DECLINING PERFORMANCE OF LSM

BETTER CAPACITY UTILIZATION AND COST OPTIMIZATION WILL IMPROVE THE PERFORMANCE.

SHABBIR H. KAZMI 
(feedback@pgeconomist.com)

Mar 28 - Apr 3, 2011

Performance of the large-scale manufacturing (LSM) sector is likely to remain lackluster during the current fiscal year (FY11) as compared to last year. The first five months of the fiscal year have been terrible for the manufacturing sector. The decline in production was due to heavy rainfall and floods in the country during July and August 2010 leading to disruption in the supply of raw material from the construction, petroleum refining, cotton textile, and agro-based industries. The damage to road networks and power infrastructure also impeded overall industrial performance.

The external sector had a mixed effect on the local industry as export demand for cement, pharmaceuticals, and electrical goods dropped due to Pakistani manufacturers losing ground in export markets captured over the past two years. However, a gradual recovery in the US and Europe provided a boost to the leather and textile sectors. The sharp increase in international cotton prices also helped the textile industry improved earnings.

One of the indicators of the performance of economy can be the financial results posted by the commercial banks. Historically, banking sector in Pakistan has been divided into big-five and medium and smaller banks. A quick review of results shows stark difference between the results of these two categories. Reportedly, the big-five have posted Rs72.8 billion profit, up 22 per cent as compared to previous year, mainly driven by declining provisions. The selected medium size banks have posted hardly any growth due to higher provisioning. However, a point to be noted is that banks benefited from net interest margins in the higher interest rate environment and also from the shift to investment in government papers from advances.

Cotton prices are currently hovering around an all time high, in tandem with global prices. However, reports suggest that Pakistan may face some shortfall. It is worth noting that value-adding sector has been demanding complete ban on export of raw cotton and yarn or quantitative restrictions at least. Failure in imposing the restraints due to pressure from cotton growers and spinners the country is most likely to end up importing up to two million cotton bales and eroding foreign exchange earned from the export of raw cotton and yarn.

Despite devastating floods of last year, local manufacturers of fertilizer have posted strong earnings growth. Growth in earnings was driven by improved margins. Though sales remained subdued higher margins allowed them to earn higher profit. Higher commodities prices are likely to keep demand robust. However, it is feared that the country may have to import more than half a million tons urea due to load shedding of gas. Reportedly, supply of gas to the plants getting gas from Mari gas field will be curtailed by 12 per cent and Sui twins by 20 per cent. Units getting gas from Sui twins have already witnessed mandatory closure beginning this year. Latest statistics for January indicate weaker off-take of both urea and DAP. The numbers have become a cause of concern because January 2011 off-take reduced to 394,000 tons as compared a hefty off-take of 546,000 tons.

Eroding disposable income and damaged caused by the floods has a toll on cement manufacturers. During July-December 2010, overall cement dispatches declined by more than 10 per cent. With the end of winter and improved income of rural population, cement off-take should also improve. Rising coal prices and imposition of tax at enhanced rate will keep cement prices high and sales subdued.

In the recent past, auto sector was contributing a large share in the LSM. Having remained subdued for a few year, the sector is exhibiting strong signs of recovery. According to the latest data released by PAMA, auto sales (cars and LCV) have grown by 12 per cent during first eight months of the current financial year to 96,142 units as compared to 86,019 units sold during the corresponding period last year. Some sector experts attribute this to higher income of the rural population mainly due to the hike in international prices of cotton. However, sale of tractors remained almost flat to around 45,500 units. Sector experts believe improved farm income can lead to higher tractor sales.

Political uncertainty, war on terror and high cost of doing business will continue to dampen investors' confidence. The rift between executive and judiciary has neither eased, nor is it likely to in the near future. In fact, the political statements and interviews of the leaders of two political parties indicate end to 'friendly opposition. However, much of the time is wasted on rituals rather than resolving the key issues facing the country.

Though, all and sundry attached to minister for water and power used to claim end to load shedding, there seems no end keeping the ground realities in mind. In fact, the duration of announced load shedding is likely to increase with the rise in temperature. Despite hike in tariff in the name of rationalization of tariff and recovery of full cost, inter-corporate debt of the energy sector is on the rise.

Over the last couple of years, the country has been suffering from hike in sugar price. Fixation of sugar price by the Supreme Court couldn't help ease consumer woes. The only solution to bring sugar prices down in the local market is to encourage farmers to cultivate high yielding sugarcane varieties. It is true that sugarcane output during 2010-11 would be constrained but production of refined sugar will be certainly more than last year.