Pipes are the backbone of irrigation and buildings industry and in a country like India where agriculture contributes nearly 20% of the GDP and urbanisation is taking place at a rapid pace, significance of this industry can never be undermined. No wonder then many new players are entering this high potential industry and the existing players are adding to their capacities to take advantage of the future demand explosion.
Raw material issues persist
However, in the short term, it is the raw material prices which are on constant up move since last few quarters posing few sets of problems for plastic pipe manufacturers. Recent hurricane Ida in USA has only added to the cup of woes of PVC user industries. The hurricane is having its impact on US export polyvinyl chloride prices with latest deals being done for September volumes in a range of $1,900-$1,950/mt FAS Houston, a fresh all-time high since S&P Global Platts began assessing the market in 1983. The prices are expected to retreat once producers restart operations. The PVC prices in Asia are further facing upward pressure due to higher freight rates.
Five US PVC plants clustered along the Mississippi River were shut down ahead of Ida’s Aug. 29 landfall. The plants that make up 41% of North American PVC capacity were slowly restarting, but were hindered by limited availability of critical industrial gases.
PVC Resin price is up by 23%
Indian PVC resin price at Rs150/kg, has moved up by 23% since July 1, 2021 due to tight global supplies and high ocean freight rate. Chinese PVC resin prices have also moved up to a record high level of RMB10.2/kg (up 3.7% on a weekly basis and up 10.7% since July 01, 2021). High PVC resin price is likely to result in increased cost of production and ultimately culminating in final product price hikes. Usually, pipe manufacturers carry inventories of 45-60 days and as such sudden spurt in price of raw material will impact with a time lag of few weeks.
Unorganised sector disrupted
Meanwhile, the unorganized segment that contributes 35% of the industry are supposedly reeling under pressure from multiple angles like stricter surveillance and enforcement rules under GST, demonetization, liquidity crisis and now steep rise raw material price and its irregular supply. This was also reflected in much superior growth for the larger organized players as against the smaller regional players. Some of these regional companies are losing market share on account of diversified businesses, highly leveraged balance sheet and deteriorating working capital requirements. While on the other hand, larger organized players with net positive cash flows are venturing into newer territories and are raising the share of value added products. All these factors are leading to accelerated consolidation in the industry and resulting in higher than industry growth for the organized players.
The shift from unorganized players to organized accentuated in FY21 when the prices of raw materials (65-70% of sales) rose by 80-100% due to global supply shortages and container availability issues which continue to plague the industry in the current financial year also. Meanwhile, the organized players are displaying better pricing discipline, managing their costs efficiently while ensuring adequate supply of PVC resin. On the other hand, the smaller regional players and the unorganized players may take longer than expected time to regain the lost market share once the supply chain stabilizes. Post covid, the larger organized players have emerged much stronger with robust balance sheet, improved working capital due to their efficient and wider distribution network and geographical expansion.
With better balance sheets organised players in the industry are well placed to gain from the emerging growth opportunities in the industry in the long term. Interestingly, the sector was one of few industries which was least affected by Covid-19 and lockdown when it was able to hold on to its market size. With real estate sector set to emerge stronger post Covid-19, pipes manufacturers can hope for a double digit growth for a foreseeable future.