• August IPI recorded a negative growth to -0.3% from 0.7% in July.

• Manufacturing component disappoints

• Mining component saw a YoY increase of 0.1%

• We reiterate our IPI forecast for 2023 which is projected to expand by 2.0%, a moderation against 6.9% in 2022.

Malaysia’s industrial production index (IPI) dipped slightly or to -0.3% in August, reversing a 0.7% increase in July. The negative growth was largely driven by lower output from the manufacturing component (-0.6%), although it was partially offset by the mining (0.1%) and electricity (1.9%) sectors. The contraction of IPI was due to subdued domestic business activities in August.

Manufacturing. Manufacturing component remained in contraction for third month in August. Manufacturing segment growth edged down or by -0.6% in August compared to -0.2% in July as output was weighed down by weaker performance from (i) Petroleum Chemical, Rubber & Plastic (August: -2.4%) and (ii) E&E (August: -3.5%).

Mining: In August, the mining sector experienced a slight increase in production, rising by 0.1% YoY after a 4.2% significant increase in July. This higher production can be attributed to growth in the natural gas index, which increased by 2.6%.

Electricity: Electricity component delivered another positive growth of 1.9% in August, compared to 1.5% in July. The expansion in electricity generation during the month was supported by further increase in electricity generation despite tepid manufacturing activities.

SECTOR ANALYSIS

The uninspiring manufacturing performance during the month was in-line with the subdued Manufacturing PMI form. The challenging phase for Malaysian manufacturers continued into the conclusion of the third quarter. In September, Malaysia's manufacturing PMI witnessed a further drop (September: 46.8; August: 47.8) due to reduced demand, declining employment, increased prices, and elevated input costs. Going ahead, we foresee manufacturing sector in Malaysia to continue to experience a slowdown in 2H23, primarily influenced by the escalation in the costs of raw materials and machinery. According to the latest Federation of Malaysian Manufacturers' (FMM) business conditions survey, the bi-annual survey on business conditions revealed that a majority of the costs incurred by the survey respondents had surged by as much as 20% in 1H23. These cost increases were primarily associated with labor, machinery maintenance, raw materials, and energy. However, labor market conditions In Malaysia, particularly in terms of employment and wages, have sustained their improvement, enhancing households' capacity to spend. Additionally, this can bolster economic growth by elevating the productive potential of the economy. We opine that better productivity may eventually lead to better manufacturing outcomes in Malaysia moving forward.

Looking at mining sector, global oil inventories are projected to decrease by 200,000 bpd in 2H23, primarily due to voluntary production cuts from Saudi Arabia and reduced output among OPEC+ nations, as reported by the U.S. Energy Information Administration on 11 October 2023. These declining inventories are expected to maintain global oil supply below consumption levels. However it is worth noting that, Saudi Arabia has made a commitment to assist in stabilizing the market after oil prices experienced a decline of around 2% yesterday.

We anticipate a positive outlook for the mining sector in 2H23. This is primarily due to the significant decrease in inventories, driven by the belief that OPEC+ will persist in restricting oil supplies. Hence, we think that there will be a potential uptick in capital expenditure within the Oil and Gas industry. This optimism is based on the delayed effects of high oil prices on offshore operations.

As for electricity component, despite higher output recorded in August, we are cautious on electricity component in the 2H23. This is on the back of muted global demand in the electronics sector, driven by inflationary pressures and a slower-than-expected recovery in the Chinese market.

OUTLOOK

Looking at the global IPI figures, several countries witnessed an upturn in output production in August. China's industrial production, for instance, saw a YoY increase of 4.5% in August, surpassing expectations of 3.9% and accelerating from the 3.7% rise observed in July. Furthermore, US industrial production experienced a 0.4% uptick in August, with manufacturing output showing a marginal 0.1% increase. The August manufacturing figures in US were somewhat dampened by a 5% decline in the production of motor vehicles and parts, while factory output in other sectors increased by 0.6%. In the near term, we do expect some growth though at a slow rate in local production, primarily driven by the sustained growth in domestic demand. We think that Malaysia's economic progress will be supported by resilient domestic demand and favorable labor market situation, especially in sectors oriented towards the domestic market. Note that domestic-oriented industries rose to 4.2% in August (vs 6.0% in July) while export-oriented industries contracted to -2.6% (vs -2.7% in July).

We reiterate our IPI forecast for 2023 which is projected to expand by 2.0%, a moderation against 6.9% in 2022 on the back of more pronounced price deceleration and subdued domestic demand outlook. Note that risks to inflation outlook remain bias to the upside if the government's subsidy rationalization plan is implemented this year.
 

Source: BIMB Securities Research - 13 Oct 2023