• IPI edged up solidly in July contributed by increment in all three sectors

• Manufacturing component was inspiring following double-digit jump

• Mining component delivered its back-to-back expansion

• Outlook remains favourable

OVERVIEW

The Industrial Production Index (IPI) delivered its eleven straight months of expansion in July, powered by broad-based increase across all components. This is significant given the volatility in mining’s form since the last 1 year which was hampered among others by facilities shutdown due to unscheduled maintenance. The month’s achievement was also pushed by favourable base advantage following the drop in IPI last year (IPI July 2021: -5.1%). Favourable operating conditions underpinned a 12.5% jump in IPI in July particularly manufacturing (+14.9%) and mining (+3.2%) components, two of IPI significant contributors (combined: 90% share in IPI). The jump in IPI was further aided by as a strong recovery in the electricity component (July 2022: +13.2%) thanks to full economic openings since April. On a MoM and seasonally-adjusted basis, IPI ticked 3.9% slower however, a slowdown against June (+8.4%).

ANALYSIS BY SECTOR

Manufacturing. Manufacturing component produced another respectable achievement in July (+14.9%; June: +14.4%) on account of improving operating conditions following diminishing disruption from COVID-19 pandemic. Demand for manufacturing goods was also boosted by full economic openings around the world thanks to vaccine-induced recovery and efforts to keep the disruption from COVID-19 to a minimal. This is consistent with favourable manufacturing exports (July: +38.0% YoY) especially electrical and electronics – E&E (July: +35.2%), a condition that signals further improvement in supply and demand dynamics. The upbeat manufacturing performance is also consistent with a steady in Manufacturing PMI form (July: 50.3), the country’s four successive months of expansion.

On specifics, manufacturing IP that jumped by +14.9% YoY in July was driven by industrial products (for export) especially non-metallic mineral products, basic metal and fabricated metal products (July: +23.9%) thanks to improvement in economic activity post COVID-19 (i.e., North America, Europe, ASEAN). This could have been much higher however if not for the uninspiring petroleum, chemical, rubber and plastics products form (July: +1.0%). The sector’s performance was further driven by a solid E&E performance (July: +17.3%), the sub-index’s successive expansion since August. Consumer-related products produced an expected recovery thanks to full economic openings - a favourable condition for sub-sectors especially food, beverages and tobacco (July: +11.2%) and textiles, wearing apparel, leather products and footwear (July: +17.9%). On a MoM and seasonally-adjusted (SA) adjusted basis, manufacturing output decreased by 6.4%, which is not a surprise given the strong output growth in June (+8.8%).

Full economic openings around the world and favourable operating conditions will push manufacturing firms to continue ramping-up output. This will also be driven by the global semiconductor upcycle, backlogs, and re-stocking activities – combination of drivers that will lift the sector’s performance in 2022. Our transition into the COVID-19 endemic stage will give the sector the additional push especially from April onwards. This will be further lifted by the reopening of international borders which will address the sector’s labour shortage issue. The sector’s performance may be dampened however by pockets of outbreaks and supply chain disruptions which may take time to improve. This is in addition to disruptions from China due to strict COVID-19 lockdown policies and protracted Russia-Ukraine conflict. The rise in input costs is another concern as that could eat into the firm’s margin, precipitating a possible slowdown in activity.

Mining: Mining output improved further in July (3.2%; June: +2.1%) driven especially by natural gas (July: +12.6%). This co uld have been much higher however if not for the protracted decline in petroleum oils and condensates production (July: -8.6%). Recall that production of petroleum oils and condensates remained affected by facilities closure for unscheduled maintenance, a bane since the last few months. On a MoM and SA basis, mining output pulled back after output slipped 2.7% (June: +7.1%). That said, OPEC+ higher supply direction (July-Sept: 490k barrel per day versus target 648k; AprilJune: 432k), is expected to drive the sector’s performance in the near-term.

This is also set to be lifted by an expected turnaround in petroleum oils and condensates output post unscheduled maintenance in addition to the commissioning of oil field facilities (Pegaga gas project; East Malaysia; March 2022). Note that OPEC+ is slated to cut output by 100k per barrel to 390k in October however in an effort to support prices and this could affect Malaysia’s production.

Electricity: Electricity component delivered another solid form (July: +13.2%) pushed by full economic openings since April. Output dropped on a MoM and SA-adjusted basis however, reflected by a decline of 4.2% (June: +4.6%). Output is expected to remain on the rise in the near term thanks to favourable base effect and a turnaround in economic and social activities thanks to full economic openings since April.

OUTLOOK

IPI is expected to remain favourable in the near term thanks to full economic openings since 2Q22. This will be further supported by favourable external conditions amid full economic openings around the world - a boon for manufacturing component. IPI will also be driven by a lag impact of expansionary global fiscal strategies in 2021 and accommodative interest rate environment amid a measured pace of interest rate normalisation by BNM - a boost for all the three components. OPEC+ higher supply direction will also bode well for the mining component in addition to a fair prospect for the pact to keep output elevated due to protracted Russia-Ukraine conflict on top of the commissioning of new oil field facilities in March. Electricity output is also set to rebound thanks to full economic openings and our transition into the COVID-19 endemic. The steady turnaround in the headline index forms the basis of our sanguine IPI outlook though we remain cautious given persistent risk of COVID-19 outbreak. Other headwinds may come from labour shortage, prolonged supply chain disruption and shortages in raw materials & containers. This may also be dampened by China strict COVID-19 lockdown policies and prolonged Russia-Ukraine conflict.

Source: BIMB Securities Research - 9 Sept 2022