• PPI dropped -0.4% yoy and moderated to 0.3% mom

• Manufacturing and agriculture, forestry & fishing sector remained as the pulling factor of a declining growth

• The cost for intermediate materials, supplies & components decreased on annual and monthly basis.

• Industrial activities to be supported by low input costs

Malaysia’s PPI for local production recorded the fifth consecutive months of negative growth as it dropped 0.4% yoy in May. However, it shows a sign of recovery as the trend of PPI continued to improve as PPI for May marked the smallest drop since January 2018. Still, manufacturing (-2.5%) and agriculture, forestry & fishing (- 9.6%) were the main sectors that dragged down the PPI. On the flipside, mining and electricity & gas supply climbed in May which increased by 29.8% (Apr: 15.9%) and 2.1% (Apr: 1.5%) respectively. Whilst, water supply eased to 0.1% yoy from 1.1% in the previous month.

On monthly basis, PPI for local production rose by 0.3% in May following a 0.5% increase in April. The growth was supported by mining (4.5%) and electricity & gas supply (0.3%). In terms of stage of processing (SOP), the declined in PPI was persistently triggered by the intermediate materials, supplies & components which dropped further to -2.7% in May from -1.6% in April. The finished good was also being the contributing factor of the decreasing growth as it declined by -2.7% yoy in May. In contrast, the crude materials for further processing surged to 9.5% yoy in May after growing by 3.7% in the prior month.

On monthly basis, the PPI for local production by SOP in May was buttressed by crude materials for further processing (+3.8%). Whilst intermediate materials, supplies & components and finished goods dropped by -0.7% and -0.1% mom respectively.

Industrial activities to be supported by low input costs

Producer prices continued to fall for fifth consecutive months as the PPI declined by 0.3% yoy in May. It was the weakest decrease in producer prices since January and with the declining input cost inflation in May, we believe that this would provide support to industrial and business activities in the coming months. Moving forward, we expect inflation to stay moderate in upcoming months as producer’s cost inflation continues on contraction. Meanwhile, Malaysia’s manufacturing condition declined for the fourth month in May as poor demand dragged the manufacturing Purchasing Managers Index (PMI) to 47.6 (Apr: 48.6), the lowest in 11 months. It was observed that manufacturers continued to face higher input prices in May due to a general increase in raw material prices, especially oil and metals. Though input prices have been on the rise since February 2015, input cost inflation eased to the slowest since October 2016. As a result, May output charge inflation eased from April’s seven-month high. Despite weak manufacturing activity in May, the change in the Malaysian government lifted sentiments and manufacturers’ optimism.

With the declining input cost inflation, we believed this would provide support to industrial and business activities in the coming months. Despite the rise in global crude oil price, retail fuel pump prices have remained unchanged and this could hold down input cost pressure and indirectly support local industrial production.

Source: BIMB Securities Research - 2 Jul 2018