2.3 per cent YoY decline in LSM
The Large-Scale Manufacturing (LSM) as determined by quantum index for the month of May 2011 registered a 0.3 per cent MoM and 2.3 per cent YoY decline after posting a positive YoY growth since Dec 2010. The drop for the month of May 2011 came due to marginal performance of heavy weight sectors specially textile, petroleum and pharmaceutical, whereas medium to light weight sector performance remained subdued during the period. This decline can also be attributed to a fall out in private sector credit and export demand during the month.
Index dipped after consecutive growth
The LSM index posted a positive growth YoY of 3 per cent and 18 per cent YoY in the 2nd quarter and 3rd quarter FY11 showing a strong recovery after July floods in the 1st quarter, where a negative growth of 11 per cent YoY was recorded. This overall growth in LSM was aided by favourable global commodity prices which improved the overall margins of domestic producers. However for the period following April 2011 to May 2011 normalising global commodity prices along with domestic restraints (energy, high interest environment) kept the domestic production under pressure, where a marginal growth in heavy weight (food, textile sector) was witnessed while non-productive or shallow growth in the medium (petro, pharma, chemicals, cements, auto sector) and small (engineering, electronic, fertilizer, metal weighted sector) proved to be an overall drag on the index.
Power crisis hampers production in LSM
Prevailing power shortages and gas curtailment are expected to plague the manufacturing sector performance. This combined with a high interest rate environment has resulted in subdued private sector credit growth reciprocating the overall industrial production performance. In addition to domestic constraints, weakening international demand is likely feed into growth of domestic production and henceforth total exports. The government is estimating a 3.7 per cent YoY industrial sector growth in FY12, however given the aforementioned risks it is expected that growth is likely to face some major limitations.
Textile Sector – Falling prices result in falling production
Textile sector which has been the most productive in the total manufacturing sectors during high commodity prices, contributing 32.6 per cent towards the index inched up by a mere 1.3 per cent YoY during the period. Production of cotton yarn was the foremost commodity that contributed to this growth. However going forward we do not see any sharp rise in textile industry production in short to medium term, said Saad Khan at AHL, adding that on the domestic level, high cost of borrowing along with commercial banks’ reluctance to agri-credit will fuel worries for the overall growth of the textile sector.
The ancillary textile industry faces risks due to ongoing power shortages, with circular debt standing at Rs131bn (as of May’11), any short term relief seems impractical. Whereas on the international front export base is likely to suffer as growth prospects weaken in the Euro-area (a major export partner contributing to approx. 25 per cent of the total exports). This along with weakened cotton prices on the global level ($139/lb as of Jun 2011) will fuel pessimistic growth of agri-industrial production.
Food Sector: High crop production
Food which contributes almost 19 per cent to the index posted a 9.8 per cent YoY growth during the 11 month FY11, whereby sugar registered 33.4 per cent YoY rise owing to better than expected sugarcane yield. However with flood water receding crop targets for FY12 have been revised upward. In particular that of sugar (expected 65-70million tonnes in FY12) and rice (expected 7-8million tonnes in FY12) owing to better water availability, salt slits, increased cultivation area and favored weather conditions.
Cement Sector: Strong demand, production healthy
Cement sector is expected to post growth in FY12. Although cement production remained subdued, posting an 8.3 per cent YoY decline in 11 month FY11 against a growth of 11.7 per cent YoY in 11month FY10. Better export opportunities, rise in construction activity, enhanced plant capacity utilization, possible expansionary phase in major cement producers and strong domestic demand, will be the likely factors owing to overall sector growth in FY12.
Rabi season demand pace
Fertilizer sector remained at the helm of gas curtailment (which extended beyond the winter season) resulted in a 0.1 per cent YoY decline in 11month FY11 despite a strong domestic demand. Going forward strong demand from Rabi season crop will likely pick up DAP and Urea demand.
Auto Sector: Production to ease
The automobile sector posted an 11.9 per cent YoY growth in 11 month FY11, despite rising prices of automotives. Thus growth can be explained by high demand generating from healthy farmer’s income during FY11. However going forward, production in automobile sector is likely to remain subdued in the short-term owing to below capacity production at one of the country’s largest auto-assembler, government decision to relax import tenor on different cars and sub-par domestic demand.