HomeIndustry TrendsSpurt in gas price may put brakes on tiles’ industry’s growth

Spurt in gas price may put brakes on tiles’ industry’s growth

It has been a smooth sailing for the tiles manufacturers post lockdown period but the sustained gas price increase may put road blocks for the industry in the coming weeks. For example, Singapore spot gas prices have risen by 112% in the second quarter of this financial year and in the last month itself it has gone up by 54%. Henry hub (US) gas prices too rose by 71% in Q2 and 43% in September itself. If these high levels sustain, domestic gas prices will rise further, impacting the whole industry and especially the tile manufacturers in the Morbi cluster.

Natural gas accounts for nearly 25% of the production cost of the tile manufacturers and average gas consumption price for Q1FY2022 stood at Rs. 32/scm versus Rs. 28.5/scm in Q4FY2021. This has further gone up to average of Rs 35/scm during the second quarter and there are no signs of gas price cooling off, meaning user industries like tile industry have to either hike the price of end products or compromise on margin front.

Gujarat Gas hiked price in August

It may be recalled here that Gujarat Gas Limited (GGL) on 24th August 2021, had sharply increased the industrial gas price by Rs 4/scm. Last price increase was on 1st February 2021when the price was hiked by Rs 5/scm. Thus, cumulative price increase during the current calendar year has been 31% or Rs 9/scm. Ras gas price which is a direct function of Brent and USDINR, is expected to be around Rs 37.1/scm in 2QFY22. At current Brent (USD78 /barrel) and USDINR (74.1), Ras Gas price will be around Rs 38.5/scm in 3QFY22.

Kajaria, Somany to gain in short term

Though Morbi accounts for nearly 2/3rd of the tiles manufacturing capacity in the country, leading tiles manufacturers like Kajaria and Somany have substantial manufacturing capacity located outside the Morbi cluster. For example, Kajaria Ceramics 74% of the production capacity is located outside Gujarat. Similarly, Somany has 42% of its production outside Gujarat. These manufacturers are expected to be more competitive, at least in the short term, as their gas cost will be lower than Gujarat gas. But this short term advantage could get negated if the Morbi loses exports momentum and start to reconsider domestic sales.

Exports see robust growth

Its true that Morbi tiles manufacturers have been witnessing strong exports momentum in recent months as a) various countries imposed anti-dumping duty on Chinese tiles and anti-China sentiment owing to Covid-19 and b) traders have been increasing import share towards India to hedge purchases. Tile exports were up 20% YoY in FY21 despite the washout in April-May 2020 due to the Covid-19 lockdown. Export momentum continued to remain strong in April-May 2021 showing a growth of 25%. It slowed down slightly in June 2021 due to container availability issues and extremely high ocean freight rates.

Exporters may have to hike prices

Due to various multiple issues of gas price hike and increasing freight cost Morbi players will need to take price increase in export orders in the coming months. The impending hike could have modest negative impact on margins (if buyers don’t agree to this increase on existing order) and could also potentially hamper new exports momentum apart from margin contraction in the interim.

Meanwhile, around 60-70 large greenfield plants (mostly in GVT segment) are expected to commission over next 2-3 quarters to cater to export demand. Thus, there are several issues acting in the opposite directions which may finally determine the pricing factors.

However, on the domestic front there are some positive factors emerging which will have some favourable impact on the industry. For example, lockdown norms are being further relaxed thus clearly indicating that Covid-19 situation is presently under control. Also, vaccination drive is in full swing which is perhaps a dominant factor in our fight against the pandemic. Also, real estate sector is showing clear signs of recovery. Though all these factors may help the tiles industry in the medium to long term, in the short term it has to tackle the cost inflation and logistic issues.

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