Investment in construction, infra key to sustain demand growth

The primary take out of the call for Atma Nirbhar Bharat relates to a robust and efficient manufacturing sector in India. It has suffered as the economy had deviated by thrusting the growth of the service sector ahead of manufacturing, while primary sector continued to observe a secular decline in share of GDP. Thus it came as a pleasant surprise that manufacturing having degrowing for last months has now entered the positive trajectory by clocking a growth rate pf 3.5% in October ’20.

The Industrial production that entered in the positive range in the last month ( 0.5% rise in September’20) continued to clock 3.6% growth in October. In the manufacturing sub-segments, the growth is observed in 1) rubber and plastic products (15.5%), 2) pharmaceutical products (12.9%), 3) food products (2.5%), 4) leather and related products (3.4%), 5) Chemical products (9.6%), 6) non-metallic mineral products (3.3%), 7) other manufacturing (10.6 %), 8) fabricated metal products (13.4%), 9) computer, electronic products (10.9%), 10) electrical equipment (20.3%), 11) motor vehicles and trailers (17.7%), 12) other transport (26.6%), 13) machinery and equipment (4.4%), and 14) basic metals (5.6%).

It is interesting to note that out of the above sub-segments in the positive category for the first time after the pandemic, the segments under categories 8-14 belong to steel industry. One must keep in mind that the indices of these groups include the updated production figures of July and September’20. The festive impact of the month of October in pushing the order flow and therefore the output as well as the pent up demand giving impetus to further rise in order flows are factors that can be said to be transient.

However, from the user segment point of view, it is certain that growth in 2 and 3 wheelers, passenger cars and tractors have been observed for the last few months and finally, albeit slowly, the trend is spreading to other user segments as well.

The use-based output indices indicate that capital goods (power equipment, fabricated metal product, transformers, material handling equipment, cranes, agriculture machineries, mining machineries, commercial vehicles, wagons and coaches etc) have clocked 3.3% growth in October’20. The infrastructure/ construction goods output (steel framework, railway products, pipes, tubes, steel casing etc.) rose by 7.8% in the month.

Significantly, the consumer durable segment (ACs, washing machines, electric equipment, passenger cars, auto components, SS Utensils etc) went up by 17.6% during the month. Electricity generation has achieved a significant rise in October’20 (11.2%). This indicates that thermal generation as well as renewable energy are contributing to enhanced power supply, also reflected in higher demand for coal for power generation.

The mining sector is continuing with its negative growth in October’20 also. The commercial mining is yet to exhibit any acceleration to the output growth in mining sector. The iron ore availability in the state of Odisha is still poor as the auctioned mines, both old license holders and the new ones, are taking some more time to resume production at a satisfactory level. As a result the small and medium scale steel units having no long term arrangement with confirmed sources and depending on spot purchases of iron ore in the open market are facing challenges to maintain and enhance production at a time when the demand for steel is rising.

The demand for the long products emanating from house building in tier II & III cities— private as well as under PMAY-U&G schemes, the EPC contractors for road construction, railways construction and state government projects generally catered to by these local players are not being met fully, contributing thereby a rise in prices of steel.
The MSME sector has an average share of 65% in TMT bars and wire rods and hence a supply shortage from them has accentuated the problem. The TMT prices have gone up by 24% during July to December’20. The second factor leading to rise in prices is the regular rise in prices of iron ore (both fines and lumps) which has led to rise in cost of steel production. The prices of merchant iron ore in the global market have reached $ 158/T (CFR China), a 44% rise in July-December’20. It has led to increased price expectation in the domestic market for Iron Ore.

There is a demand to completely stop exports of iron ore and pellets so as to enhance domestic availability. There is an export tax of 30% on exports of iron ore more than 58% Fe content. The government must consider putting a complete ban on iron ore exports as meeting the domestic demand should be the first priority of the industry.
Growth in manufacturing and industry signal an improvement in the commodities market. After the pent up demand has been unlocked, it is now the time for the industry to consolidate its position, restructure and strengthen the supply chain in order to move fast to reach the consumer.

A sustainable price rise for steel crucially hinges on regular order flows in the market, a feel-certain factor that assures reasonably good return for investment and a pro-active government to support the demand-supply parity by enhancing public investment in construction and infra sector that would multiply the demand acceleration activities in all other segments.

(Views expressed are personal)