Nikkei PMI has positive news for Indian manufacturing and services

by Abin Daya

It just might be that things are slowly falling in place for the Indian economy. The Nikkei Purchasing Manager’s Index for Manufacturing and Services has positive news, both in performance and sentiments. What we now need is better capacity utilisation leading to improvement in private investment. A good monsoon this year should create that.

Some indication of that is also seen in the performance of the infrastructure industries during the month of March. Performance improved from 1% growth in Feb, to 5% growth in Mar, though it was far from the 9.3% growth achieved a year back. While growth for the full year improved from the previous FY, the fertiliser industry seems to have been badly affected.

One topic that I have revisited time and again, both in the weekly updates as well as individual articles, is the issue of crude prices. Rightly so, because of the many fronts that these prices impact on the Indian economy. An item which generated significant interest was the OPEC supply cut from Nov 30. Prices had gone up after the supply cut, but recently, have come down again. What do we foresee going forward?

• Factory output increased for the consecutive fourth month in April, supported by growth in new orders
• Manufacturing PMI stood at 52.5 in April, at the same level as in March; a level above 50 indicates growth, while below 50 indicates decline
• Rate of growth of new orders was at a six month high in Apr, and new export orders rose for the third month in a row
• Manufacturing jobs rose for the second consecutive month, as a result of increase in production and expectation of pickup of demand
• Stocks of finished goods dropped, as it had been doing for the previous twenty-one months, but rate of depletion slowed significantly
• Again, purchases of inputs, both raw materials and semi-finished goods, increased for the fourth consecutive month in April
• The outlook for manufacturing looks encouraging, and the positive sentiments have prompted manufacturers to plan capacity expansions, new product launches and marketing campaigns
• However, growth in services activity slowed down in April, compared to March
• Services PMI was down from 51.5 in March to 50.2 in April, lowest in the past three months
• Advertising campaigns supported the increase in new orders for services, but competitive pressures hampered pricing
• While future predictions tend towards the positive, services companies are also apprehensive about the increase in competition; the sentiment can be described as ‘cautiously optimistic’

Core sector industries grow 4.5% in FY17

• The eight core-sector industries grew by 5% y-o-y in Mar 2017, against the 9.3% growth that they achieved in the same month of last year
• This is significantly better than the 1% growth demonstrated in Feb 2017, and also the fastest growth in three months
• Out of the five industries that were in the red in Feb 2017, Crude Oil (0.9% against -3.4%) and Natural Gas (8.3% against -1.7%) pulled back into black during March
• Compared to March 2016, Refinery products, Fertilisers and Cement which had exhibited strong double digit growth, returned negative growth in Mar 2017
• However, looking at the year as a whole, the sector managed to grow at 4.5% as against the 4% growth achieved in FY16

• Steel, which was in a bad position last year, recovered strongly, thanks to the performance of the recent months
• Steel industry index, with second highest weightage of 6.684 in the overall index, has grown by 9.3% in FY17 as against -0.1% in FY16
• The worst affected is the Fertiliser industry, where a growth of 12.5% in FY16 has changed to a marginal growth of 1.8% in FY17
• Production has grown marginally in FY17 for the fertiliser industry, with monthly production in 6 months of the year being lesser than last year

• While monsoons helped cropping, the impact of demonetisation curtailed demand during the critical months of Nov-Dec, thereby affecting production

Oil prices drop as OPEC production cut nears end

• Crude oil prices have erased a good part of their gains made after the start of the six-month OPEC production cut on Nov 30, 2016

• Brent crude fell to $48.17 on Thursday, May 04, the lowest since late November
• We have always maintained that the chances of prices rising above $60 on the back of these cuts are rare, and for the most parts they would remain below $55
• These predictions were made on the basis of the fact that Break-even points for US Shale players have been coming down consistently due to improved technology and developments in drilling techniques
• From $80/bbl in 2013, BEP has declined to around $35/BB, and this has led to an increase in US production
• As crude prices rise supported by OPEC cuts, more and more drillers are sinking wells, and occupying the space vacated by OPEC producers

• Despite the production cut, the world is still looking at a supply overhang, and it might not be easy to find the bottom just yet
• If major producers do not agree to extend their production cut by another six months, it is likely that we will see a further fall in prices
• Closer home, the prices of India’s basket of crude was at $48.82/Rs.3135.01 on May 04, 2017, the lowest Thursday closing in the past 23 weeks

Abin Daya the author of 'Basics of Trade: An India Perspective' is a FEMA expert, a career transaction banker, with close to 15 years of experience in corporate and transaction banking, in India.