Where does the madness of ever lower prices in natural stone end?

Anil Taneja,

Director, LITOSonline.com

anil.litosweb@gmail.com

 

If there is one emotion in the natural stone industry which is currently common among all businessmen involved in the processing stage, it is a feeling of desperation at the ever lower prices that their products command. Never mind which country it is, whether the factory works with granite or marble or any other stone, whether the factory is big or medium sized or small, the one common trend which keeps all businessman awake at night and increasingly demoralised, is that the prices at which they have to give to make a sale, any sale, is always getting lower and lower. Things have gone to the extent that no matter how efficient a factory is, having eliminated all superfluous costs, very often even the costs of processing are not covered by the prices the buyers are willing to pay and the competition is offering. If there is one aspect of the business that provokes an ulcer among the long suffering factory owner and create a visceral hatred and mistrust towards the competition, it is the question he or she is asking himself or herself all the time, every single day of his/her life- just how can that other person give these low prices? Does that person not know how much it costs to produce a slab of stone? One more time, the businessman takes out the calculator, does the numbers rigorously, calculating every single cost that is incurred in the factory, and one more time he/she comes to the same conclusion- it is impossible to match the prices the competition is giving.

Ever lower prices is a phenomenon common to just about every industry, to almost every physical product and most services, there is nothing new there. They call it commoditisation, when an entire industry enters a spiral of constantly declining prices. When the profitability of practically the entire industry disappears completely, and a company making an acceptable level of profits is a rare exception, the situation is especially dangerous. Especially in 2019, the decline in prices of slabs, for example, exists just about everywhere. Veterans with memory will even take out their rates 15 years ago to prove it- prices today are less than what they were at that time). And we are not even talking of payment terms, which is another story, and a reason to take out another handkerchief to dry the eyes of the weeping factory owner.

 

CASE STUDY OF A TYPICAL MARBLE PROCESSING FACTORY

What follows is a case study - an example of costs of a fairly typical marble processing factory in Spain. The numbers may change from country to country, company to company, they will be somewhat different in granite and other stones, but in a general sense, most factory owners would concur with the overall orientation. In this particular case, we are assuming the factory has modern machinery, an administrative and commercial structure that is well adapted to the current age, and the company is financially sound with no major debts or interest payments to make every month. This company is medium sized, which means its daily production is approximately 1000 sqm. The total number of employees is between 20 and 30, and they are qualified and experienced. This company is also meeting its fiscal obligations- social security, taxes, etc. Also important to mention is the company is determined to make a quality product.

This company processes blocks of an average limestone or marble. The cost of a low quality limestone block in the market is, on average, around 300 euros per cubic metres, in the case of a high quality material the block price tends to be anywhere between 800 to 1000 euros per cubic metres. We will assume, in this particular case, that our factory owner, because he has really squeezed his supplier of blocks (also crying away and with a handkerchief in one hand) really hard and managed to obtain a medium quality block at 300 euros per cubic metre.

The cutting cost for the factory owner works out to about 100 euros per cubic metre (this includes, electricity, maintenance costs, labour costs, cutting costs).

So, the cost of slab is 400 euros per cubic metre (300+100), and assuming a cubic metre gives around 40 sqm of slabs, the cost of an unpolished slab works out to be 10 euros per sqm.

Now add the cost of treating stone (filtering, resins, epoxies,etc.) and polishing. This  average cost is another 10 euros per sqm. Add 2 euros per sqm for cost of bundle.

The cost of a polished slab is now 22 euros per sqm (10+10+2). Not included are financial costs, administrative costs, depreciation, or commercial costs.

Now, let us enter the jungle, sorry market. Hungry lions (sorry, buyers) await this serious minded factory owner and shady characters (sorry, the competition) are all over the place.

What does the factory owner find? There are actually people offering slabs at 14 or 15 euros per sqm!

Something obviously is terribly wrong with the business. This cannot be a reality that lasts very long - it is financial ruin for serious companies. How can anyone give these prices? In some cases, the factories are obsolete and the owners of these factories have no real interest in continuing in the business- it is simply a matter of time before they disappear. In some cases, not very frequent, but it does happen, it may be a question of liquidating stocks. In most cases, however, it is obvious that low quality inputs are being used- resins, epoxies, poor quality nets, etc.

There are consequences for the price squeezing buyers too, though they do not want to admit it, even to themselves. The buyer is purchasing a low quality product, no matter how much he or she make a pretence of insisting on quality. The polish will be gone within a few months, depending on the particular application. The strengtheners come apart. The end customer complains and loses trust in stone and stone supplier. Buying cheap and selling at great margins may be a sign of a good businessman but in the natural stone industry it is also killing the goose that laid the golden egg. The stone loses prestige in the market, and so do the companies working with stone.

 

Conclusion: it is time the people working in the industry, both buyers and sellers, learn to value the effort that is required to make a quality product. Maybe a situation of severe oversupply with respect to demand requires companies to reduce production voluntarily instead of launching ruinous price wars, though this is easier said than done. But the sad reality is there are far too many unprofessional people, ignorant and unwilling to learn, not aware of the real costs, of what constitutes quality, and often with no long term commitment to the industry. Too many “speculators” in the stone industry, trying just to make a fast buck-and then move on to something different. It is not always a situation of a tough market, an economic crisis, or declining demand for a particular stone. The fault, to quote Shakespeare, is not in the stars, but in ourselves.

 

Note: Acknowledgment to Mr. José Miguel López for sharing the bottle of wine which provided the inspiration for this article. The writer loaned  him a (wet) handkerchief.

 

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