India’s Morbi ceramic cluster hit by supply chain disruptions linked to Middle East conflict

The ceramics and tiles manufacturing hub in Morbi in the Indian state of Gujarat is the second largest in the world. The $6bn industry is facing intense pressure due to the ongoing conflict in the Middle East. The Indian ceramic and tiles industry, which maintains a deep trade link with the countries in the Middle East region, has been majorly affected by the conflict involving the US, Israel and Iran.

With a ruptured energy supply chain, the industry has faced a large-scale fuel shortage, which has impacted output. The fuel crisis was especially acute immediately after the conflict began, during the month of March. The supply chain disruption has not only impacted the fuel supply to the industry, but the Indian ceramic and tiles exports have also been hit due to the closure of the Strait of Hormuz.

The closure of manufacturing units in Morbi has also badly affected migrant workers employed in the industry, a large chunk of whom come from states such as Bihar and Uttar Pradesh. Factory closures in March led to major labour displacement as workers returned home amid uncertainty over plant operations.

Manufacturing units have slowly started to come back online, however. According to a report by SocialNews.XYZ, which quoted Gujarat Energy Minister Rushikesh Patel, only 83 ceramic units in the Morbi region were functioning on March 31. However, more than 670 units were back online by mid-May. The Morbi cluster comprises around 1,800 ceramic and tile manufacturing units.

The Gujarat government expects fuel supplies to stabilise in the coming weeks, which could allow more factories to restart operations. Despite the slow recovery seen since March, the industry is expected to book a weaker revenue growth in FY2026. If the conflict drags on for the full first quarter of FY2027, the overall picture of the fiscal year may also look weak.

The impact of the Middle East conflict may be mild during FY2026, but if it continues to drag on, it will significantly weaken India’s ceramic industry in FY2027, with exports, fuel supplies and profitability all coming under pressure, according to a report by Crisil. The ratings agency expects industry growth to slow for a second consecutive year in FY2026 as geopolitical tensions continue to affect key markets and supply chains.

The biggest risk factor, according to Crisil, is the complete dislocation of exports, especially to the Middle East market. Ceramic exports constitute close to 40% of industry revenue, with the Middle East shipping in around 15% of India’s total ceramic exports. Supply chain adjustments, shipping delays and bottlenecks and trade disruptions in the region have already started to affect export volumes.

The agency estimates that disruptions linked to the Strait of Hormuz could lead to a 6-7% decline in export revenue. Not only has the conflict disrupted exports to the Middle East, but due to a rise in freight and insurance costs, exports of Indian ceramics to markets outside of the Middle East have also been impacted.

Another key risk factor is the decline in the availability of liquefied natural gas (LNG) and propane, which are the most important inputs for ceramic manufacturing. Together, the two fuels account for over a third of the industry's cost of goods sold, making production highly vulnerable to supply shortages.

Following widespread production stoppages in March, Crisil expects domestic demand growth to moderate. The domestic ceramic market is now projected to expand by 4-5% this fiscal year, compared with the agency’s earlier estimate of 7-8%.

Nitin Kansal, director, Crisil, said limited access to gas supplies continues to be the most pressing challenge for manufacturers. He added that weaker demand from Middle Eastern buyers and rising logistics expenses in other export markets are likely to disrupt production schedules and weigh on industry performance. Based on current conditions, Crisil expects industry revenue to decline by 1-2% in FY2026, with the possibility of sharper monthly drops if the conflict is not resolved soon.

Manufacturers are also expected to face pressure from fixed overheads, which account for 15-20% of production costs, even when plants operate below capacity. Additional logistics expenses equivalent to 3-5% of cost of goods sold are expected as freight rates have risen by 45-50% and insurance premiums by 25-30%.

As a result, Crisil forecasts operating margins to contract by 130-150 basis points to 9.3-9.5% in FY2026, the lowest level in five years. If current disruptions persist through the entire first quarter of FY2027, operating profitability could decline further to 8.2-8.5%.

The assessment is based on Crisil’s review of 40 ceramic manufacturers that collectively account for about one-fourth of industry revenue. The agency said further escalation of geopolitical tensions, prolonged production shutdowns, weaker exports and the effectiveness of government support measures will remain key factors influencing the sector’s outlook.