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Recent surge in engineering exports driven by rising metal prices; likely to sustain

* India’s exports recorded strong growth in Mar – Apr 2021: Provisional data released by commerce ministry shows that India’s exports increased 197% y/y to $30.2bn in April 2021. The sharp uptick in exports was partly due to low base (exports contracted 61% y/y in Apr 2020 as lockdown restrictions were put in place worldwide). However, there is also a strong uptick in month-on-month momentum in export performance in the past few months on the back of massive stimulus and unlocking of economic activity globally.

* Export performance driven by strong growth in engineering exports: An analysis of exports by principle commodities shows that engineering exports have been driving growth in total exports. In March 2021, out of the total export growth of 58% y/y, engineering exports accounted for 20 percentage points. As per provisional data for Apr 2021, out of total export growth of 197% y/y, engineering exports accounted for 61 percentage points. Engineering exports account for ~25% of India’s total exports. However, in March-April 2021, they have contributed close to one-third of the increase in total exports.

* Within engineering goods, base metal exports record strong growth: India’s engineering export basket consists of 33 products which can be classified into 5 groups viz. base metals, industrial machinery, electric machinery, transport equipment, and medical & surgical equipment. In FY21, engineering exports stood at $73.12bn, down 3% y/y. Out of the five categories, only one category viz. base metals recorded positive growth of 15% in FY21.

* Base metals export in H1FY21 driven by volume growth…: In the beginning of FY21, Covid-19 related lockdown brought domestic economic activity to a standstill. Hence, there was little demand for base metals domestically. As a result, exports of base metals surged. However, gradual unlocking of economic activity led to increasing domestic demand for base metals and export growth moderated as the year progressed. During H1FY21, base metal prices also remained under control. Hence, the average monthly increase in 11% in base metals exports was largely driven by increasing volume of export.

* …while in H2FY21, growth in base metals export is driven by rising prices: However, starting Oct 2021 prices of base metals started increasing in double-digits on the back of large stimulus in major economies, unlocking of economic activity and a rebound in demand from China. Our in-house metal price composite index recorded average monthly increase of 24% in H2FY21. Export volume growth, on the other hand, remained muted during H2. Hence, the base metal export growth in H2FY21 is driven by rising metal prices, not volume.

* Base metal prices likely to remain elevated in the near to medium term; likely to push engineering exports higher: Base metal prices are expected to remain high in the near to medium term as accommodative central bank policies and large stimulus globally boost investment activity. Moreover, other components of engineering exports which recorded contraction in FY21 could witness a revival as Covid-19 cases recede worldwide and countries open up an increasing number of activities. As a result, we expect engineering exports to record strong growth in the near to medium term.

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