What is surprising the most is the survival instinct of the Morbi unorganised tiles sector. Antagonists had long ago written off this segment – way back in 2016 when demonetisation was announced. But this segment who sell unbranded tiles have survived several headwinds – real estate sector slowdown, demonetisation, adoption of RERA, GST implementation and the NBFC funding crisis. The latest one was in last year when NGT banned the use of coal gasifiers in tile manufacturing. Everyone had written off this segment several times indicating market share gains to branded players. But every time these unbranded players have risen like phoenix rising from ashes. These unbranded players have not only survived but also have given their branded counterparts a run for their money.
Outbreak of COVID-19 gives new lease of life
This time it is an opportunity out of disaster arising out of COVID-19 outbreak in China and its subsequent spread to the whole world. Lunar New Year holidays and its subsequent extension due to outbreak of Coronavirus in China created a vacuum in tiles export market which was very quickly grabbed by the Morbi based tile manufacturers who were grappling with stagnating demand and weakening price in the domestic market. Outbreak of Coronavirus forced Chinese players completely out of export market for nearly two months. Incidentally China is the world’s largest manufacturer and exporter of tiles.
Morbi increases tiles exports
China’s shutdown thus, allowed Morbi-based players to increase export sales. Exports were not restricted just to traditional export heavens of Gulf countries, but also made inroads into Europe and North/South America. Markets in US, Indonesia and Thailand started opening up. Meanwhile, GCC decided to defer its decision to impose anti-dumping duties on Indian tiles – partly due to the efforts of the Indian government and partly due to unforeseen circumstances arising out of COVID-19. While certain players faced order fulfilment delays due to shortage of shipping containers, most of them were able to make profit. However, the spread of the pandemic in these places caused sales in March to fall.
With Chinese re-entry future is uncertain
Despite having good time on the export front, Morbi tile makers are staring at an uncertain future with the resumption of production in China, much faster than one expected. With Chinese producers restarting supplies, India’s market share gains could reverse if export markets open up and Morbi players stay under lockdown for long. With India now under lockdown, and China restarting production, it is possible that China could regain its export market share that it lost to India. It could possibly make in-roads into Italy’s and Spain’s markets as well (2nd and 3rd largest exporters, respectively), especially if export markets open up earlier.
Steady beginning on domestic front
In the domestic market too, demand was good in the first two months of January and February when the awareness about COVID-19 was not much among the public at large. Tile makers were hoping for 5-6% growth in the quarter. However, March was a different month altogether. New constructions slowed down and renovation and repair works almost came to standstill as the people started fearing Coronavirus spread. Second half of March was complete washout. This is the most important period for the tile makers as it marks just the beginning of the new season.
However, there was not much fluctuation in the tile prices during the fourth quarter. On the export front, China’s withdrawal from the scene increased the pricing power of exporters slightly. As most of the Morbi based players were focused on executing export orders and ignored the domestic market which helped the branded tilemakers to maintain the price at a steady level. Its also true that most of the players in Morbi were operating on a thin margin with no further scope for price reduction in the domestic market. The only casualty was extended credit period of 120-150 days which put stress on working capital.
Falling natural gas price a tailwind
One silver lining among the dark clouds was the softening of natural gas price. Gas cost accounts for nearly 30% of the manufacturing cost and any reduction in gas price is a good news for the tile manufacturers most of whom were forced to switch over to natural gas from coal gasifiers. Usually, reduction is passed on to the gas consumers with a time lag of three months. Gas prices in Morbi have been hovering at Rs29-32/scm and part of the benefit of educed gas price has been nullified by falling rupee value.
With the resumption of Chinese production (much faster than one expected) market has entered into uncertain phase. China will make all the efforts to regain the lost market and also enter new markets. However, cases of COVID-19 relapse going up in China in recent days has once again increased the suspense. Thus, its an anxious moment for tile manufacturers in Morbi.