December saw a phenomenal month-on-month growth of 18.51 percent in large scale manufacturing (LSM) index. Then again, December is a month of seasonal spike for LSM. So there shouldn't be any hurrahs there.
The year-on-year growth in December 2014 stood at 2.35 percent, down from a year-on-year growth of 11.27 percent in December 2013. However, that is largely because of the high base affect as back in 2013 factory engines had gathered steam following the then partial resolution of circular debt in mid-2013 and the ensuing power supply, which in turn had led to unusual LSM growth.
The first half LSM growth number now stands at 2.65 percent, which is significantly lower than 6.53 in the same period last year. With the data reported by Provincial Bureau of Statistics showed growth - in fact its highest 1H growth in the last three years - the factors responsible for LSM slowdown mostly lie in OCAC and Ministry of Industries sub-indices.
Refineries production remained flat with a nominal output growth of 0.94 percent in 1HFY15 as against a growth of 9.9 percent last year. The reason: liquidity shortages due to re-emergence of circular debt, and therefore, lesser amount of crude oil processing, as well as avoidance of inventory losses in the wake of falling global oil prices.
Within the data reported by Ministry of Industries, sugar production fell substantially about 17 percent year-on-year in the first half ending December 2014 after farmers reduced the area used for sugarcane cultivation due to lower incomes last year, which caused a decline in its production. Cigarette production also fell by about 7 percent plausibly due to higher smuggling level following the restructuring of taxation on the sector that resulted in a 13 - 28 percent increase in retail cigarette prices.
The production of chip board crashed by 75 percent in 1HFY15 due to the closure of a large chip-board plant following the increase of wood prices and power shortages, according to the central banks recent first quarter report.
The cumulative impact of the decline in these, and some other minor items offset the impressive growth in the production of steel products, and nominal growth (~4%) in cement on account of strong demand from a number of mega construction projects, for example the Rawalpindi-Islamabad Metro and Multan-Faisalabad Motorway.
"In addition to strong demand, steel production also benefited from certain supply side factors: Pakistan Steel Mills resumed operations after receiving another bailout package from the government; and softening global steel prices (particularly in China), helped the local industry by reducing the cost of imported raw material," according to the central bank report.
Moreover, the first half also saw unimpressive growth in cotton yarn/cloth (following slowdown in Chinese cotton imports), and cooking oil on account of import substitution in the edible oil market. With these factors expected to continue amid persistent power and gas shortages, the remaining half of the fiscal also doesn't look very good for the large scale manufacturing sector.
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LSM growth - YoY % change LSM growth - YoY impact
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1HFY15 1HFY14 1HFY13 1HFY15 1HFY14 1HFY13
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OCAC 0.94 9.91 10.76 OCAC 0.06 0.63 0.63
Ministry of Industries 1.35 6.4 0.32 Ministry of Industries 0.9 4.27 0.22
Provincial BOS 6.31 6.05 5.36 Provincial BOS 1.69 1.62 1.39
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2.65 6.53 2.24
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