New Year has not begun well for the tile makers as it has coincided with rising tension between USA and Iran in the Middle East. Volatile political situation in Middle East will always make crude oil prices volatile thus increasing the worries of oil users world over. Natural gas price too moves in tandem with the crude oil price and recent 17% spike in the price of crude oil has no wonder made the tile makers more worried as the natural gas is the main fuel for the tile manufacturing.
The cost of natural gas accounts for 30-32% of tiles manufacturing cost for ceramic companies. The gas prices are a function of international Brent crude (particularly Ras gas) and the exchange rate. In the first half of last financial year too gas price had seen significant spike leading to margin contraction for the tile manufacturers. However, subsequent drop in Brent crude (from USD85 per barrel to USD 60 per barrel) as well as rupee appreciation vis-à-vis dollar had helped the tiles manufacturers to maintain their margins. However, with the rising tensions in the Middle East the situation is back to square one in January 2020. If the situation continues to remain tense in the area for long, their margins may again come under pressure. Since tile makers almost have lost their pricing capacity due to poor demand conditions, increasing the price of end product may not be the solution. To add to their worries, rupee too has started depreciating which is not at all a good sign for them.
The ceramics industry in Morbi largely depends on Gujarat Gas while tiles plants outside Gujarat largely depend on RLNG/Ras Gas, imported from the Middle East. While Gujarat Gas decides its own price, to be charged to the ceramic industry in Gujarat, RLNG prices are a function of the 3-month rolling average of Brent crude since January 2016.