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Author: PublicInvest   |   Latest post: Wed, 21 Aug 2019, 10:13 AM

 

Industrial Production Index (IPI) - Remaining Resilient

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OVERVIEW

IPI remained resilient in May, powered by positive growth across all sectors especially mining which produced its best performance for the year. IPI soared 4.0% YoY for the month, matching April’s showing, pushing YTD average higher to 3.2% (YTD April: 3.0%) with the jump lifted by mining (May: +3.0%; April: +2.3%) and supported by manufacturing (May: +4.2%; April: +4.3%) and electricity (May: +5.7%; April: +5.8%) outputs. Though YTD IPI of 3.2% is sluggish by historical standards, it does have the potential to rebound especially after the recent tariff truce and the expected recovery in mining.

The slight moderation in manufacturing momentum was caused primarily by the slowdown in E&E (May: 3.7%; April 4.1%) output which remained cautious due to trade uncertainty. YTD manufacturing growth of 4.1% (YTD 2018: 5.0%) is fair given the chaos in global trade. On specifics, manufacturing IP that jumped by 4.2% in May (April: 4.3%) was driven by woods-related products (May: 6.5%; April: 5.2%) and F&B and tobacco (May: 4.7%; April: 4.2%) though offset by E&E (May: 3.7%; April: 4.1%) and petroleum, chemical, rubber and plastics products (May: 3.2%; April: 3.6%). The slowdown in E&E activity is in consonance with E&E export momentum (May: 0.5%; April: 3.9%) and remains our best bet to push the IPI higher given ample capacity on hand. Sluggish YTD E&E performance of 3.5% (YTD 2018: 5.8%) is in-sync with tepid global PMI manufacturing indices (June: 49.4; May: 49.8) and may be ripe for a rebound.

Mining sector produced a stronger performance in May (+3.0%; April: 2.3%) pushed by stronger natural gas production (May: 7.6%; April: 6.1%) which signals that output may have recovered post-outage in 2018. Crude petroleum remained a source of pain following its 5th contraction for the year (May: -2.0%; April: -1.9%) no thanks to production constraints and PETRONAS’ voluntary supply adjustments. Mining sector YTD average of -0.2% (YTD 2018: -0.7%) is a disappointment but it may turn positive in the near term driven by the expected turnaround in natural gas output. Headline IPI was also lifted by the surprise buoyancy of electricity output (May: 5.7%; April: 5.8%) amid volatile weather conditions.

The recent tariff truce could trigger a rise in trade appetite especially after the removal of some uncertainties. The decision to do away with additional tariffs mean a certainty in cost of input, a source of great uncertainty since the start of trade war. Better clarity on tariff at the very least allows producers to be certain on pricing where this could push trade to return to some form of normalcy soon.

ANALYSIS BY SECTOR

Manufacturing. Growth eased slightly to 4.2% YoY in May (April: 4.3%), hurt by the softening in E&E activity (May: 3.7%; April: +4.1%). Manufacturing YTD average of 4.1% is trailing the similar period in 2018 (5.0%) but could rebound once global trade returns to some form of normalcy. Other sub-sectors that showed steady performances include transport equipment and F&B and tobacco.

Below are the details for the month:

  • F&B and tobacco (May: 4.7%; April: 4.2%)
  • textile, wearing apparel, leather products and footwear (May: 5.8%; April: 5.7%)
  • wood products, furniture, paper products, printing (May: 6.5%; April: 5.2%)
  • petroleum, chemical, rubber and plastics products (May: 3.2%; April: 3.6%)
  • non-metallic mineral products, basic metal, fabricated metal products (May: 3.8%; April: 4.0%)
  • E&E (May: 3.7%; April: 4.1%) and
  • transport equipment and other manufactures (May: 6.9%; April: 7.2%)

Manufacturing sector growth rose 0.2% on a MoM and seasonally-adjusted basis, a notable slowdown against 1.5% in April.

Mining: Mining sector sustained its strong showing in May driven by stronger natural gas performance that more than offset the disappointing crude petroleum output. It expanded 3.0% YoY in May against 2.3% the month before, pushing YTD average to improve to -0.2% (YTD April: -0.9%). The mining sector’s improving performance may sustain in the months ahead pushed by the expected rebound in natural gas output which is likely to offset the expected contraction in crude petroleum (i.e. production constraints and extension of voluntary supply adjustments by PETRONAS).

Natural gas showed resilient YTD performance amid 2019 average of 2.0% (YTD 2018: 0.1%) signaling that production has returned to some form of normality following persistent outages last year. This was not enough to offset the slide in mining sector growth however following crude petroleum’s disappointing YTD growth of -2.5%. The details of the month’s performance are as follows:

  • natural gas (May: 7.6%; April: 6.1%)
  • crude petroleum oils & condensates crude oil production (May: -2.0%; April: -1.9%)

On a MoM and SA basis, mining output slipped to -1.3%, a marked deceleration against 3.1% in April.

Electricity: Output growth remained elevated in May following volatile weather conditions (+5.7%; April: +5.8%). YTD average of 5.8% may not sustain and is likely to ease in the next quarter amid more normal weather conditions. On a MoM basis, the index ticked 0.4% higher, a slowdown against +1.7% in April.

OUTLOOK

IPI may stage a rebound driven by the recovery in manufacturing and aided by the turnaround in mining. Manufacturing sector may benefit from the current tariff truce while mining sector may gain from the ramp-up in natural gas production. Crude petroleum may also recover, though slightly later, consistent with the lower OPEC (and allies’) supply cut agreement that will continue until March 2020. There could be upside risks to our projection should there be significant developments in trade negotiations.

Source: PublicInvest Research - 15 Jul 2019

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