COVID-19 to scrape fifth of Mining and Construction Equipment industry in 2020

The COVID-19 disruption has also dented the prospect of recovery of the mining and construction equipment (MCE) sector this year with the industry expected to suffer a volume decline of over 20 % in the current calendar year (CY), rating agency ICRA had said in a report.

The fall in volume is expected primarily due to severe loss in sales in the months of April and May and an overall weakness in the economy.

As per an ICRA note, during Q1 CY2020, the industry reported an over 23%volume decline, with volumes in March '20 falling by 50 per cent. The same continued to contract in April and May 20 too before reporting a surprising pick-up in June 20.

Given this situation, the MCE industry is expected to suffer a volume decline of over 20% in CY2020, due to two months of lost sales and an overall weakness in the economy, the agency said.

"The MCE industry witnessed some demand recovery in June 2020 after a prolonged downturn, driven mainly by rural demand for construction equipment (CE). It was found that rural demand has been up with vehicle utilization levels and had been trending up since May 2020 led by agriculture, irrigation, canal clearing and mulching activities. However, while the revival during the month of June is no doubt a positive sign, it is in no way conclusive; the same has to be sustainable in the near to medium term and much will be contingent on the underlying economy and headroom for infrastructural spend," said Pavethra Ponniah, Vice President and Sector Head, ICRA.

After three strong years and the industry volumes peaking at about 94,000 units, CY2019 saw the industry volumes fall by 16 per cent. Plagued by tight liquidity conditions, delayed payment to contractors and an overall slowdown in Government spend on infrastructure activity, MCE volumes have witnessed a sharp contraction since December '18.

Partial recovery was visible from December '19 with some relief on payments and Government spending, however, the lockdown from March '20, disrupted this growth momentum.

The ICRA note said that MCE demand is strongly correlated to economic activity and government (and private) investments in infrastructure and other long-term fixed assets.

In the current context, GDP growth has slid to a 44-quarter low of 3.1% in Q4 FY2020 with the onset of the lockdown. Domestic steel consumption and cement production has witnessed de-growth at -7 % and -5% respectively. The contraction in Gross Fixed Capital Formation (GFCF) in the economy has worsened to a series low of 6.5 % in Q4 FY2020.

With no let-up in the COVID-19 outbreak, climbing infections and localized lockdowns, recovery will be delayed. Thus there exists a significant negative bias to current forecasts, ICRA said.

"The strain on State finances will impact funding for infrastructural projects and is one of the key risks to infrastructure investments in the coming quarters which could have a telling impact on CE demand. Further, private sector capex, and interest in public private partnership (PPP) based infrastructure projects is also expected to be limited in the near term, due to increased risk averseness, and limited capital availability," Ponniah said.

Amidst considerable volatility in growth trends in the first three quarters of FY2020, the pace of Y-o-Y decline in the capital outlay of 20 state governments, for which the data is available, worsened and doubled to 12 % in Q4 FY2020 from 6% in Q3 FY2020. This contrasted with the healthy expansion in FY2019 and the impact of this slowdown was reflected in the 23 % contraction in the sale of equipment during FY2020.

In the current scenario, revenues of both the Central and the state governments have been impacted resulting in reduced government expenditure. While Central Government projects could still continue with its implementing agencies, the Central Public Sector Enterprises (CPSEs) borrowing (to fund the expenditure), to budget for the sharp reduction in revenue receipts during FY2021 and the limited flexibility to prune revenue expenditure and increase borrowings, many state governments may have to resort to cuts or defer capital expenditure.