• IPI eased to 1.8% in January

• Manufacturing component sustained single digit growth

• Mining component delivered its eighth month of expansion

• IPI to remain intact despite various global headwinds

OVERVIEW

Malaysia’s industrial production index (IPI) eased to 1.8% YoY in January 2023, down from a 2.8% gain in the previous month. Still, January’s IPI marked the seventeenth month of expansion since August 2021. The expansion of IPI was underpinned by a recovery in domestic demand and sustained global demand compared to the preceding year. It is worth to note that the expansion in IPI for January 2023 was attributable to the improvement in the index of manufacturing (+1.3%) and mining (+5.9%) though dampened by electricity (- 4.3%). On a monthly basis, the IPI in January contracted by 2.4%, pulled down by manufacturing and electricity segments on the back of supply disruptions, and moderating global demand. That said, negative growth was seen in manufacturing (-2.7%), mining (-0.4%) and electricity output (-4.3%). We reiterate our IPI forecast in 2023 in this report, projected to expand by 4.5% YoY, a moderation against a 6.9% in 2022.

ANALYSIS BY SECTOR

Manufacturing. Manufacturing component growth eased further or to 1.3% in January compared to 3.0% in December as output was dampened by the slowdown in a few components namely (i) textile, wearing App. and others (down by 1.8%), (ii) woods products and others (decreased by 6.1%) as well as (iii) non-metallic products and others (fell by 0.6%). The gloomy manufacturing performance is a slight detach against Manufacturing PMI form which rose to 48.4 in February from 46.5 in January, and posting its highest reading in four months. This is a contrast with January numbers (46.5) compared to 47.8 in December 2022 as operating condition was hit by various headwinds particularly the elevated level of input cost and tepid demand.

On specifics, manufacturing IP that grew at a slower pace of +1.3% YoY in January 23 was also partially supported by (i) F&B (January: 4.4%), (ii) petroleum, chemical and others (January: +2.0%) and (iii) transport equipment and others (January: 8%). Despite the change in consumer behavior from spending towards goods to services post-pandemic, manufacturing remains supported by the still-lean inventories at businesses as demand for goods remains at a satisfactory level. Looking at consumer-related products we note that this component still has a good growth momentum thanks to full economic openings and therefore, uninterrupted economic and social activities (F&B subcomponent: +4.4% in January 23 versus +3.4% in December 22). We opine that supply chain challenges are acute and still unfolding in Malaysia. However, we believe supply chain will continue to record growth momentum as the Malaysian government has eased the conditions for hiring foreign workers. On a MoM and seasonally-adjusted (SA) basis, manufacturing output shrank by 2.7%, a deterioration against December 2022 at -2.2%.

The recovery in transport segment has been encouraging, and may stay supported by the gradual reopening of international borders. Moreover, the global economic recovery into 2023 is likely to support other growth-related industries. We opine that the resumption of China's outbound travel could also improve the global economy and eventually lead to stabilization in output.

Mining: Mining output continued to record growth though at a faster rate, up by +5.9% compared to +3.9% in the previous month. The positive growth was driven by solid petroleum oils and condensate performance (January: +8.0%) and another steady form by natural gas output (January: +4.5%). This is in tandem with the ramp-up in output post production outage including the full contribution of a new oil field and new gas pipelines. On a MoM basis, mining output further decline by -0.4% for the month as compared to -0.8% in December.

Despite supply disruption that caused by the Ukraine-Russia war, we are still positive on Malaysia's production as long as global demand remains resilient. All in all, we remain bullish on the mining components in-line with the start-up of offshore fields (East Malaysia; Pegaga). Other factor that might propel mining output are the full year impact of post outage production - a ramp up in output to fill a shortfall in OPEC+ quota and the operational of new natural gas pipelines in Sarawak (e.g., Jerun, Rumi, Kasawari). On top of that, we also expect Petronas to accelerate its development of offshore gas fields which is intended for oil and gas production.

Electricity: Electricity component delivered another negative growth in January or -4.3% YoY, a deterioration compared to -2.2% in December. The decline in electricity generation was dragged by weaker demand in tandem with the sluggish performance in semiconductor sector. We anticipate a cloudy outlook on the back of prolonged supply chain disruptions, the easing of consumer electronics demand due to inflationary pressure, fluid macroeconomic conditions as well as chip shortage (due to Ukraine-Russia crisis). In line with that, output shrank on a MoM and SA-adjusted basis to -4.3% in January as compared to -1.0% in December.

OUTLOOK

Overall, the slower growth momentum in January manufacturing data suggests that Malaysia’s industrial production space remains gloomy given the challenging external backdrop. Nonetheless, pent-up demand, high commodity prices and robust exports may push our economy to grow healthily. On top of that, we expect IPI number to remain convincing going into 2023. Nevertheless, downside risks to our view include (i) input cost inflation, (ii) shortage input and labour, and (iii) persistent supply chain disruption remains. In regards with the development from China, we believe China’s reopening remains one of the key catalysts for Malaysia’s transportation and manufacturing sectors, particularly when China is our biggest trade partner. Aside to that, Ringgit is expected to remain steady in 2023 amidst US rate hike slowdown. On that score, competitive Ringgit will also bolster the demand for local manufacturing component. As for electricity output, we opine output may remain sluggish in the near term. Looking at mining output, we remain bullish on the components in-line with the start-up of offshore fields (East Malaysia; Pegaga). We also expect Petronas to accelerate its development of offshore gas fields which is intended for oil and gas production. We reiterate our IPI forecast for 2023 which is projected to expand by 4.5%, a moderation against 6.9% in 2022.

Source: BIMB Securities Research - 13 Mar 2023