HomeIndustry TrendsMany Morbi tile manufacturers switch over to propane gas

Many Morbi tile manufacturers switch over to propane gas

With surge in natural gas price showing no signs of cooling off consumers of gas have been forced to look for other alternatives to remain afloat in this highly competitive world. For Morbi tile manufacturers past court order restraining them from the use of coal gasifier has limited their choice but that doesn’t mean that they are left with no other alternatives. Many tile manufacturers in Morbi are switching over to propane gas which is mostly produced at the time of petroleum refining.

Propane production at full capacity

As the propane was available at a 10-15% discount to gas in Q1FY22, there was enough incentive to switch over to this alternative. As a result, existing propane capacity utilisation is now running full and has also prompted the industry to implement further capacities. Out of 850 manufacturing units in Morbi, about 60-70 already have a propane facility and now 8-10 units per month are adding this facility. Companies take 4-6 months (including government approvals) to set up and operationalise propane capacity. Capital cost ranges from Rs 3mn-10mn for a capacity of 10-60t which the tile manufacturers feel worth spending as the natural gas price has gone through the roof.

Steep increase in natural gas price

Pre-Covid, gas cost was at Rs 27/scm which has more than doubled in last 18 months and currently stands at Rs 58/scm plus taxes for 80% of contractual quantity. The additional 20% is purchased on spot basis at above Rs 100/scm. This has dented the profit margin of the Morbi tiles manufacturers who saw margins falling from pre-Covid level of 10-15% to 5-7%. According to industry experts, ideal gas rate for sustenance of the business and competition with China is Rs 30-35/scm. Also note that the cost of transport for China is 4-6% of revenue vs 10-12% for India.

Steep rise in gas price affected its consumption which has reduced to 4mmscmd from 7.0-7.2mmscmd, with a 1.5-2.0mmscmd decrease in consumption and 1.0-1.2mmscmd of substitution by propane and LPG.

However, due to increasing switch over to propane gas gap between the prices of natural gas and propane is narrowing down and at this rate latter may equal the former’s price or may even exceed it in the near term which may prompt the natural gas supplier to hike the price again.

Logistics problems affect exports

The Morbi ceramic industry has a Rs 40000 crore turnover, of which 60% is domestic and 40% comes from exports to 130 countries. Turnover has decreased in both exports and domestic market in last few months due to logistics problems and cost inflation. In the last six months, non-availability of containers and higher freight cost (US$ 10k-12k per container from US$ 7k-8k) have led to a 25% decline in exports. Freight cost has reduced a bit to US$ 9-10k in April but container shortage remains a challenge. Additionally, the rising gas cost has intensified cost inflation, forcing a quarter of the Morbi plants into temporary shutdowns.

New capacity additions

Further, there is new capacity addition overhang in Morbi. The Morbi industry is setting up about 100 new units, out of which nearly 50% have already commissioned during the past year and another 30 are expected over 4-6 months. Last year, 60-70 units closed down despite which the industry saw a net addition of 2-3 times the size of the closed capacity.

It should be noted that post Covid, the increased churning of old real estate inventory and replacement market revival led to robust demand for ceramic players. Demand for old real estate inventory has been steady in April thus far as consumers are buying property in anticipation of increasing prices. However, with the rising commodity costs and absorption of pent-up demand, new construction activity has slowed down. This, in turn, will affect demand for tiles and sanitaryware in the short and medium term.

Subscribe to our newsletter

To be updated with all the latest news from Sawdust

reports

moves

tenders

latest news