The Iran war is starting to hit India’s small manufacturers

In Coimbatore, S Surulivel is bracing for losses. His foundry, which does welding, cutting and fabrication work, relies on gas cylinders. “We use five cylinders every day,” said Surulivel. “We cannot work at all if we have no gas.”

Up north in Panipat in Haryana, Yashpal Malik’s textile dyeing unit stopped operations by the second week of March after he ran out of gas. Gas is crucial fuel for the boilers to produce steam. “There is no work in dyeing that can happen without steam,” said Malik. “Now that gas supply is not there, how can operations continue?” Panipat has about 10,000 textile manufacturing units, of which Malik estimates that about 1,000 are involved in dyeing.

As the war on Iran enters its third week, its effects are starting to ripple out across India. Small-scale manufacturing and industries, from textiles and dyeing to automobiles and plastic, are struggling to continue operations due to the gas shortage or are facing an increase in the cost of raw materials, putting businesses and worker livelihoods at risk.

The stakes are especially high for them. Like Surulivel, who has signed a one-year tender for railway supplies and must provide the required number of equipment every month. “If there is a delay in supply, then I will have to pay damages and that can mean losses up to 10%,” he said.

Following the US and Israel’s military strikes on Iran, the Strait of Hormuz, a crucial maritime corridor, has been closed for ships, disrupting the supply of fuel and natural gas. The government on March 11 said that India imports 60% of liquefied petroleum gas, 90% of which comes through the Strait of Hormuz. For the moment, the government has prioritised domestic and essential use of gas till alternative supplies can stabilise the demand.

Larger industries, with deep re, might be able to cushion the blow, but smaller enterprises are starting to worry, scrambling to make alternate arrangements, only to find that there are few options.

In Mysuru, craft rum distiller Huli’s last cylinder will run out by the weekend, says co-founder Aruna Urs. “We cannot do distillation, generate steam and, therefore, cannot produce anything,” said Urs. Huli relies on LPG because it is more efficient and better for the environment. “It is also difficult to switch to alternate options because the process to get it done is long and arduous,” said Urs.

Caught unprepared, high operating costs

Many say they did not expect the war to last this long and that its wider effects could be so severe for India. Surulivel, head of the Railway Equipment Suppliers Association in Coimbatore, said he was shocked when news of the shortage of gas cylinders began spreading.

Urs of Huli too said the crisis was unexpected. “Even until last week we didn’t have any idea,” said Urs. “Even the government seems to have been blindsided.”

Malik, however, had started to worry about three days into the war on Iran. Days before the shortage of gas became a national crisis, Malik had been struggling to keep his dyeing unit running. His 60-70 workers are currently idle, but Malik says he is paying them. “The immediate impact has been on the medium-scale dyeing units that were dependent on cylinders,” said Malik. Smaller units are continuing work “as much as they can by burning wood for the boilers”, he said.

Urs, too, is bracing for a massive loss in the coming days. “Some cylinders are being sold at higher rates but it doesn’t make sense to buy them when that will only last another two-three days,” he said.

In Coimbatore, Surulivel said that his operating costs have also increased due to the panic about a possible fuel shortage. “Taxis are waiting for hours together waiting for fuel,” he said. “Whether it is customers coming to order equipment or transporting equipment, we are heavily reliant on vehicles as well.”

As head of the Railway Equipment Suppliers Association in Coimbatore, Surulivel said that all micro, small and medium enterprises had been affected by the LPG shortage. “There is panic everywhere,” said Surulivel. “We don’t know how long the war is going to go on either.”

He has written to the Tamil Nadu industries commissioner and the director of industries and commerce seeking support for micro, small and medium enterprises until gas is available.

“We are not a participant in the war but so many of us are affected,” said Urs.

Plastics get pricey

Some industries are also seeing an increase in the price of raw materials, adding to their operating costs in the face of losses.

In Delhi, the textile industry has seen an increase in the price of raw materials like poly-cotton threads. Poly-cotton, a polyester mix with pure cotton, is a common combination for denim manufacturing. Polyester is derived from crude oil, by refining it to create a plastic that is melted and spun into thread. Plastic bags used to wrap textiles too are costlier. Both are derived from crude oil, the supply of which has been disrupted across the world.

Abid Khan, a former jeans manufacturer from Khyala in West Delhi, said the war is affecting the entire textile supply chain and could temporarily increase the price of cloth per metre. “The dyeing units are not taking on any material to dye and so there is no cloth to sell,” said Khan.

Plastic pellets, or daana, which is the raw material to make plastic products, has also seen an increase in cost. “Prices of products made from petroleum, especially plastic daana, have increased by 50% here,” said GS Tyagi, president of the Faridabad Small Industry Association.

Spillover effect

Faridabad’s automobile manufacturing units are also facing an increase in steel prices. The sector provides components, parts and accessories for vehicles. But raw materials, like steel, are now costlier by 10%-15%, said Tyagi. “This is a lot for the industry.”

Small steel-makers are grappling with rising costs in the production of steel, Reuters reported. A small portion of steel makers make direct reduced iron, or sponge iron, which depends on natural gas for production. Even steel majors announced production cuts on account of the gas shortages.

Limited supply of natural gas can have spillover effects on other fuels, said Hemant Mallya, fellow with Delhi-based Council on Energy, Environment and Water.

“Industries that are able to switch from natural gas to coal can lead to an increase in demand for coal and, therefore, the price,” said Mallya. “Coal is also transported using diesel trucks, and the cost of transportation could increase due to an increase in the price of crude oil and petroleum products.”

The net effect is an increase in coal demand and prices, he said. According to him, a long-term solution is electrification or the use of biomass or green hydrogen in industrial equipment.

For now, however, Tyagi fears that increased costs will slow down or completely halt manufacturing. “If things do not improve, it is possible that by March-end, industries will have to reduce workers’ shifts because there will be no raw material to work with.”