From a contraction of just -0.1% in Sep-20, the month of Oct-20 saw core sector contractingby -2.5%. This can be partially attributed to the base effect and partially to fall in steel and refining output.Core sector growth has now been negative for 9 out of the last 13 months.
The month of Sep-20 had given hope that the core sector would now move decisively into positive territory but that could be delayed now with the contraction widening to -2.5%. From a business point of view, the core sector is extremely critical as it comprises 40.27% of the IIP, and therefore is an important high-frequency signal for GDP growth.
As we shall see in our detailed analysis of the components of core sector; weak oil prices continues to be the principal reason for the negative core sector growth. A bounce in oil prices could be the trigger for a bounce in the core sector growth.
The 8-sector story: More sectors show positive growth
The core sector growth has been the story of 8 infrastructuresegments that are the building blocks of the economy. Last month, we said it is getting better and despite the fall in Oct-20 there are some positives. In April and May 2020, all the 8 core sectors showed negative growth. Then the positive growth sectors improved to 1 in June-July, 2 in August and 3 sectors in September. In Oct-20, a total of 4 sectors are in positive territory with weak oil accounting for 75% of the negative growth sectors.
How the Eight core sectors panned out in Oct-20
• Coal Sector (weight 10.33%) output saw +11.6% growth in Oct-20. The return of power sector demand and the resolution of labour problems means that coal is back to growing at pre-COVID levels.
• Electricity generation (weight 19.85%) increased by +10.5% building on the positive growth of the previous month. It benefited from resumption of factories and steady coal supply helped thermal get back on track. There was traction in alternate energy too.
• Fertilizers (weight 2.63%); after a briefly surprising fall in September, it is back to growth at +6.5% in Oct-20. Clearly, fertilizers sector has benefited from robust Kharif, build-up to Rabi sowing and better income levels in rural India.
• Cement (weight 5.37%) output turned around with +2.8% positive growth in Oct-20. There is demand visibility from residential, business and infrastructure pockets. Cement consolidation has also resulted in better unlocking of output.
• Steel (weight 17.92%) saw a -2.7% contraction in Oct-20. Over the last few months, steel has been a big driver of the core sector. However, this fall is attributed to steel buyers front-ending purchases in August and September anticipating price hikes.
• Crude Oil (weight 8.98%) extraction fell -6.2% in Oct-20. Growth continues to be tepid due to weak crude oil prices. However, the good news is the sharp 30% rally in Brent Crude on the back of vaccine hopes should be favorable for crude.
• Natural Gas (weight 6.88%) production fell -8.6% and is still looking very weak. The cuts in natural gas production continued in October and the cut in gas prices offered has not gone down too well as gas producers are finding prices unviable.
• Refinery Products (weight 28.04%) fell -17.0%and is, perhaps, the biggest factor putting pressure on core sector growth in Oct-20. Hopefully, the sharp spike in crude prices should help in improved GRMs and better refining output in November.
Crude bounce could lead core sector into positive in Nov-20
In the previous monthly note, we had written about crude prices driving 45% of the core sector. That was evident in the October numbers too. However, there is hope if one looks at November data. Crude prices are up by 33% from $36/bbl to $48/bbl in the Brent market. That is likely to drive extraction and refining output higher as economic revival hopes keeps oil prices closer to $50/bbl mark.
|Core Sector Growth (%)||3.8%||2.6%||4.9%||3.0%|
|Core Sector Growth (%)||4.8%||4.3%||4.4%||0.4%|
|Core Sector Growth (%)||-13.0%|
The Apr-Jun quarter exerted tremendous pressure on core sector growth in this fiscal and that explains why the annualized core sector growth is at -13% after seven months. With stimulus 3.0, the government has done its bit. The onus is on industry to catalyze demand pick-up from here!