• IPI expanded even higher in August, its best in 2022

• Manufacturing component was inspiring following another double-digit jump

• Mining component delivered its 3 rd month expansion

• Outlook remains favourable

OVERVIEW

The Industrial Production Index (IPI) delivered its twelve successive months of expansion in August, powered by broad increase across all components. This is even more meaningful given solid mining form amid its volatility 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 Augus 2021: - 0.7%). Favourable operating conditions underpinned a 13.6% jump in IPI in August particularly manufacturing (+15.2%) and mining (+8.0%) components, two of IPI significant contributors (combined: 90% share in IPI). The jump in IPI was further aided by as a sustained recovery in electricity component (August 2022: +10.0%) thanks to full economic openings since April. On a MoM and seasonally-adjusted basis, IPI expanded by 1.7%, a rebound against July (-3.9%).

ANALYSIS BY SECTOR

Manufacturing. Manufacturing component produced another respectable form (+15.2%; July: +14.9%), record high for the year, 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, efforts to keep the disruption from COVID-19 to a minimal and sustained semiconductor upcycle especially electrical and electronics (E&E) goods. This is consistent with strong manufacturing exports numbers (August: +48.2% YoY) especially electrical and electronics – E&E (August: +48.5%), a condition that signals further improvement in supply and demand dynamics. The upbeat manufacturing performance is slightly detached against our Manufacturing PMI form which slipped below the neutral level in August (49.1).

On specifics, manufacturing IP that jumped by +15.2% YoY in August was driven by industrial products (for export) especially non-metallic mineral products, basic metal and fabricated metal products (August: +13.6%) and petroleum, chemical, rubber and plastics products form (August: +5.9%) thanks to improvement in economic activity post COVID-19 (i.e., North America, Europe, ASEAN). Consumer-related products produced an expected recovery thanks to full economic openings - a favourable condition for sub-sectors especially food, beverages and tobacco (August: +11.9%) and textiles, wearing apparel, leather products and footwear (August: +12.9%). On a MoM and seasonally-adjusted (SA) adjusted basis, manufacturing output increased by 4.3%, a turnaround compared to July numbers (-6.4%).

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 full 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 disruption from China’s 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. The slowdown in global growth next year (World Bank 2023F GDP: +2.7%; 2022E: +3.2%) could also bite.

Mining: Mining output expanded further in August (8.0%; July: +3.2%) driven by a steady natural gas output (August: +8.0%) and an impressive turnaround by petroleum oils and condensate (August: +8.0%). Though it is too early to say but petroleum oils and condensate could be finally out of the woods post production outage. On a MoM and SA basis, mining output recovered after output jumped by 0.2% (July: -2.7%). That said, OPEC+ higher supply direction (July-Sept: 490k barrel per day versus target 648k; April-June: 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). The completion of new pipeline in Sarawak namely Kasawari, Jerun and Timi will also give a boost to natural gas. OPEC+ is slated to cut output by 1mn barrel per day in November in an effort to support prices however and this could affect Malaysia’s production.

Electricity: Electricity component delivered another steady form (August: +10.0%) pushed by full economic openings since April. Output was also lifted by favourable base effect following its contraction last year (August 2021: -4.8%). Output also improved on a MoM and SA-adjusted basis, reflected by an increase of 0.2% (July: +4.2%). 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.

Source: BIMB Securities Research - 12 Oct 2022