Thus far, India has passed through the secular age of Information Technology. This was an important first step as the tools to enhance productivity were a must. She did this not just for herself, but for the globe too. In doing so she created a trickle of wealth. She next proceeded to the secular age of Consumer Discretionary spending; everyone from the fruit vendor to the CEO carries a mobile today; and the number is still growing. Bicycles have been upgraded for scooters and motor cycles, scooters and motor cycles have been upgraded for cars, retail malls and leisure have grown in importance, people bought houses; all this in the secular age of Consumer Discretionary which now draws to a close.
Now, she strives to enter the secular age of Basic Materials in anticipation of the secular age of Industrials. Within that secular trend, she now enters a strong cyclical upturn in Basic Materials. This, in anticipation of a cyclical upturn in Industrials, with the Commonwealth Games as a catalyst. Yes, roads are needed, as are trains and public transportation, hospitals, power stations (even nuclear power is needed), potable water, proper sewage, residential accommodation, office space, and retail malls. So far India is still at the need recognition stage; real demand exists because the need & the ability to pay are both in place. Yet, so far much has been promised and little delivered.
Today, India is at the door-step of a secular age of Basic Materials. Before entering the secular age of Industrials (which we call Capital Goods in India), India first must past through the age of Basic Materials. She needs iron ore, steel, copper, cement, and much more to build the nation's infrastructure. Similarly, she needs chemical, fertilizer, seed, and much more before she builds her tractors. She is also entering a strong cyclical upturn in Industrials, which will be led by a cyclical upturn in Basic Materials.
So what holds India back?
Firstly, Basic Material prices have been greatly elevated. China passed through its secular age of Basic Materials a long time ago. It passed through its secular age of Industrials and entered the secular age of Energy in 2003. In the run up to 2008, in the midst of its secular age of Energy, China passed through a cyclical upturn in Basic Materials & Industrials, aided by the Olympic Games as a catalyst. For India, it is always a disadvantage being second in line; demand is the desire backed with the ability to pay and the ability to pay is impacted by price levels. Nevertheless, prices have pulled back, with expected reduction in China demand following conclusion of its cyclical Industrials cycle, and so India should be ready to recommence the Basic Materials cycle from a lower base than recently; the demand side of the equation is thus in place.
Secondly, capacity & supply was an issue. Cement capacity has been increased, as has steel and iron ore, fertilizer and chemicals amongst other Basic Materials. The corporates (Sesa Goa, Sterlite (SLT), Hindalco, Tata Steel, Essar Steel etc.) have done well to create the required capacity expansion and they continue to do so; for this is the secular age of Basic Materials. Of course the global miners and producers are ready and willing to supply at the equilibrium price. So supply is in place too.
Thirdly, is the capital goods industry ready to run the cyclical up-turn? Yes, not only ready, but raring to go. So far the Commonwealth Games infrastructure needs are woefully behind, perhaps with the exception of the airports and metro which are on target. Amongst the capital goods sector my favorites are L&T, Punj Loyd, GMR and Mundra - all ready to build airports, special economic zones, ports and other infrastructure. So this is no impediment.
Finally, it's the government. This is the greatest impediment to progress in India. It has changed a lot over the years, but controls still slow the pace of progress. Efficient price discovery is hindered because of interventionist government policies, be they in mining, sugar, steel, iron ore, cement, chemicals or fertilizer; no matter how noble the intentions, they are always bad. Intervention can be legislative, it can be a dictatorial policy note, it can be an import or export tax, it can be a simple suggestion. Upcoming elections will cause problems short term; but perhaps once that is done, better sense shall prevail - the risk of an international embarrassment during the Commonwealth Games might prove a change catalyst.
Now what confuses me is that the analyst community in India remains negative on materials but positive on capital goods. Is it not obvious that for capital goods to succeed, first materials must prosper?
Gentlemen and ladies, India's entry into a secular age of Basic Materials is not merely a trend within an economic cycle; it is a powerful secular trend with the ability to influence the global Basic Materials sector. Together with a cyclical upturn in anticipation of the Commonwealth Games, we have a very powerful catalyst in place for sector out-performance on an India and Global level.
Disclosure: Author is long Sesa Goa, Tata Steel in India.