The Corporate results for the first quarter of the current fiscal have resurfaced the issue of market dynamics which is fast changing in our country.
The Corporate results for the first quarter of the current fiscal have resurfaced the issue of market dynamics which is fast changing in our country. Increased WPI indices of manufactured goods contributed by higher commodity prices have made it possible for many units, large and small, under engineering (heavy and light), yellow goods, white goods segments to improve their bottom lines. The balance sheet of the large fabrication and engineering firm like L&T displays a significantly improved order book position with controlled inventory estimates in the next quarter.
The real estate sector buoyed by the affordable housing segment, the road networking (part of Bharatmala Pariyojana), the port development activities and expansion/creation of existing/new airports are emerging as a few avenues that attract private investment whose secular decline in the past few years had adversely affected the gross fixed capital formation. It may be mentioned here that this critical factor which is taken as a proxy for investment had remained stagnant at a level of 28.5% during FY16 to FY18, only to reach a level of 29.1% in Q1 of the current fiscal.
DIPP reports for June’18 indicates a record growth of 6.7% by the index of eight core industries comprising of a weight of 40.27% in IIP which gives us a confidence that IIP for June’18 would also be a rising one. In the month of June’18 the highest production growth has been achieved by Cement (wt 5.37%) at 13.2% followed by Petroleum Refinery products (wt.28.04%) at 12.0%, Coal (wt.10.33%) at 11.5%, steel (wt.17.92%) at 4.4% and Electricity (wt.19.85%) at 4.0%.
The increase in WPI rate (5.77% June’18 over last year) is high and along with a rising CPI reflecting an increasing cost of daily needs, RBI is constrained to enhance the repo rate to 6.5% with Reverse repo rate at 6.25%. It would marginally impact the capital borrowing and working capital costs.
The global steel prices specifically the HR prices have come down and have settled at a lower level. Current prices of HRC SS 400 fob China at $574/t is nearly $15-20/t less compared to 3 months back. The current prices of Rebar export at $540/t fob Turkey have come down by around $17/t compared to what it was 3 months back.
Expectedly the global prices of Iron Ore at $65/t cfr China and that of Coking Coal at $174.5/t fob Australia show that rising trend in prices have been stalled and the current quarter may also exhibit a downward trend, albeit marginally. Overall the current market outlook, significantly buoyant, places confidence to a stable revenue growth and definitely not a windfall profits the sector. The latest Monetary Policy Committee report of RBI has indicated Bank’s Business Expectations Index for Q1 of Fy19 as optimistic with marginal softening of order books and exports. Sales of Tractors and two wheelers (15.9% increase in Q1) indicates good rural demand. Growth in sales of passenger vehicles by nearly 20% and commercial vehicles by more than 50% in the first quarter also shows that urban demand is robust and growth in the auto sector is contributing to the better performance of the manufacturing sector.
A look at the steel consumption trend in Q1 is worth mentioning. In tune with increased activities towards gauge conversion and new lines, the demand from the Railways is much on a higher scale. SAIL has made available higher volume of Rails with additional supplies from JSPL and as a result around 23,000 tonnes of railway materials additionally made available in Q1 compared to last year. More availability of 1,42,000 tonnes of Plates from the domestic producers has enhanced the domestic consumption of this category to grow by around 12%.
As Plates are needed both by the construction sector (for making fabricated structural sections inter alia) as well as by the manufacturing sector (for engineering items), the higher sales growth signals a revival of demand from both the segments. In HRC/S the indigenous availability exceeds last quarter supply by more than 1,60,000 tonnes .
Additionally imports of HRC in current Q1 exceeds last quarter’s import level by more than 1,58,000 tonnes and this must have taken the market share of domestic producers as increasing imports from RCEP members of South Korea and Japan have been entering India taking advantage of nearly nil duties under the agreement. Much reduced stocks and lower volume transferred for production of Coated products have contributed a much higher level of consumption in CRC/S in the current quarter as imports and exports are both lower in the current quarter compared to last year. Higher domestic availability and higher imports of Electrical sheets in the current quarter has made the growth in consumption of this item at a massive 48% compared to last quarter. The consumption of non-flat categories of Alloy steel has exhibited a good growth with drop in flat consumption.
The above trend may change even significantly in the subsequent quarters due to changes in sectoral demand pattern, global uncertainty specifically on the trade account and indigenous infrastructural investment.
-The author is DG, Institute of Steel Growth and Development (Views expressed are personal)