Published in January, 2019
Anil Taneja,
Director, LITOSonline.com,
anil.litosweb@gmail.com
A new year brings with it new hopes, new expectations, often new objectives, a new determination. The main question a businessman has in his/her mind is- “What are the prospects for my business this year ?”
Below is an attempt to highlight some factors/possible developments that will affect the natural stone companies from the global perspective, and which many stone industry businessmen may need to follow especially closely during the year 2019 to answer the above question. Of course, every local market has its own characteristics, idiosyncrasies, preferences, trends, competitive environment- all these can be much more important to the results of a particular company. Also, obviously, every company is a world in itself, so generalization has its limits.
THE OLD ASSUMPTIONS ARE NOT VALID
Normally it would make sense to first focus on macro-economic trends. If a country’s economy is doing well, it is reasonable to assume that construction and renovation activity will also see some upturn in that country, be it a developed or an emerging market. Stone companies in that country will also benefit in the benevolent environment. This has been a very basic and safe assumption during the last four decades.
However, especially during the last five years, the very strong link that existed between economic dynamism in a market reflecting in greater or less demand for natural stone, has loosened. The growing popularity of quartz in many important markets along with the appearance of a new generation of ceramics due to technological innovation, is the reason. This weakening of the linkage between economic growth and demand for stone should have served as a warning to the natural stone industry that a more fundamental change was taking place in the competitive dynamics. However, by and large, the natural stone industry, conservative, inward looking, almost ‘ narcissistic’ in nature, chose to ignore the signs. Most businessmen adopted a ‘wait and see’ attitude.
That link broke completely during 2018. Last year the world economy grew at a very healthy rate in most major markets( there will always be some countries among more than hundred fifty that will be in a crisis). Yet, in spite of overall strong world economic growth, by and large, the natural stone industry companies all over the world were struggling, many barely surviving. Real production of natural stone was much less compared to the installed production capacity in 2018.
THE NEW INDUSTRY DYNAMICS
So let us first elaborate on the new industry competitive dynamics which are currently undergoing unprecedented volatility and have created great uncertainty.
The huge increase in production of the 'new' alternative materials because of technological innovation, and the desperate need for selling all that stock, has created a big mismatch between supply and demand. Many new factories making big format porcelain and also not so big formats, with big marketing budgets aimed at reaching the mass audience, have been making great efforts in educating specifiers like architects and interior designers, and are even aiming to create their own brand in the world. They are direct competitors to natural stone. Quartz and porcelain, during 2018, took away major market share in many applications at the expense of natural stone. While US is where quartz and new alternative materials have met with the biggest success, in many other high income countries they have also replaced natural stone in applications such as kitchen countertops, floorings, facades, etc.
The relatively higher prices of the alternative materials actually made them more attractive to work with, this way there was more margins for everyone, be they wholesalers or fabricators. In natural stone industry, even those companies with access to very attractive exclusive stones available in limited quantities, often foolishly took the opposite approach, lowering prices, leaving little gross margins for the intermediate chains, thus making natural stone less attractive to do business with.
HOW HAS THE INDUSTRY RESPONDED?
It makes sense to ask- how did the industry respond to the rapidly evolving situation in 2018 ? Did the industry people, collectively or individually, do anything different to improve their competitive positioning ? The answer is, by and large, very little, clearly insufficient. Some companies have made greater efforts at reaching out to architects, promoting their stones, and offering cut to size for projects. A handful have tried to diversify in new applications like furniture and placed greater emphasis on design in everything they do. Some have experimented with new textures and finishes. Some more have concentrated in ensuring their samples are well placed in kitchen and interior design outlets. Some associations have made greater efforts in the digital world. These are all laudable efforts. But for a global industry of more than two hundred thousand companies, big and small, overall, the effort has been too little. Most businessmen have simply been overwhelmed with the day to day responsibility of running their companies in a very tough environment.
THE COMPETITIVE ENVIRONMENT IN 2019
During 2019 we can expect to see:
1). A further increase in supply of big format porcelain slabs in the market as more production lines come into the market. New porcelain factories are also expected to come up in Eastern Europe, Middle East, and elsewhere. Some Spanish and Italian companies are spending huge amounts in marketing to create their own brand and are systematically strengthening their logistics infrastructure throughout the value chain as they enter new markets. But not every company will succeed in this effort, and with so many players one should expect a commoditizing of ceramics and a very sharp decline in prices in 2019. Most observers of the ceramic industry agree there is going to be a huge mismatch between supply and demand, there simply is not so much demand for the amount of production that exists and is expected. Will the porcelain companies set up their own stockyards and train installers in attractive markets, bypassing the existing infrastructure of wholesalers and fabricators? Most likely this start happening in 2019 in a big way.
2). The tariffs on Chinese quartz by the USA, if the trade wars continue in 2019, means that many Chinese factories, unable to compete with much high prices, will close down. But it also means they will be aggressively pushing their materials in rest of the world markets, with Chinese quartz prices, already low, going down to throw away levels. This could mean quartz may frequently replace even very low priced stone in the price sensitive markets. Those people who had assumed that artificial stone was too expensive in their market segment and was thus not be a competitor for them, will get a big shock.
3). The massive US$ 500 million market in USA at customs prices, that was occupied by Chinese quartz, is now up for grabs if the high tariffs are not removed by the US government.(The Americans seem to think the custom duties will stay). Who will occupy this huge new space and opportunity ? Some of it will be eagerly taken up by quartz manufacturers from USA and from factories in other countries. New production lines are coming up in USA and also some new quartz factories in countries like India. But some of this space will also be taken up by the porcelain companies. Natural stone exporters with a consolidated presence in USA are also hopeful of at least a modest increase in demand for their granite and marble slabs. Will the wholesalers and fabricators, in USA and elsewhere, finding it difficult to do business in such an extremely volatile situation of changing prices and new logistic competitors, decide to once again to return to pushing natural stone, which they know best ? That is a distinct possibility and one of the most interesting aspects to keep an eye on.
And now, finally, what does the macro-economic environment look like in 2019 ?
THE WORLD MARKETS FOR STONE IN 2019
1. Probable gradual slowdown in the US economy, but it should not to be confused with a recession in the sense we are familiar with. It is hard to believe that an economy that was at almost full employment in 2018 with rising wages, will suddenly start looking like it was in 2009. But when an economy slows down, unpleasant things do happen in the construction industry. In some parts of USA there is already a situation of oversupply in housing. Building permits, indicator of future activity, are also down. But for now, things still look very good.
2. A still booming East Europe (those countries inside EU). The EU subsidiary funds will continue to work their magic in boosting the East European economies with a buoyant construction industry. For now there is no reason to expect any slowdown in demand. Do expect artificial stone to increase its market share there, neutralizing most of the possibilities for natural stone.
3. No significant change expected in demand in Germany. This is a very stable country. The German stone companies will continue to have other types of problems- shortage of qualified labour, managing the transition to a new generation. Some of the optimism in France has disappeared recently but public works will continue to be the main motor of demand in natural stone. Stable demand in other west, central, south and north European countries should also be the norm, even if the headlines scream of slowing economies. Italy is giving nightmares to many financial folks, but it is hard to predict anything about what could happen later on in the year. Possibly a sharp decline in construction could suddenly take place in UK affecting demand for stone, if the much talked about Brexit process runs out of control, but who know ?
4. Turkey was an important market not just for the local marble companies but also as a buyer of granite and other stones from other countries. It is now going through a serious economic slowdown which will likely continue throughout 2019.
5. Russia is no longer the market where pricey exotic stones from abroad was once used for huge shopping malls. Public works involving huge quantities of local stones for exterior pavings meant that many local stone companies have been doing extremely well during last few years. Stone suppliers from other countries have recently noted a small but steady increase in demand for imported materials- this situation will probably continue in 2019. It is possible there will be more investment by government in housing and other infrastructure projects to boost the economy- that will be most welcome if it happens.
6. The Gulf countries saw through a sharp drop in construction activity during last 3 years. The continuing low energy prices mean there is much less money flowing around in the region. Projects related to the World Football Cup in 2020 and the Expo in Dubai will, of course, continue. But the overall market is much smaller now, and very price sensitive. There is much talk of oversupply in hotels and housing in the Emirates. Iraq has become a rare bright spot. Saudi Arabia market will depend mostly on government projects. Some people are excited about Syria now that the end of the war is in sight, but it will be quite some time before reconstruction takes place. The new capital being built in Egypt and government spending means there will be more demand for natural stone, but most of that demand will be fulfilled by the several brand new marble and granite government owned factories that have come up, and by the local companies. The other north African markets should remain stable. As in Egypt, in Algeria and Morocco, and possibly Tunisia, more development of the local stone industry should continue with governments looking to create opportunities for employment.
7. India has impressive economic growth figures, around 7 to 7.5%. By now many people had expected booming construction activity, but the balance sheets of the banks have still to be cleaned up before this takes place. The demand for natural stone remains fairly decent, but by no means is it expected to reach a level anywhere close to China. Generally speaking, the companies selling in the local market will continue to see steady growth in their business. The new marble industry in the south ? That is old news now. Expect to hear more about new quartz factories coming up as time passes by, and a new modern granite cluster coming up in Rajasthan.
8.It has become evident to block exporters around the world during the last four years that China is no longer buying as many blocks as before, and it is not because of increased local production. Sales of many of the granite, limestone etc .blocks that were being bought by Chinese buyers, have gone down dramatically, by as much as 50 to 80%, in many cases. Exporters of some exotic materials, from Brazil, for example, or onyx, however, have seen increased sales in recent years, but the volumes are now much smaller. It is hard to predict a major change in trend during 2019. China, during its peak growth period, accounted for around 50% of the world demand for natural stone. Even with slower economic growth ( but now with much higher per-capita income level), it will still remain the most important market for several types of stones and for many stone mining companies. There may be less new construction, but there will also be more renovation work.
9. Far East Asian countries used to be overshadowed by the spectacular economic growth of China, but now almost all the countries, Indonesia, Thailand, Vietnam, Philippines, Malaysia, etc. have become interesting markets for stone exporters everywhere. Steady annual growth of around 5% for several years means the “ half- China” region of 600 million people will become more and more important in the stone industry, both as a market as well as competitors. Australia has been going through non-stop strong economic growth for decades now, it has become an important market for many companies. As in USA, quartz became popular and replaced natural stone in many applications, but now there are signs that natural stone is on the growth path once again.
10. There is greater optimism in Brazil with the new government in power, but it takes time before an upswing in construction in the country takes place and the local companies note the difference. For now the Brazilians will continue to travel to all kinds of places, especially USA, but are now also upgrading their skills and capacities to more sophisticated stone products, not just slabs.
11. Latin American countries have now finally become used to stable and steady economic growth even though countries like Argentina gave an unexpected shock last year. Mexico has become a must visit destination for any export manager of a stone company. But their air tickets, if the salesmen are coming in from another continent, also now include Bogota, Lima, Santo Domingo, Panama etc as part of their itinerary. Not Caracas, though.
12. For some years now sub-Sahara African countries have become part of the stone industry map where not only some very attractive stones quarries have been found and are being developed, but a growing middle class means they have also become markets. Countries like Tanzania and Ethiopia have some great materials, not just South Africa, Zimbabwe, Angola or Namibia. Countries like Kenya and Nigeria and others are now steadily growing markets for stone. Expect more of this positive development to continue during 2019.
CONCLUSION
With so many variables in such a fast changing and volatile world any predictions must be taken with a grain of salt- and so it is with this article. We hope you enjoy reading it, but also be careful about taking it too seriously. There are three predictions, however, we are sure of:
1.Demand for sleeping pills in stone industry will increase.
2. Consumption of alcohol will increase.
3. By the end of the year many people will find their hair has turned completely white.
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