For Pakistans auto sector, FY11 kicked off on a cheerful note, with encouraging signs emerging from growth in agricultural production and remittances.
The market had anticipated improvements in consumer confidence that would help lift auto sales further one step closer to peak sales levels touched during FY07. Though, demand for cars has come a long way from what it was in FY09, it is still far below peak levels.
Unfortunately, the onset of floods, which shook the entire economy, hit a sour note on the automobile industry.
So far, the industry has managed to escape the consequences of the water catastrophe. Advance bookings, carry forward money from previous crop seasons and hefty remittances played down the affect of floods on auto demand, and, in turn, helped increased total car sales volumes by 12 percent to 30,030 units in the three months ending September.
But now, as a cut in agriculture income is imminent, auto industry stands little chance of sustaining growth in the current fiscal year. Auto sales during the second and third quarter are expected to remain weak. However, market conditions are likely to start stabilizing after the spring harvest in the last quarter.
On the other hand, business activity fell into disarray much earlier than expected, as evident from declining appetite for commercial vehicles, such as trucks, jeeps, buses, and pickups, in 1QFY11. This shows that sales of commercial vehicle will take the major brunt, when the impact of flood will become more apparent.
Battered by high commodity prices and a stronger yen, the countrys auto makers are expected to post dreary 1QFY11 results despite volumetric growth. Yen alone has strengthened by an average 14 percent in the first quarter FY11 compared to same period last year, and it looks set to appreciate against the rupee in the quarters ahead.
Moreover, there are no signs of steel prices cooling off during the year. World Steel Association foresees global steel demand to grow by 5.3 percent in 2011. However, even if global steel demand remains low, production cuts will continue to prevent prices from falling.
With profits tapering off from the manufacturing wing, profits through the trading of CBU and premium on advances will continue to provide cushion to the industrys bottom line during the year.
Of course, the industry can increase prices if it wants to keep margins intact, but it must learn to tread carefully, as even slight increases in prices could further damage market demand.
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Vendors 1QFY11 1QFY10 % Chg
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Pak Suzuki 17,820 16,434 8%
Indus Motors 11,792 10,426 13%
Honda Atlas 3,832 3,263 17%
Dewan motors 52 396 -87%
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Source: PAMA
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