The industrial production numbers sparked a nice little rally in capital goods on Friday, with the Bombay Stock Exchange’s Capital Goods index going up 2.86%.
That jump was on account of a 10.4% year-on-year rise in capital goods production in February that came on top of an 18% rise in February 2007, which vindicated the widely held view that the growth of 2.3% in January was an aberration.
The consumer goods index also did well, going up 9.2%, quite a change from the tepid growth during the earlier part of the fiscal year.
But there isn’t really any reason to celebrate. The Central Statistical Organisation had said manufacturing growth for fiscal year 2008 would be 9.4%. That growth has been 9.1% between April and February, which means a spurt is needed in March to achieve the target.
Also, the inflation numbers continue to get worse.
The latest IMF projections put the global commodity price index, which was at 134.9 in 2007, at 165.3 this year, with only a small reduction to 161.2 in 2009.
For some indices, such as the coal price index or the cereal price index, the increases persist in 2009.
For instance, the coal price index is expected to go up from 137.6 in 2007 to 188.6 this year and to 191.2 in 2009. The cereals index is projected to rise from 158.7 in 2007 to 216.6 in 2008 and to 217.4 in 2009. It is only in the metals index that IMF expects a substantial fall in 2009. In other words, this inflation is here to stay and the Reserve bank of India (RBI) has no option but to slow demand and to diminish inflationary expectations.
What will be the impact of such a policy and of the current steps being taken by the government?
Producers are increasingly caught between the devil and the deep sea. That is because the policies won’t allow them to pass on the increases in input costs, while any dampening of demand by RBI will also have the same effect.
In short, the operating environment for companies can only get worse in the near future. Perhaps the lesser evil in the circumstances for RBI is to appreciate the rupee. After all, that’s what China has been doing with the yuan.
The outlook for cement stocks gets bleaker
Cement maker Ambuja Cements Ltd was the biggest loser among stocks comprising the National Stock Exchange’s Nifty index, declining by 3.5%. Other cement stocks such as ACC Ltd, Grasim Ltd and India Cements Ltd did much better, falling by less than 1%—but that is taking a rather sanguine view of the government’s decision to ban exports of cement and clinker.
True, exports account for just 2.3% of total cement dispatches, but the ban could well be the beginning of greater price control. According to Alchemy Share and Stock Brokers Ltd, “The ban will clearly indicate the willingness of the government to take any steps it considers effective to control prices and in all probability will result in no more cement price hikes across country (including the southern markets). This will be a material negative for the sector.”
The ban itself will not impact prices greatly, since cement exports have already been declining to accommodate higher domestic demand.
In the 11 months between April 2007 and February 2008, cement exports fell by 38% over the corresponding previous year period. Companies in the south, such as India Cements Ltd and Madras Cements Ltd, which have enjoyed the greatest pricing strength, have already ceased exporting.
But for large cement and clinker exporters such as Ambuja Cements and Ultratech Cement Ltd, the ban will have some impact. Alchemy notes that Ultratech exports as much as 12% of total clinker production because of logistical reasons, adding that thecompany will be the worst hit if the ban materializes. Ultratech shares, however, fell by just 0.56%.
Another negative impact for exporters will be in the form of higher import duties, as they can no longer offset the duty payable on imported coal against cement and clinker exports. Cement shares have been underperforming for a while owing to lack of freedom in raising prices. The ban gives further credence to this view, thanks to which cement stocks may continue to languish.
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