed in Tier-II & III cities. This brand has reportedly gained significant traction and now forms 10% of overall plywood volume of the company. Similarly, Greenply has also launched 2 sub-brands in the lower end of the mid segment (Bharosa and Jansathi), for which the company is getting favourable response from the market. Interestingly, Greenply is seeing increased growth for its premium plywood brand from residential sector. It is an important development as the demand from residential sector had remained muted in last 2-3 years.
Manufacturers are increasingly concentrating on mid segment of plywood market as they expect shift in consumer preference from lower segment to mid-segment in the coming years. This transition, they expect to happen much faster post-GST introduction.
Better surveillance under GST
It has been more than a year since the GST has been introduced in the country now and the unorganized players are feeling the heat in the current GST/e-Way bill environment as it is becoming increasingly difficult to play the tax arbitrage game. Delayed, albeit improving implementation of the e-Way Bill should aid large organized players over the longer run. According to some unconfirmed reports some plywood industry units are facing shutdowns while some have started approaching larger players in organised sector to explore the JV/contracting route.
As the surveillance becomes more efficient, life for players in unorganised sector may become tougher. For example, Uttarakhand has introduced a rule to install RFID (Radio-frequency identification) sensors on trucks carrying freight so as to take care of the e-way bill evasions. These sensors send signals to highway based sensors on whether the particular truck’s e-Way bill has been generated or not (if not, a flying squad will intercept the particular vehicle). This makes the evasion of tax practically impossible. However, such measures have been taken in only in Uttarakhand and may be progressively implemented in other states as well.
Raw material supply stabilising
On the raw material front things getting stabilised slowly. Though timber prices had gone up a few months back that was mainly due to Monsoon when the availability of timber usually becomes a problem. Some of the manufacturers have started plywood production with low-cost Okoume face veneers vs high-cost Gurjan face veneers used earlier. This has helped them to keep the cost of production under check without affecting the quality of the final product. According to industry sources, core veneer prices have come down in recent months due to lesser demand from unorganised sector. However, this may be a temporary phenomenon as the dip in demand by the unorganised sector is likely to be made good by increased demand from organised sector.
Medium Density Fibreboard (MDF) is struggling with excess supply and lower demand. India has a total installed MDF capacity of 1.3mn cbm, with domestic demand at 0.7mn-08mn cbm. According to industry experts, the company expects the new capacities set up by key players to be absorbed over the next 24 months. However, good news for the industry is that no fresh capacities are likely to come up in the sector in the foreseeable future due to the massive expansion seen of late.
Due to intense competition price cuts had become norm of the day in the industry. Especially newcomers resorted to heavy discounts to push their products in the market and gain market share. Greenply is considered to be the market leader in MDF and its products used to command premium in the market. However, intense competition in the market has changed all that. The company cut prices by 8-10% in August 2018 and now its prices are at par with competitors.
However, industry is growing at healthy rate of 15-18%. Imported MDF is still flooding the market and according to unconfirmed sources, imports account for 35% of the market. Recent rupee depreciation neither could prevent imports nor could it help in increasing exports as other Southeast Asian currencies also weakened and thus competition remained stiff.
Phenol price is increasing.
Laminates were one of the worst sufferers of recent crude oil price jump and rupee depreciation. Price of phenol which is the main raw material in laminates is directly linked to crude oil price. Also, paper required in laminates is either imported or priced at import parity and thus rupee depreciation pushed up its price too. As a result laminates manufacturers had to hike the price of their end products to pass on the cost inflation to the consumers. For example, Century Ply has taken a 3.5% price hike from November. But the industry sources believe that phenol prices may stabilise soon and they don’t expect any further hike in the cost of raw materials in the short term.