Robust activities in manufacturing to lead steel demand

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Published: July 17, 2019 1:32:21 AM

The significant drop in manufacturing of motor vehicles and trailers from FY18 to FY19 and till the first two months of FY20 resemble the decline in automobile production from 14.9% to 6.3% during the past two years and subsequently, de growth of 10.53% in April-June 2019.

manufacturing, manufacturing industry, steel demand, Index of Industrial Production, IIP,  fabricated metals, electrical equipments, machinery & equipmentsThere is a similar drop in the output of manufacture of fabricated metals, electrical equipments and machinery & equipments in the identified months in both the years. (Reuters)

Manufacturing sector in the country had grown 3.2% in the first two months of the current financial year 2019-20 (FY20) and the rate had been only 2.5% in May. The industrial production, which includes mining and electricity, has grown 3.7% in the first two months and the Index of Industrial Production (IIP) was down at 3.1% in May. These data may be revised after two months when wider coverage of production data would be made available.

Going through the previous 24 months’ data, it is seen the country has achieved the highest growth rates in manufacturing during November 2017 at 10.4%, followed by 8.7% growth apiece in December 2017 and January 2018 and 8.4% in February 2018. The corresponding IIP figures in these months moved up high as manufacturing showed 77.6% weights in IIP.

Manufacturing dipped in June and July of FY18 to (-) 0.7 and (-) 0.1%, respectively, and in November, February and March of FY19 to (-) 0.7, (-) 0.4) and 0.1%, respectively.

This implies that after a slide in the middle of FY18, the reversal in manufacturing growth was observed in the H2 which were repeated in the months of June, July and later in October of FY19 with 6.9, 7.0 and 8.2% growth, respectively.

After October 2018, the slide in manufacturing was pulling down the IIP growth. From the past two years’ data, apart from stimulus available in festival months October and November, there is hardly any seasonality impact on manufacturing in other months of the year. Implications of actual growth rates from a very low base (negative) also need to be taken into account.

From the use-based classification, it is observed that lower growth in manufacturing during specific months in FY18 and FY19 had coincided with significantly lower growth rates in capital goods, intermediate goods and consumer durables segments, while infrastructure/construction sector seems to be relatively less influenced by the slide in manufacturing in these months.

There is a similar drop in the output of manufacture of fabricated metals, electrical equipments and machinery & equipments in the identified months in both the years.

The significant drop in manufacturing of motor vehicles and trailers from FY18 to FY19 and till the first two months of FY20 resemble the decline in automobile production from 14.9% to 6.3% during the past two years and subsequently, de growth of 10.53% in April-June 2019.

 

The above data highlights a few aspects in steel consumption in the country. On an average, we presume that around 65% of steel flows into building, construction and infrastructure segments (including other transport) and a balance of 35% goes to manufacturing (including engineering and fabrication, automobile and packaging). This ratio may have undergone some changes in two years based on the evidence gathered from the fluctuations in manufacturing growth rates during the period.

Steel consumption in the country has been maintaining an average growth between 6.8 and 7.5% in the past 27 months. It is believed that this growth has been primarily due to higher demand from infrastructure and construction sector, and less by manufacturing sector. This translates to a lower share of manufacturing (30-32%) and a higher share by infrastructure to the extent of 68-70% in FY19.

The average long-term share of steel flows between infra and manufacturing sectors may still remain at 65:35 ratio, but there is no denying that the monthly ratio in determining steel consumption has gone in favour of infra sector.  There are a few supporting facts. Engineering exports from manufacturing sector (without petrol) has grown 8.5% in FY17, against 10% achieved by total exports in that year and 7.1% growth against the annual rate of 8.7% achieved by all exports.

The decline in the share of manufacturing in total engineering exports indicates a temporary slowdown in the sector. Sales as well as the operating profits of non-government/non-financial companies in manufacturing sector have declined between FY18 and FY19. On the other hand, there has been a significant growth in actual investment (metallurgical industries, electrical equipments, textiles, etc.) in 2016-18 in terms of industrial equipment manufacturing (IEMs) filed. This fact coupled with lower manufacturing output may signify an excess capacity scenario in the sector. Drying up of liquidity flows by non-banking financial companies to manufacturing sector has been one of the growth-constraining factors addressed by necessary policy guidelines.

The Economic Survey has suggested incentivising the small (not so small) sectors in manufacturing (including those in basic metals, fabricated metals, machinery, transport equipments, etc.) which are employment-intensive and have a better potential to grow to get priority treatment. This sounds much better for enhancing steel consumption in the country by favourable policy perspectives for the MSMEs in manufacturing.

Sushim Banerjee is DG, Institute of Steel Development & Growth
(Views expressed are personal)

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