Large scale’s small manufacturing

Not that the state of large-scale manufacturing (LSM) in January 2020 matters in times likes these, but as the novelist D.H Lawrence would say ‘we've got to live, no matter how many skies have fallen’.

Recall that December 2019 saw a sugar-led high (9.9%) in the LSM index that feeds into Pakistan’s large-scale manufacturing GDP – a growth whose quality and future was questioned in this space. (See BR Research’s ‘Reading LSM’s Dec jump’, published 18 Feb 2020)  

In line with the estimates discussed in last month’s LSM coverage, January 2020 saw LSM fall by 5.9 percent on year-on-year basis, where about eight sectors have contributed a combined decrease of 6.8 percent, against a combined growth of 0.87 percent in six sectors. That pretty much speaks for itself.

The future of sugar-led growth, the biggest factor to LSM growth in December 2019, looks uncertain. While total sugar production for fiscal year 2020 may be higher by 2.66 percent over last year (most optimistic estimates), it is unlikely to report year-on-year growth between February and April.

Of the total estimated production of 5.4 million tons for FY20, millers had already produced 49 percent of it by January 2020, led by the production spike in December 2019. Which implies that the best of sugar production is already behind us, and that production between February and April 2020 will be less when compared to the numbers in the same period last year.

This alone was enough to dash hopes for the government’s LSM growth target of 1.3 percent for FY20, even after accounting for the hopes for low-base effect for all other production items tracked under LSM. But another sky chose to fall on Pakistan: covid19. The complete nature, degree and duration of the impact of the virus is not known. But we do know that it will impact different sectors differently.

In the case of food and medicines, for instance, production should increase – assuming the government takes necessarily action in that regard. But in the case of export-orientated sectors (not that exports are adequately reflect in the LSM index), and auto, cement, white goods etc, production might take a hit, the numbers for which will be reflected in May and June 2020 for March and April production. Refinery production, which has about 5.4 percent weight in the LSM, may also take a hit as lower oil prices offer lower refinery margins which may disincentivize production at a time of low fuel usage (assuming a voluntary/compulsory lockdown scenario).

If data for the first seven months has shown that large scale production in FY20 is worse than FY19, even after all efforts towards post-IMF programme stabilization, the appearance of corona might just make FY09 look good compared to FY20.