Until October 2017 LSM growth was gathering steam, having posted a phenomenal four-month average growth of 9.6 percent. But November is another story. The benchmark large scale manufacturing index dropped 2 percent year-on-year in November 2017 – its first November fall in many years. The consequence: the year-to-date average manufacturing growth has tapered off to 7.2 percent, which is higher than five-month figures in recent history but sharply lower than previous month’s number.

Some of the key drivers of five-month LSM growth so far are not very different from those in the preceding four months: iron & steel, cement, automobile, and cigarettes, although some of those items have witnessed a bit of slowdown. For instance, cement production slowed in November due to the seasonal affect; November and December usually see weaker cement production due to lower demand in winters. Or in the case of cigarettes, higher base affect has kicked in leading to slower growth in November 2017.

The index-heavy weight cotton – yarn and cloth – saw an improvement in November. In last month’s LSM coverage, this column said that based in our channel checks, production in yarn and cloth has picked up pace following the notification of revised textile export package in late October. That growth, although rather tepid, is visible in November’s numbers. Yarn and cloth production rose 0.11 and 0.12 percent in November year-on-year – higher than growth figures of 0.07 and zero percent growth in the first four months.

The biggest dent to LSM growth in November was made by petroleum, fertilizer and sugar. Following the recent LNG-furnace oil saga, a number of refineries had scaled down operations roughly from the start of November 2017 to mid-December 2017. Based on that industry insight, in this column’s last month coverage, BR Research said it expected the LSM numbers in November and December to take a hit. Therefore, the 4.7 percent November fall in the production of petroleum products should not come as a surprise. However, petroleum production seems to have resumed and the same should reflect in the LSM number December onward. The long-term outlook of this sector however hangs in balance. But that’s a different story.

The fertilizer sector continues to dent LSM growth. But the sector is expected to show some growth in the second half, as the plants that witnessed earlier-than-usual maintenance shut down are due to resume production soon, whereas gas supply issues now stand much improved compared to the second quarter.

Sugar production on the other hand is a messy story. High support prices have led to a buildup of sugar stocks that the mills have been unable to offload in the international market without subsidies and under quota restriction. In turn, sugar production in this season has taken a hit (down 81% in LSM index) with growers protesting that their harvest is not being bought as per the price schedule.

The sugar saga is a classic example of how bad governance limits and erodes the growth stoked by kicking off aggregate demand through government’s development projects. Relying on Keynesian growth without fixing the policy and governance cogs only lead to loud cranks in the system. November’s 2 percent drop is that crank!

Copyright Business Recorder, 2018

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