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Dominance of auto, cement and steel in LSM sector

The large-scale manufacturing (LSM) sector has 80 percent share in manufacturing and 10.8 percent share in the gross domestic product (GDP) whereas small-scale manufacturing has 13.8 percent share in manufacturing and 1.9 percent in GDP. The sector is poised to grow further if the consumer durables and construction-allied industries continue to benefit from higher retail spending and infrastructure activities in the country. However, economic activity is likely to slowdown in FY19 as the general macroeconomic policy mix is focusing towards stabilization. The recent monetary and fiscal measures would likely impact large-scale manufacturing due to rising inflation and large twin deficits. Other responsible factors are higher than expected rise in global oil prices, increase in domestic gas prices, increase in regulatory duties for imports and continuing nosedive of rupee’s depreciation.

Most important auto sector

A major contribution to LSM comes from the automobile sector which will gain more growth due to entry of new variants such as Hyundai, Renault and Nissan coupled with rapidly growing ride-hailing services like Careem and Uber. Increased demand for passenger cars can largely be explained by rising incomes, upsurge in popularity of online ride hailing services, and easy access to affordable bank finance. The vibrancy in this market allowed car manufacturers to pass on the impact of rising assembling costs to consumers without taking a perceptible hit on their sales. Moreover, as availability of adequate public transport lags behind the requirements of the growing population, online ride hailing platforms are gaining traction. This has particularly benefited the 800-1000cc passenger car segment. Despite historic production and devaluation of rupee, there is significant appetite for imports of both new and used vehicles. In addition to passenger cars, the demand for light commercial vehicles (LCVs) also remains strong. Moreover, the surge in the production of trucks continues as it registered an increase. The uptick in production and sales of commercial vehicles highlight the growing transportation and economic activities in the economy. As for the tractors, improved purchasing power in rural areas on the back of healthy cash crops, coupled with a continuation of lower sales tax, led to a sizeable surge in the sales for tractors. Growing middle class incomes mainly drove the growth of motorcycle sales which continued their upward trajectory.

 

Trust in cement sector

The continued buoyancy in cement exports helped the sector post over 18.9 percent growth during Sept 2018, as 0.715 million tons cement was exported from Pakistan in this period against 0.401 million tons exported in Sept 2017. The industry closed the first quarter of this fiscal on a moderate note. This growth pales when compared with the high growth the industry maintained in past five years. The growth in the first quarter does not even match the increase in the production capacity of the industry in 2018. It utilized only 79.75 percent of its capacity in the first quarter compared with average capacity utilization of 87 percent during previous three years. Majority of cement capacity is located in Northern part of the country. These mills remained under immense pressure in the first quarter. They dispatched 7.151 million tons of cement during this period that was 4.94 percent less than the dispatches of 7.523 million tons during the same period last year. Exports from North also declined by 21.58 percent to 0.747 million tons compared to 0.953 million tons during first quarter of FY2017-18. Mills in South were in driving seat as the exports increased from this region by a whopping 212.13 percent to 1.044 million tons from only 0.334 million tons during July-Sep 2017.

Expectant steel industry

The outlook for construction remains encouraging in view of expected strong demand in allied industries like steel industries. The demand for steel products remains strong as public-sector infrastructure projects and private investment in housing schemes is expected to pick up pace. Additional stimulus comes from increasing raw material requirements by two- and three-wheeler manufacturers, as bike sales continue to rise substantially in the country. Keeping in view the demand-supply gap, the large scale producers are investing further in capacity expansions. Investments worth around US$ 112 million by big players (such as International Steel, Amreli Steel, Aisha Steel, and Mughal Steel) will lead to cumulative capacity expansion of 53.0 percent. Furthermore, some big players are introducing new products to cater to the diverse needs of various infrastructure projects. For example, Mughal Steel is investing in the production of shockproof steel pipes.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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