• A steady expansion in September, a slowdown against August however

• Manufacturing component was inspiring, another impressive form

• Mining component delivered its fourth month of expansion

• Outlook remains favourable

OVERVIEW

The Industrial Production Index (IPI) delivered its thirteen continuous months of expansion in September, powered by another broad increase across all components. This is even more meaningful given sustained mining form amid the sector that was hit by production outage since 2021. The month’s achievement was also pushed by favourable base advantage following sluggish IPI form last year (IPI September 2021: 2.1%). Favourable operating conditions underpinned a 10.8% jump in IPI in September particularly manufacturing (+10.4%) and mining (+15.0%) components, key components in IPI (combined: 90% share in IPI). The jump in IPI was further aided by as a steady recovery in electricity component (September 2022: +4.1%) thanks to favourable base advantage and full economic openings. On a MoM and seasonally-adjusted basis, IPI expanded by 0.7%, a slowdown against August (+1.6%) however.

Manufacturing. Manufacturing component produced another solid form (+10.4%; August: +15.2%), though a slowdown against August, thanks to favourable operating conditions, made possible by diminishing disruption from COVID-19 pandemic. Demand for manufacturing goods was also pushed 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 primarily electrical and electronics (E&E) goods. This is consistent with strong manufacturing exports numbers (September: +30.1% YoY) especially electrical and electronics – E&E (September: +39.8%), a condition that signals further improvement in supply and demand dynamics. The upbeat manufacturing dynamics is slightly detached against our Manufacturing PMI form which slipped below the neutral level in September (49.1), suggesting a possible slowdown in the next few months.

On specifics, manufacturing IP that jumped by +10.4% YoY in September was driven by industrial products (for export) especially non-metallic mineral products, basic metal and fabricated metal products (September: +6.4%) and petroleum, chemical, rubber and plastics products form (September: +6.5%) thanks to improvement in economic activity post COVID-19 (i.e., North America, Europe, ASEAN). Consumer-related products produced a sustained recovery thanks to full economic openings and therefore, uninterrupted economic and social activities - a favourable condition for sub-sectors especially food, beverages and tobacco (September: +5.0%) and textiles, wearing apparel, leather products and footwear (September: +8.0%). On a MoM and seasonallyadjusted (SA) adjusted basis, manufacturing output decreased by 0.5% however, a deterioration compared to August numbers (+4.3%).

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 and into 2023. Our transition into the COVID-19 endemic stage and hence, uninterrupted social and economic activities will also be a boon for the sub-index. This will be further lifted by the full reopening of international borders, a key to solve the sector’s labour shortage issue. The sector’s performance may be dampened however by pockets of outbreaks (note: Variance-of-Concern – VoC) 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 hurt 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 recovered further in September (15.0%; August: +8.0%) driven by solid natural gas output (September: +21.0%) and another steady turnaround by petroleum oils and condensate (September: +7.2%). Petroleum oils and condensate steady forms since the last few months suggest that the sub-sector is finally out of the woods post production outage since 2021. On a MoM and SA basis, mining output improved further after output jumped by 6.3% (August: +0.2%). That said, OPEC+ higher supply direction (July-Sept: 490k barrel per day) 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 new 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 production and hence, the sub-index. OPEC+ is slated to cut output by 1mn barrel per day in November however and this could affect the sector’s production.

Electricity: Electricity component delivered another favourable form (September: +4.1%) pushed by full economic openings since April. Output was also lifted by favourable base effect following its tepid form last year (September 2021: +0.4%). Output slipped on a MoM and SA-adjusted basis, reflected by a drop of 1.1% (August: +0.0). 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 - 8 Nov 2022