• June IPI growth pulls back to -2.2% vs +4.8% in May

• Manufacturing recorded a negative growth in June

• Mining component down 6.4% YoY, the slowest growth since November 2020

• Electricity component produced another positive growth

OVERVIEW

Malaysia’s industrial production index (IPI) declined to 2.2% in June, registered its second negative growth in 2023. Note that Malaysia IPI first negative growth was in April to -3.2%. The disappointing performance was largely dragged by subdued performance of two components namely manufacturing (-1.6%) and mining (-6.4%). The contraction of IPI was due to sluggish consumer spending and hampered by the weak global demand. In tandem, on a MoM and seasonally-adjusted basis, IPI has shown a gloomy performance of -1.7%, a depreciation against May (7.3%). Looking at quarterly figures, Malaysia IPI declined marginally by 0.3% YoY in 2Q23 (vs 6.7% in 2Q22) mainly due to lower output from mining sector (-2.8% YoY). Electricity and manufacturing however improved by 2.8% YoY and 0.1% YoY in 2Q23.

ANALYSIS BY SECTOR

Manufacturing. Manufacturing component delivered another contraction in June after a month of positive growth. Manufacturing segment growth plummeted by -1.6% in June compared to growth of 5.1% in May as output was weighed down by weaker performance from (i) petroleum, chemical and others (June: -4.6%; May: 2.3%), (ii) E&E (June: -3.6%; May: 1.9%), and (iii) wood products (June: -0.2%; May: 3.0%). Nonetheless it is worth to note that there are a few sub-components under manufacturing sector that showed a decent growth namely (i) non-metallic products and others (June: 5.2%; May: 8.1%), (ii) textile, wearing app. and others (June: 3.1%; May: 6.1%) as well as (iii) F&B (June: 2.9%; May: 11.6%). The uninspiring manufacturing performance during the month was in-line with the subdued Manufacturing PMI form. Note that the seasonally adjusted Manufacturing Purchasing Managers' Index (PMI) in July was still below the critical threshold of 50 points. July PMI however rose marginally to 47.8 in July from 47.7 in June.

Export-driven sectors experienced a 3.9% decrease, whereas industries focused on the domestic market maintained their growth, albeit at a modest pace of 4.1%. In the near term, we think that export-oriented sectors to continue to record sluggish level of output on the back of currency fluctuations, commodity price fluctuations and political uncertainties in-line with Malaysia’s upcoming state polls. Note that the worst performer sub-sector under manufacturing component in June was petroleum, chemical and others (June: -4.6%; May: 2.3%). However, we are bullish on this sub-sector in 2024 as Petronas anticipates that its domestic oil and gas production will reach its highest point, reaching approximately 2mn barrels of oil equivalent per day next year. Additionally, Petronas has set its sights on broadening its international portfolio to encompass a capacity of 700,000 barrels of oil equivalent per day by 2030. This expansion strategy involves increasing production from its joint venture for liquefied natural gas (LNG) in Canada.

We opine that, in the short term, our forecast is likely to remain restrained mainly due to concerns related to inflation and the rise in operational expenditures, notably labor and electricity expenses. Nevertheless, the comprehensive projection for the entire year of 2023 remains optimistic, underpinned by consistent growth in sales momentum propelled by the enduring strength of the local economy. Elements such as a resilient job market and the projected upswing in tourist expenditures contribute to this perspective. Moreover, the anticipated surge in tourist numbers, especially from China, is expected to generate increased foot traffic in shopping malls and stores, thereby benefiting both the retail and food and beverage sectors. On a MoM and seasonally-adjusted (SA) basis, manufacturing output down by 1.5% in June, a depreciation against May at 7.7%.

Mining: The mining sector has suffered a significant decline in production by 6.4% YoY in June, reversing a 2.9% growth in May. The pullback was due to weaker growth in crude oil & condensate index by -4.5% in June (June: -4.5%; May: 0.6%; Apr: -0.9%) as well as negative growth in natural gas output (June: - 7.8%; May: 4.5%; Apr: -7.8%).

On a MoM and SA basis, mining output that decreased by 5.0%, a significant decline as compared to 5.9% in May.

We anticipate a better outlook for mining sector in 2H23 mainly driven by substantial inventories draw due to OPEC+ production cut. On 3rd August 2023, Saudi Arabia, the leader of OPEC, announced its decision to prolong a voluntary reduction in oil production by 1mn barrels per day for an additional month, encompassing September. The announcement included the possibility of further extensions or deeper cuts beyond that period. Following Saudi Arabia's declaration, Deputy Prime Minister Alexander Novak of Russia stated that Russia would also curtail oil exports by 300,000 bpd in September.

Electricity: Electricity component delivered another positive growth of 2.8% in June, a moderate expansion compared to 5.9% in May. The expansion in electricity generation during the month was supported by further increase in electricity generation despite tepid manufacturing activities. Nonetheless, electricity output was lower on a MoM and SA-adjusted basis or to -1.8% in June compared to 8.6% in May. All in all we are cautious and less sanguine on electricity component in 2H23. This is due to anticipation of subdued worldwide demand within the electronics end market, influenced by inflationary pressures and a Chinese market recuperating at a pace slower than initially projected.

OUTLOOK

Looking at the global IPI figures, a few countries experienced decreased output production in June. Notably, the US saw a decline of 0.5%, Singapore's output decreased by 4.9%, and Thailand's by 5.2%. These trends collectively indicate a sluggish pace of production momentum on a global scale. However, China contradicted this trend by recording an elevated industrial output of 4.4% in June compared to the same period the previous year, unexpectedly accelerating from the 3.5% observed in May.

In the near term, we think that our forecast is likely to remain constrained primarily due to apprehensions linked to inflation and the upsurge in operational expenses, particularly those concerning labor and electricity costs. Despite the tepid output levels witnessed in June, we are cautiously optimistic on Malaysia's IPI in 2023. This perspective is grounded in the belief that demand will continue to find support from sectors driven by domestic factors. On top of that, full economic openings around the world and favorable operating conditions may push manufacturing firms to ramp-up output.

Source: BIMB Securities Research - 9 Aug 2023