• IPI accelerated by 4.2% yoy and 4.6% mom
• The recovery of production in mining pushed sector to 6-month high
• Double-digit growth of manufacturing sales in October
• Productivity increased by 7.8% yoy
• Global semiconductor sales remain strong
• Strong regional IPI performance
• Better outlook for 4Q18

Industrial production grew at 6-month high

Malaysia’s industrial production index (IPI) accelerated by 4.2% yoy in October, almost doubled last month’s increase of 2.3%. The stellar growth in October emanated from the recovery in mining sector (Oct: 1.4%; Sep: -6.2%) as well as soaring production in manufacturing sector (Oct: 5.4%; Sep: 4.8%). Meanwhile, the output from the electricity grew at a slower pace of 2.1% yoy in October from 4.2% yoy in the previous month and marking the slowest growth since Jun 2017.

On monthly basis, the IPI rebounded by 4.6% yoy in October after falling for two consecutive months (Sep: -0.3%; Aug: -0.8%). The growth was supported by all major sectors. Production from mining and electricity bounced back by 3.6% (Sep: -3.2%) and 3.9% (Sep: -6.3%) respectively in October while manufacturing’s output expanded by 2.1% in October following a 1.1% rise in the preceding month.

Cumulatively, IPI grew by 3.1% in the first ten months of 2018 from 4.5% in the same period last year. The modest growth was due to the declining production in mining sector (10M2018: -2.3%; 10M2017: 0.3%) as well as waning output from manufacturing sector (10M2018: 4.9%; 10M2017: 6.2%). Nevertheless, electricity index climbed by 3.8% from 2.3% between January and October this year.

The recovery of production in mining pushed sector to 6-month high

Malaysia’s IPI surged by 4.2% yoy in October after four consecutive months of growth below 3.0%. The larger increase in October was primarily driven by the improvement in output produced by mining sector. The IPI in October was also bolstered by higher manufacturing output.

Mining sector returned back to positive territory in October after a prolong decline since May 2018. The mining index recovered by 1.4% yoy in October from -6.2% yoy in the previous month (Aug: -4.6%; Jul: 5.9%; Jun: -9.4%; May: -0.5%). The increase was supported by a larger production in natural gas and crude oil. Natural gas which holds 12.92% over total IPI weightage jumped 2.3% yoy in October after continuously posting a declining production since February 2018. The extension of poor performance in mining sector since May 2018 was mainly prompted by the reduction of natural gas output. Besides natural gas, the stronger output from mining sector in October was also driven by crude oil production which bounced back by 0.4% yoy after falling for two months in row (Sep: -6.3%; Aug: -0.6%). In total, both of these sub-sectors contributed 25.14% to total weightage of IPI. Thus, the significant growth in mining sector gave a quite huge impact towards the overall IPI.

Manufacturing sector surged by 5.4% yoy in October, 6 percentage points higher than September’s figure (4.8%). The higher production was mainly driven by stronger output produced in transport equipment and other manufactures products (10.1%), electrical and electronics products (7.1%) and petroleum, chemical, rubber and plastic products (4.1%).

Production by the electricity moderated by 2.1% yoy in October from 4.2% yoy posted in the prior month. It was the slowest growth since Jun 2017 (2.09%).

Double-digit growth of manufacturing sales in October

Manufacturing sales in October rose by a double-digit growth of 10.2% yoy from 8.2% yoy rise in the previous month. The manufacturing sector recorded a sales value of RM73.1bn in October, with an increase of RM6.8bn as compared to RM66.3bn reported a year ago. The growth for the month was due to the increase in transport equipment & other manufactures products (Oct: 13.3%; Sep: 3.1%), electrical and electronics products (Oct: 11.5%; Sep: 9.1%) and petroleum, chemical, rubber and plastic products (Oct: 11.5%; Sep: 10.4%).

Meanwhile, on monthly basis, the sales value spiked by 3.3% (RM2.3bn) from 0.4% rise in the preceding month. On a seasonally adjusted mom, the sales value in October grew by 3.0% after falling by 2.1% in second consecutive month.

Manufacturers added more workers during the month as reflected in the hiring of workers where total employees engaged in the manufacturing sector in October was 1,076,377 persons, an increase of 2.2% or 23,042 persons as compared to 1,053,335 persons in October 2017. On monthly basis, the number of employees show a slight increase of 0.2% as compared to 1,074,292 persons in the preceding month.

Salaries & wages paid in October 2018 increased by 10.2% yoy (RM359.8m). When compared to the previous month, the total amount paid in October slightly decreased by -0.04% (RM1.7m) to RM3.9bn. The average salaries & wages paid per employee was registered at RM3,625 in October 2018, a rise of 7.8% yoy and a decrease of 0.2% mom.

Productivity or average sales value per employee in October 2018 increased by 7.8% yoy. On monthly basis, it grew by 3.1% to register RM67,889.

Global semiconductor sales remain strong

According to data from the Semiconductor Industry Association (SIA), global sales of semiconductors reached USD41.8bn for the month of October, an increase of 12.7% from the October 2017 total of USD37.1bn and 1.0% more than last month’s total of USD41.4bn. Yearto-year sales in October were up across regional market, with sales into China (23.3%) and the Americas (11.1%) continuing to lead the way.

Meanwhile, the World Semiconductor Trade Statistics (WSTS) projects that the industry’s worldwide sales will be USD477.9bn in 2018. This would mark the industry’s highest-ever annual sales, a 15.9% increase from the 2017 sales total of USD412.2bn. However, in 2019, growth in the semiconductor market is expected to moderate, with annual sales projected to increase by 2.6%.

Strong regional IPI performance

Thailand’s manufacturing production index (MPI) in October rose 4.1% yoy, after falling for the first time in 17 months in September (-2.7%). The rebound was led by higher production of cars and car engines, petroleum and air conditioners. After a brief and slight contraction of -0.1% yoy in Sep, Singapore’s industrial production rebounded to record a 4.3% yoy expansion in October. One of the main pillars of Singapore manufacturing, the electronics cluster, continued to decline for a second straight month in October, but by a smaller -2.7% yoy from -6.1% yoy in Sep.

US industrial production ticked up a modest 0.1% mom in October. It was the fifth straight monthly gain and left output up 4.1% yoy but still below an upwardly revised 5.6% rise in September. China reported an uptick in industrial production growth of 5.9% yoy. This brought the cumulative increase in the first 10 months of the year at 6.4%. Meanwhile, industrial production in Japan rebounded 4.2% yoy in October from -2.9% yoy in September.

Better outlook for 4Q18

Coming on the heels of unexpectedly strong exports in October, stronger-than-expected industrial production data for the month was not too surprising. Industrial production increased by 4.2% yoy in October, following a 2.3% gain in the prior month. It was the steepest growth in industrial output since April. As with exports, October was the second-best month for industrial production growth this year. It was not just output either. Overall manufacturing did quite well in October. Manufacturing sales, employment in the sector, as well as salaries and wages, all posted faster growth than September.

Overall, industrial activities show some signs of improving, in line with the run-up in export growth. Export growth accelerated to a 9-month high 17.7% yoy in October from 6.5% in September. Manufactured goods, the largest contributor to exports grew further by a double digit of 19.9% yoy (Sep: 7.9%). Exports of E&E products which constituted 37% of total exports rose by 23.3% yoy to RM38.4bn in October compared to 6.5% yoy growth in the previous month.

Strong October activity data suggests that the final quarter of this year is off to a good start. IPI growth tracks manufacturing GDP growth, and manufacturing sales growth tracks services GDP growth. If growth in both of these indicators in the remaining two months of the year stays in line with the seasonal pattern, we should see a sustain GDP growth in the current quarter. Based on this, we are maintaining our full-year 2018 growth forecast of 4.8%.

Trade data has been choppy in recent months owing to the US–China trade tariffs and domestic tax policy changes. The recent pick-up augurs well for growth. Notwithstanding, trade improvements could signal potential gains from the ongoing trade tensions, global manufacturing activity is expected to remain subdued going forward. Despite the announcement of 90-day new tariff halt by President Trump, uncertainties regarding trade war are expected to remain, until further concrete resolution are being put forward.

Source: BIMB Securities Research - 13 Dec 2018