Ups and downs are part of any business and its more so in case of Indian tiles industry because of its intensity as well as frequency. Every time the industry faced a setback – be it change in taxation regime or upheavals in user industry or induced by stringent environment rules, the industry has fought its way back to recovery and normalcy in no time. In 2019-20 industry was in deep trouble mainly due to some court rulings and slowdown in real estate industry which was followed by Covid-19 outbreak and consequent lockdown bringing the industry to grinding halt. But the industry refused to accept the defeat and recovered from abyss much faster than any other industry, partly aided by exports and pent-up demand.
Rising natural gas price is a cause of concern
However, this recovery seems to be short-lived as the industry is faced with rising natural gas price which has gone up steeply in last one year or so. The cost of natural gas accounts for nearly 25% of the production cost for the industry and even a slight increase in the cost of gas price will have much larger impact on the margins as the industry is operating on thin margins. Along with the price of natural gas price, the cost of other inputs too have gone up which have only helped in worsening the situation. Also, non-availability of containers and spurt in freight rates have added to their agony.
Morbi cluster which accounts for about 65-70% of country’s tiles production is hit the hardest by the gas price spike. Usually, Morbi manufacturers keep their units closed for one week to celebrate Janmasthami but this time holiday was extended for few more weeks due to problems engulfing the industry.
Gas price varies region to region
There is no uniform policy or norm to determine the gas price that is applicable to the whole country as a result of which it varies from state to state depending upon the distributing agency and the source though they tend to converge over a period of time. Thus, while gas price is higher in Southern and Morbi region its comparatively cheaper in some other regions. Due to varying prices of gas, cost of manufacturing too varies from region to region. As a result, north based units are comparatively better placed as compared to Morbi or South based units. This has put the North based tile manufacturers in a much better position than others. For example, for Kajaria Ceramics, as on 01st October 2021, the gas prices for northern plant stood at Rs 38 SCM, Morbi Rs 50 SCM and Southern region it stood at Rs 60 SCM. This is the first time that the industry has seen higher gas price in Morbi than in the north. According to some Morbi based manufacturers price of natural gas is likely to go up by another Rs 15 SCM in the coming months which may further aggravate the situation.
Exports are declining
The impact of gas price hike is visible and telling on Indian exports in recent months. Exports which were hovering around Rs 1,100 crore/month in July have come down to Rs 800 crore now. However, industry experts say the decline in exports is also due to higher freight rates. Ocean freight cost has increased significantly in last 6-9 months and the freight cost at present is around US$ 7,000-8,000 per container. According to some exporters, freight prices in Europe have increased by US$ 1.0-1.5 per square meter.
Meanwhile, prevailing situation has encouraged some of the non-Morbi manufacturers or those who have manufacturing facilities in multiple locations to look at exports as an additional revenue earning option. For example, Kajaria Ceramics whose main focus continues to remain on domestic market providing benefits of premium pricing, largely backed by its strong brand recall, and wide-distribution strength in the local markets is planning to rework its strategies. The export markets such as Europe have become attractive currently with sharp increase in product prices due to jump in input costs. The company is planning to raise the share of exports in its overall revenue to 5-8% from the current level of 2-3% to take advantage of the prevailing situation.
However, continuation of the current situation for a prolonged period may put the Indian tiles manufacturers into a danger of losing the international clients permanently. Though such situation may not arise as the gas price hike is universal and not restricted just to Indian manufacturers only. So, one only hopes that the normalcy returns to market soon.