In a bleak post covid manufacturing environment, India’s metals sector appears to be holding steady in the near term, thanks to surprisingly robust export demand.
Production of metals and metal products is expected to be moderate during the first quarter of this fiscal year, while capacity utilisation during the period is in line with the year ago period, notwithstanding a drop in most sectors, according to a Federation of Indian Chambers of Commerce and Industry (FICCI) survey.
This comes at a time when one of the demand mainstay, the automobiles sector, expects output in April-June to be lower on year. Production estimates for another key consumer the capital goods sector is also bleak.
Though there are no estimates for housing construction and infrastructure in the sector, its unlikely to have fared much better amid a nationwide lockdown.
Such a sharp decline in domestic production of downstream sectors would have dragged metals as well, however two-thirds of respondents to the FICCI survey expect export demand to be higher or remain the same.
With most of Europe and the US still in lockdown, where is this demand coming from ?
Though the survey does not expressly say, it appears likely that the buyers are in the neighbourhood like China and Southeast Asian countries.
For sure, the world’s No. 2 economy — by far the largest producer of metals usually — has been snapping up tons of steel from overseas as the nation has been the first to recover from the pandemic.
Therefore, it would not be surprising if they have been voraciously buying other metals like aluminium from India of which the nation is a fairly significant producer.
Southeast Asian countries like Vietnam, Thailand and Indonesia have also been relatively unaffected by the pandemic and therefore would also likely be a destination for Indian metals.
That said, would it be wise to bank upon this export demand for too long?
Demand could moderate
With the rainy season affecting construction over swathes of the region , its likely that the export demand will moderate in coming weeks.
By the time construction work resumes, it’s quite likely that metals production in China and parts of Southeast Asia would have returned to normal.
Therefore, the longer term resilience of the domestic metals sector would likely depend on whether the government incentivises production of downstream sectors like automobiles and construction of roads and bridges.
Nearly 50% of India’s manufacturing sector is dependent on automobiles, while a planned boost to Make in India programme that aims to lure foreign investment to India would also critically depend on building world class infrastructure.