Bimb Research Highlights

Author: kltrader   |   Latest post: Wed, 6 Nov 2019, 4:40 PM


Economics - Recovery in Mining Output Supports IPI Growth in August

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  • IPI increased by 1.9% yoy; declined 0.2% mom
  • Growth in mining still contracted but improved
  • Manufacturing sales decelerated
  • Productivity increased by 3.3% yoy
  • Global semiconductor sales down 15.9% in August
  • Global trade uncertainties distorted IPI performances
  • Manufacturing remains under pressure

Steady industrial production growth in August

Malaysia’s industrial production index (IPI) rose marginally by 1.9% yoy in August, following a 1.2% gain in July, aided by a lower contraction in mining activity although manufacturing production softened further, and electricity production decelerated to almost zero growth.

However, on monthly basis, the IPI declined 0.2% in August, after a 0.4% declined in July. Recovery in the mining (Aug: +4.2%; Jul: -10.7%; Jun: -3.9%; May: +3.8%; Apr: - 5.9%) unable to support the monthly IPI growth due to the decrease in manufacturing (Aug: -1.2%; Jul: +2.0%; Jun: +1.2%; May: +3.1%; Apr: -2.0%) and electricity (Aug: -1.1%; Jul: +7.2%; Jun: -7.9%; May: +2.4%; Apr: -0.2%). However, in seasonally adjusted terms, IPI in August grew by 0.9% due to the increase in mining index (9.9%). Meanwhile, manufacturing index and electricity index decreased by 1.1% and 3.2% respectively.

The IPI of Malaysia for the period of January to August recorded a growth of 2.9% as compared to the same period of the previous year. The increase was contributed by the growth in electricity sector (4.1%) and manufacturing sector (4.0%). Meanwhile, the mining sector declined by 1.0%.

Growth in mining still contracted but improved

Malaysia’s IPI improved marginally to 1.9% yoy in August as mining activity recovered.

Growth of mining activity contracted by 3.9% yoy in August but improved somewhat from - 8.4% in July. Despite recovering, the subcomponent, which showed improvement in crude oil and condensate production at -9.5% (Jul: -22.7%; Jun: -3.7%; May: -2.0%; Apr: -1.9%; Mar: - 2.0%; Feb: -4.3%; Jan: -2.2%), was offset by a smaller increased in natural gas at 1.2% (Jul: +7.3%; Jun: +13.0%; May: +7.6%; Apr: +6.1%; Mar: +1.4%; Feb: -5.6%; Jan: +0.3%).

Growth in manufacturing output weakened to 3.7% yoy in August after recording a growth of 4.0% in July amid softer output growth in electrical & electronics (E&E) (Aug: 3.5%; Jul: 4.9%; Jun: 3.5%; May: 3.7%; Apr: 4.1%; Mar: 2.7%; Feb: 3.1%; Jan: 3.9%), petroleum, chemical & plastic products (Aug: 2.8%; Jul: 3.4%; Jun: 3.0%; May: 3.2%; Apr: 3.6%; Mar: 3.7%). as well as non-metallic minerals. However, production of food & beverages, textiles & wearing apparels, and wood & paper products rose for the month, providing respite.

The electricity sector output increased by 0.3% yoy in August from 2.0% in July, marking the lowest rate of growth since Apr 2017.

Manufacturing sales decelerated

Manufacturing sales decelerated in August and grew by 4.7% yoy (Jul: 6.0%) to RM73.7bn as compared to RM70.4bn reported a year ago.

The year-on-year growth registered in sales value in August 2019 was driven by the increase in non-metallic mineral products, basic metal & fabricated metal products (6.6%), petroleum, chemical, rubber & plastic products (4.1%) and electrical & electronics products (3.6%).

On month-on-month growth, the sales value went down by 0.8% while on a seasonally adjusted terms, the sales value registered a decrease of 2.6%.

Despite modest sales growth, manufacturers maintained their pace of hiring during the month as reflected in the hiring of workers where total employees engaged in the manufacturing sector in August was 1,088,547 persons, an increase of 1.3% or 14,448 persons as compared to 1,074,099 persons in August 2018. On monthly basis, the number of employees decreased marginally at 0.01% as compared to 1,088,616 persons registered in the preceding month.

Salaries & wages paid amounted to RM4.0bn, rose by 3.3% yoy or RM129.7m in August. Simultaneously, salaries & wages paid in August declined slightly at 0.1% mom (RM4.4m) The average salaries & wages paid per employee in August was RM3,677, increased by 2.0% yoy but edged down by 0.1% mom.

Productivity or average sales value per employee in August increased by 3.3% yoy to register RM67,681. Meanwhile, on month-on-month basis, the average sales value per employee decreased by 0.8%.

The sales value of the manufacturing sector in the period January to August 2019 registered a growth of 6.0% to RM568.8bn. The number of employees engaged during the period grew by 1.3% to register 1,088,547 persons while salaries & wages paid posted an increase of 4.9% to RM32.1bn. The sales value per employee during the reference period rose by 4.5% to record RM522,569.

Global semiconductor sales down 15.9% in August

According to data from the Semiconductor Industry Association (SIA), worldwide sales of semiconductors were USD34.2bn in August 2019, a decrease of 15.9% yoy from the August 2018 total of USD40.7bn but 2.5% mom more than the July 2019 total of USD33.4bn. While worldwide semiconductor sales remain well behind the totals reached in 2018, month-tomonth sales increased in two consecutive months for the first time in nearly a year. Sales into the Americas market were mixed, decreasing significantly year-to-year but increasing more than any other region on a month-to month basis. Regionally, sales increased on a month-tomonth basis in the Americas (4.1%), Asia Pacific/All Other (3.8%), China (1.8%) and Japan (1.1%), but decreased in Europe (-0.8%). On a year-to-year basis, sales were down across all regional markets: Europe (-8.6%), Asia Pacific/All Other (-9.2%), Japan (-11.5%), China (- 15.7%) and the Americas (-28.8%).

Global trade uncertainties distorted IPI performances

Thailand’s industrial production declined by 4.4% yoy in August, following a 3.2% drop in a month earlier. This was the fourth straight month of decrease in industrial output as production of cars, petroleum and steel declined. Manufacturing production in the Philippines dropped by 7.9% yoy in August, the ninth straight month of contraction, after a revised 5.5% drop in July. Singapore’s industrial production in August contracted 8.0% yoy (- 7.5% mom sa) in August, marking the biggest year-on-year fall since December 2015. Excluding biomedical manufacturing, output fell 12.4% yoy. July’s manufacturing growth was however revised higher to -0.1% yoy from -0.4%. Accounting for the latest data, industrial production contracted 2.4% yoy in the first eight months of 2019.

Industrial production in the US increased 0.4% in August over the same month in the previous year. Meanwhile, US manufacturing output increased more than expected in August, boosted by a surge in machinery and primary metals production, but the outlook for factories remains weak against the backdrop of trade tensions and slowing global economies. The manufacturing production rose 0.6% mom in August after an unrevised 0.4% drop in July. However, production at factories fell 0.4% yoy in August. Manufacturing, which accounts for about 11% of the US economy, is being hobbled by trade war between the US and China and slowing global economic growth. The trade war has eroded business confidence, leading to a slump in the sector, which ironically the Trump administration has sought to protect against what it called unfair foreign competition.

Sharp slowdown in China’s industrial production remained a key concern as the manufacturing sector bears the brunt of the hit from US-China trade tensions. Industrial production growth slowed further to 4.4% yoy in August from 4.8% in July on the back of an escalating trade dispute with the US and sluggish domestic demand. This was the slowest growth since February 2002 when industrial production growth registered 2.7% yoy. All in all, uncertainties arising from the trade tensions have resulted in weaker manufacturing and investments in China. In August, industrial production in Japan fell 4.7% yoy, the eighth time in the last 12 months in which production had fallen. Production was down 1.2% from the previous month. There were sharp declines in the production of iron, steel, and nonferrous metals as well as machinery. Production of vehicles was also down. The weakness of Japan’s industrial sector is, in large part, related to the trade war between the US and China. Indeed, Japanese exports to China have fallen sharply, in part due to weaker Chinese demand for inputs used in products that are re-exported to the US. Likewise, industrial production in neighboring South Korea declined in August as well. Both countries have been hit by the trade war, and the two countries are in the midst of their own trade war. However, the conflict between Japan and South Korea is not believed to have had a significant impact on Japanese output—at least not yet.

Manufacturing remains under pressure

Malaysia’s IPI improved marginally to 1.9% yoy in August. Growth in manufacturing output weakened to 3.7% yoy (July: 4%) amid softer output growth in electrical & electronics (E&E). Latest manufacturing PMI data showed that manufacturing activity continued to struggle in September but at a softest pace since May as September's PMI reading stood at 47.9, up marginally from August level of 47.4, and remained in contractionary mode for the twelve straight months.

Meanwhile, August export growth surprisingly fell by 0.8% yoy (Jul: +1.7%) as lower shipments were mainly recorded for E&E and commodities products. Exports of E&E dropped by 7.4% yoy (Jul: +4.5%). Malaysia’s semiconductor exports have performed far better this year in the face of a global technology slump. Heavy weights in the field, Korea and Singapore, have seen their exports plunge in recent months.

Moving forward, we expect IPI to remain resilient in the face of protracted trade friction between the US and China. Overall, we remain cautiously optimistic on the manufacturing sector as uncertainties in the global economy brought about by the trade feud and growth slowdown in the major economies may weigh on domestic growth due to Malaysia’s high exposure to external trade. Should there is a clarity and concrete deal between the US and China, we expect the domestic manufacturing activities to recover. Nevertheless, trade war factor remains as downside risk to global trade activities as well as Malaysia’s trade and industrial activities given the prospect of slightly gloomy manufacturing sales following the rising trade war effects and declining business optimism globally.

Source: BIMB Securities Research - 14 Oct 2019

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