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Yesterday, the stock market discounted the Dharna and gained 900 points or 2.6 percent – highest single day increase in over two months. In the last three trading days, the market is up 4.5 percent – giving no heed to the rising political temperature in Islamabad.

What is triggering this enthusiasm and how sustainable could it be. Data points at both macro and micro levels improving, suggesting that the worst may well be over. 1QFY20 was deemed to be the worst quarter in terms of economic activities while the macro indicators improved such as low current account deficit and fiscal primary surplus. The market based interest rates are down from its peak in July and August. All these are pumping blood in the equity market.

The two economic activity indicators – cement and oil marketing sales numbers, released yesterday, are encouraging. A resounding comeback has been made by Diesel, the takers of which were plenty in October 2019. High speed diesel (HSD) sales increased by 19 percent in Oct-19 as compared to Sep-19 while down by 10 percent versus Oct-18. The 4MFY20 sales are down by 14 percent. HSD is a leading indicator, as it shows the likely economic growth in the months to come. The number peaked in FY18 and started falling since then – in Jul-Oct 19, the sales decline is 30 percent versus the same period two years back (Jul-Oct 17).

The prime reason for decline in ongoing and last fiscal years is the economic slowdown, but there are other factors as well. In days of high load shedding, commercial and small industrial plants used to run on diesel in hours of power shutdown. Now with near zero load shedding in most urban centers, that consumption has declined. The other reason is lower consumption in Furnace Oil (FO) transportation. The FO consumption in 4MFY20 is down to one fourth from its peak in 4MFY17, and for good reason – new fuels of choice in power consumption are RLNG and coal, and in both options, the mode of transportation from port to up country does not need diesel. It is not to say Diesel, has become redundant overnight, it is just others have also come to prominence.

Apart from economic slowdown, these two factors partially explain dip in HSD. The question is what is behind MoM increase in Oct-19 – one apparent reason is application of axle load limitation which had increased the numbers of trucks for transporting same amount of goods. Now with this decision to be rolled back, there will be some dip. And to establish any economic recovery, one will have to wait for a few more months.

In case of cement, the surge in dispatches is more encouraging. The overall dispatches increased by 4.4 percent in 4MFY20 while the export volumes are up by 16.3 percent. The number in Oct-19 is surprisingly high – 6.5 percent local and 27.9 percent exports growth while overall dispatches increased by 9.3 percent.

In Sep-19, when some volumetric growth came, analysts were of the view that dealers picked up higher amount in anticipation of increase in prices. The prices started increasing in first week of Oct and peaked in second week – overall price increase is around Rs30-35 per bag in North. And even after that the dispatches growth continues.

One reason is that there is some pick up of PSDP allocation in Oct-19; last year PSDP was too low. The other element is that there is upsurge in pending projects of CPEC phase 1. And more will pick when Dasu dam construction starts, and apart from that, there are talks of building SEZs.

In short, cement is more resilient and its export potential is increasing as export is seemingly prime choice of plants in South. If the government announces relief for construction, cement is to remain out beat. The good news is that with cement expansions to come online in coming quarters, cement prices may dip again around Mar-20.

The increase in cement consumption is also implying better offtake of steel. The earlier signs are healthy as with stabilization, there are signs of growth revival. However, it’s too early to establish any trend. If the improvement continues for the next two quarters, FY21 may show some promising growth.