Mining, construction equipment sector may face 20% volume dip in 2020: Icra

After three strong years and industry volume peaking at about 94,000 units, CY2019 saw industry volume fall by 16%

The domestic mining and construction equipment (MCE) sector is likely to see a volume decline of over 20 per cent in calendar year (CY) 2020 on account of loss of sales in April and May, and an overall weakness in the economy, Icra said on Tuesday.

The domestic credit rating agency said it continues to maintain negative outlook for the domestic MCE sector based on the prevailing overall scenario.

"The MCE industry is expected to suffer a volume decline of over 20 per cent in CY2020, due to two months of lost sales and an overall weakness in the economy," Icra said in a statement.

After three strong years and industry volume peaking at about 94,000 units, CY2019 saw industry volume fall by 16 per cent, it said.

Plagued by tight liquidity conditions, delayed payment to contractors and an overall slowdown in government spend on infrastructure activity, MCE volume has witnessed a sharp contraction since December 2018.

"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," it said.

During the first quarter of 2020, the industry reported over 23 per cent volume decline, followed by 50 per cent decline in March.

The same continued to contract in April and May too, before reporting a surprising pick-up in June, it said.

The MCE industry witnessed some demand recovery last month after a prolonged downturn, driven mainly by rural demand for construction equipment (CE).

This was corroborated by our extensive channel checks across all participants -- original equipment manufacturers (OEMs), ancilliary, dealers and users, Pavethra Ponniah, Vice President and Sector Head, Icra said.

It was found that rural demand has been up with vehicle utilisation levels trending up since May, led by agriculture, irrigation, canal clearing and mulching activities, he said.

"The pick-up in rural demand is coming off two years of healthy monsoons and harvests. 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," he added.

Typically, CE demand is strongly correlated to economic activity and government (and private) investments in infrastructure and other long-term fixed assets, the rating agency said.

"In the current context, GDP growth has slid to a 44-quarter low of 3.1 per cent in Q4 FY2020 with onset of lockdown. Domestic steel consumption and cement production has witnessed de-growth...," Icra said.

"The contraction in Gross Fixed Capital Formation (GFCF) in the economy has worsened to series low 6.5 per cent in Q4 FY2020. With no let-up in Covid-19 outbreak, climbing infections and localised lockdowns, recovery will be delayed. Thus there exists significant negative bias to current forecasts," it added.

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