Mixed signals in capacity utilization: cement, steel, FMCG, automatic lag

0

The steady rise in capacity utilization in the manufacturing sector over three quarters to the end of March 2022 is encouraging, but experts believe that tighter monetary policy conditions and weak demand could weigh on sentiment. investment.

Analysts said the 75-80% capacity utilization needs to be sustained over 3-4 quarters for it to translate into industry expansion momentum. In addition, there are also mixed signals within the sectors. While steel and cement are up, capacity utilization in autos and consumer goods continues to lag.

Capacity utilization is the ratio of actual output to the potential output that can be produced under normal conditions. Higher capacity utilization, accompanied by growth in the order book, signals robust demand conditions in the economy.

Cement demand likely saw a mid-teens rebound in the year ending March 2022, after reaching capacity utilization of around 70%. It is also expected to rise by a mid-to-high figure this year with the government’s push on infrastructure and affordable housing, and a pick-up in business capital spending, Fitch Ratings said in a report last week. Steel consumption is also recovering and is expected to have increased by 4.1% month-on-month to reach 9.4 MT in May and exceeded the pre-Covid production of May 2019 by 6.7%, said another rating agency ICRA.

The best of Express Premium
Prime
Express Investigation - Part 3: The revision of the textbook begins part of the story...Prime
Big shortfall in hiring former military in government services and positions: dataPrime
What the West Seti energy project can mean for India-Nepal relationsPrime

Capacity utilization in the manufacturing sector rose to 74.5% in January-March 2022, from 72.4% in October-December 2021 and 68.3% in July-September 2021, according to order books, inventory and capacity utilization survey of RBI or OBICUS, a quarterly report. quantitative survey, which collects information on the production capacity used per product at the enterprise level to infer capacity utilization at the aggregate level. RBI Governor Shaktikanta Das referred to it after the June 8 monetary policy review and said investment activity is expected to strengthen, driven by rising capacity utilization.

But in sectors such as FMCG and automotive, demand concerns weigh heavily. While some automotive segments like commercial vehicles and SUVs are seeing an increase in demand, mass market segments like two-wheelers and small cars continue to struggle to gain volumes. With the semiconductor shortage easing a bit, wholesale passenger vehicle (PV) shipments in May improved from May 2019, a Covid-free year. But sales were still lower than in 2018 when the segment had seen strong growth. Wholesale shipments of two-wheelers in May were not far off the volumes achieved three years ago, but also below the numbers achieved nine years ago.

In FY22, according to data provided by the Society of Indian Automobile Manufacturers, two-wheeler shipments fell to a 10-year low of 1.35 lakh units. Similarly, demand remained subdued for FMCG businesses, with marginal sales growth visible in value, but declining demand as evidenced by lower volumes.

Buy now | Our best subscription plan now has a special price

Even in cement, faster additions of new capacity are expected to push utilization in the sector from around 70% in fiscal 2020 to 65%, as they are expected to outpace demand amid industry consolidation. , said Fitch Ratings.

It may therefore still be too early to embark on a path of capacity expansion and new investments.

“Typically, when capacity utilization stays around 75-80%, the industry starts thinking about expansion. But that’s subject to certain conditions — will the trend continue? Or is it due to a temporary phenomenon? When this holds then they will think about going to the drawing board and start making decisions…if it (capacity usage) now stays at this level for 1-2 quarters then there will be more certainty that demand is going to stay,” said Devendra Kumar Pant, chief economist, India Ratings.

But Pant would monitor whether demand would survive despite tighter monetary conditions, higher interest rates, a weaker MSP increase and weak wage growth. “If that stays broadly at the same level for Q1 (April-June 2022) and Q2 (July-September 2022), then we can say demand is there for a capacity increase despite the low rate scenario. high interest,” he said.

In a report released last Thursday, ICRA said its monitoring of business activity more than doubled to 38.7% in May 2022 from 16.4% in April 2022. But it reported monthly growth tepid 1.7% in May 2022. , implying mild sequential momentum amid geopolitical tensions, rising commodity prices, tighter monetary policy around the world and high levels of inflation.

Eight of 14 non-financial indicators saw May volumes improve from the pre-Covid level of May 2019, but six indicators lagged their pre-pandemic volumes, including auto production and sales in supply issues and limited demand in a high ownership environment. costs, diesel consumption and domestic airline passenger traffic as part of a gradual resumption of contact-intensive services. “CIFAR forecasts a broad-based recovery in private sector investment that will only take hold by the end of 2022, despite higher than expected capacity utilization of 74.5% in the fourth quarter of fiscal 2022 “, did he declare.

Apart from capacity expansion, India’s investment story is also boosted by greenfield projects that take advantage of the government’s Production Linked Incentives (PLI) scheme, which was designed to increase the capacity of domestic manufacturing, accompanied by greater import substitution and job creation. So far, the government has announced PLI programs for 14 sectors, including automotive and automotive components, electronics and hardware, telecommunications, pharmaceuticals, solar modules, metals and mining, textiles and apparel, white goods, drones, and advanced chemistry cell batteries, but gains were only observed for certain sectors. With incentives under the PLI scheme exceeding Rs 2 lakh crore, stakeholders now feel the need to check whether companies reaping the benefits are creating value.

In his statement, RBI Governor Das also said that while urban demand is picking up, rural demand is gradually improving. “Contact-intensive services related to trade, hospitality and transport recovered in the fourth quarter of 2021-22… Capacity utilization is also expected to increase further in 2022-23. Investment should therefore strengthen, driven by higher capacity utilization, the surge in government investment spending and the deleveraging of corporate balance sheets. recovery in demand for bank credit and continued growth in imports of capital goods,” he said.

RBI’s OBICUS also showed new order backlog grew 10.5% quarterly in October-December, with backlog growth of 3.5% and backlog growth of 7. .8%. The average amount of new order books stood at Rs 224.4 crore in October-December against Rs 195.7 crore in the previous quarter, while pending orders averaged Rs 196.6 crore in October-December against Rs 207.4 crore in the previous quarter.

Capacity utilization reflects demand conditions in an economy where production processes respond to changing demand and fluctuate accordingly. Increased demand may translate into upward pressure on the general price level and higher capacity utilization may therefore be accompanied by higher inflation, he said.

Share.

Comments are closed.