AC industry faces raw material shortage, supply chain issues: Bluestar MD

Bluestar MD B Thiagarajan

This year's summer was a record-breaker in terms of the extent of the heat wave across large parts of the country. And while that normally spells good news for air conditioner manufacturers, the soaring demand has led to raw material shortages, according to Bluestar MD B Thiagarajan. So much so that the consumer durables firm increased prices in June by 2-3 percent.

“Input cost was stable till April, but afterwards it went up by 3-4 percent on air conditioner-specific items. Even component manufacturers are struggling, while we are trying to procure raw materials at prevailing prices,” he said.

Across various brands, there has been a price hike ranging from 3 percent to 5 percent, as per Prabhudas Lilladher's research.

The Mumbai-headquartered Bluestar on monthly basis witnessed an “unexpected growth” of 40 percent in March, and 70 percent in April and in May, shared Thiagarajan.  The earlier onset of peak demand meant AC manufacturers had to buy raw materials sooner and at a higher price and "we are producing what is supposed to be produced two quarters later, what is full year's sale is done in five months only. So, we had to increase the prices by 2-3 percent from June onwards," Thiagarajan said.

The sudden spurt in demand caught manufacturers flatfooted, and had them scrambling to arrange for fresh materials at new costs as what they had in stock was used up months earlier than anticipated, Thiagarajan explained.

On-year sales growth in the first quarter of FY25  is expected to be at 60 percent for the air conditioner industry, said the Bluestar MD. Looking forward to FY25 growth to be around 30 percent, Thiagarajan said Bluestar will add 3 lakh units capacity at its facility in Sri City, in Andhra Pradesh's Chittoor district.

But there are clouds on the horizon,. To begin with, supply chain kinks are being reported globally, even if they aren't as disruptive as they were during the Covid years. Moreover, as Thiagarajan pointed out, “The next two years, if India’s growth persists, the raw material price will increase. Growth comes at a price.”

Global economic revival is leading the world to consume more than what can be offered. Challenges manufacturers face are not limited to higher input cost due to wars, elections, geopolitical issues putting pressure on the supply chain, he said.

This necessitates that companies continue to invest in securing inputs seamlessly, Thiagarajan said. Some potential strategies companies could employ include investing in inventory buffers and exploring alternative materials where possible. Of course, one has to be nimble. “Quickly order, quickly alter,” he said.

The cooling industry may be going through a golden period, but it will have to face multiple challenges and have risk mitigation measures in place. “The pressure is not unprecedented, but is part and parcel of doing business,” he said.

The big picture is that demand is high because temperatures are high. When demand is high, one consumes raw material at a faster rate. In the case of Bluestar, copper supplies that were to last till June or even July were consumed by May, Thiagarajan said.

The price of copper, which averaged $8,500 per tonne in 2023, surged to more than $10,000 per tonne in May, before easing in June at around $9,700 per tonne as per London Metal Exchange.

“The entire AC industry is Rs 23,000 crore to Rs 25,000 crore, including Rs 6,000 crore copper (out of which Bluestar requires Rs 700 crore of copper),” Thiagarajan said.

He noted that a 10 percent rise in copper prices has a potential impact on the industry of Rs 600 crore. The bulk if not all of the cost escalation will be passed on to consumers.

Domestic capacity is a big constraint. A large part of India's copper demand is met by Aditya Birla Group company Hindalco. Last year, Malaysia's MetTube, which manufactures copper tubes for the refrigeration and air conditioning industries, started a copper tube facility in Gujarat.

Copper availability is also a complex geopolitical issue, Thiagarajan noted. As with any other resource, there are multiple competing industries vying for it. To begin with, integrated circuit manufacturers prefer the metal over aluminium for their more powerful chips. So with the boom in AI and the embedding of chips in almost everything, chip makers are trying to garner as much of the material as they can.

Another front is electric vehicles (EVs). Compared to vehicles powered by internal combustion engines, EVs use twice or even three times as much copper.

According to Thiagarajan, with the EU threatening a 48 percent tariff on Chinese EVs, the Asian country is making all efforts to ship as many cars as possible before the levy comes into effect. "This is choking the supply chain. China’s growth has revived because everybody is working overtime to complete the supplies that triggers raw material consumption," he said.

Compounding the issue, India is promoting Make in India, raising non-tariff barriers. “India cannot expand manufacturing in two to three years to be self-reliant. We are still dependent on chemical, semiconductor, battery, chips, metals imports,” he said.