FE Editorial : Straws or shoots?

FE Editorial : Straws or shoots?
The Financial Express, March 4, 2009, Page 6

Could the two stimulus packages announced by the government in December and January have already begun to help sectors like automobile, cement and steel? All three sectors are reporting an upturn in January and February. For auto, excise duty cuts, cheaper auto loans by banks, and the pay commission arrears to government employees may have pushed sales of cars and two wheelers in February, after eight months of doldrums. But it’s too early to take a call on sustainability. Much of the growth in sales in February this year is on account of low base in the same month last year, as consumers had postponed buying automobiles in anticipation of price cuts after the Budget. Even automakers are anticipating flat sales in months to come because of subdued corporate spending and the higher sales base of last year. Overall commercial vehicles sales in February 2009 saw a 52% decline as compared to the same month last year because banks were stringent on disbursing loans in this category. Cement dispatches rose by 8.3% at 16.1 million tonnes in January 2009 because of high demand from government infrastructure projects. However, there is no visible recovery in cement demand from the real estate sector and the demand has in fact slowed down in recent months due to slackening property sales. But with the government announcing a slew of measures to revive the demand in the housing sector especially of low-cost housing, demand for cement is likely to pick up around June this year. A notable indicator of rising cement demand is on the prices, which started firming up and went up by Rs 3 per 50 kg bag in Mumbai last month. Prices are likely to start softening from the second half of the current fiscal as new capacities start coming on-stream. This points to the possibility of overcapacity in the industry.

Falling demand from the automobile and real estate sectors had a direct bearing on the steel sector. Though the demand for steel picked up by 1.5% in January compared to the same month last year, distress sales by companies has put further pressure on prices. During the month, average prices of hot rolled coils fell by 11.3% and galvanised sheets were down by 9%. And now with a sharp reduction in input prices expected in the renewed contracts of domestic companies, and global steel prices remaining subdued, it is likely that steel prices would remain weak this year. Whether the third stimulus package and a further monetary easing, assuming it comes, have any effect will be clear by the time the next government comes in.