• October IPI recorded positive growth to +2.7% from -0.5% in September

• Manufacturing component slightly improved

• Mining component saw a solid growth of +8.7%

• Reiterate our 2023F IPI growth of 1.1% as we expect restrained growth in manufacturing output in 4Q23

OVERVIEW

Malaysia's Industrial Production Index (IPI) improved to +2.7% in October, the fastest growth since May 2023. The positive growth was largely driven by higher output from all sectors namely manufacturing (+0.9%), mining (+8.7%) and electricity (+5.8%). The expansion of IPI was due to better domestic business activities in October. The YTD average growth for Malaysia's IPI is currently stands at 1.1%.

Manufacturing. The manufacturing component experienced another period of growth in October. Manufacturing segment edged up or by 0.9% in October compared to +0.4% in September as output was supported by better performance from (i) transport equipment and others (October: 7.2%) , (ii) F&B (October: 6.5%) and (ii) non-metallic products and others (October: 5.6%).

Mining: In October, the mining sector experienced a significant increase in production, grew by +8.7% YoY after a -5.2% decrease in September. The better production can be attributed to higher output from both natural gas and petroleum oils & condensate.

Electricity: Electricity component delivered another positive growth of 5.8% in October, compared to 2.5% in September. The expansion in electricity generation during the month was supported by further increase in electricity generation which also in-line with better manufacturing activities.

SECTOR ANALYSIS

The slightly better manufacturing performance during the month was in-line with the Manufacturing PMI form. Malaysia's PMI achieved a seven-month high, recording 47.9 in November compared to October's 46.8. There were indications of improvement, resulting in less pronounced slowdowns in new orders, output, and employment. Notably, business confidence reached a seven-month high. Despite a modest increase, both input and output prices rose slightly due to the weakening of the ringgit against the US dollar.

Looking ahead, we anticipate a resurgence in manufacturing output in 2024, driven by (1) global economic growth, (2) increased trade activities, and (3) a favorable base effect compared to 2023. Additionally, we opine that the upcoming months will witness better manufacturing output, supported by a more robust labor market which will lead to improved productivity. Note that the labor market strengthened further in October, reflecting positive economic activities, marked by a consistent rise in the number of employed individuals. On a YoY basis, the number of employed persons increased by 2.0% (+321.7k) in October 2023, from 16.08mn persons in October 2022.

Looking at mining sector, oil benchmarks were headed for a seven-week decline last Friday (8/12/2023), marking their first such decline in half a decade. The decline was on the back of concerns over a supply surplus and sluggish Chinese demand initially contributed to the decline. However, prices rebounded after Saudi Arabia and Russia persuaded OPEC+ members to participate in output cuts.

In 2024, mining sector is expected to improve by 2.7%, propelled by notable achievements in the natural gas, crude oil, and condensate subsectors. The expectation of initial natural gas production from new gas field development projects like Gansar, Jerun, and Kasawari, along with increased production from existing gas fields, is anticipated to stimulate growth in the natural gas subsector.

As for electricity component, despite higher output recorded in October, we are cautious on electricity component in the 4Q23. This is on the back of muted global demand in the electronics sector, driven by inflationary pressure. To recap, semiconductor industry reached its low point at the end of the 1H23. Subsequently, the industry has initiated a recovery, laying the groundwork for ongoing growth in 2024. Hence, we are positive on the electricity component outlook next year supported by better global demand. Note that the World Semiconductor Trade Statistics (WSTS) foresee a strong upturn in 2024, with a projection of 13.1% increase in the worldwide semiconductor market, reaching a valuation of USD588bn.

OUTLOOK

Looking at global IPI data, global countries exhibited diverse production output performances in October. In the United States, the industrial production index experienced a 0.6% YoY decline during the month. This decrease was largely attributed to a 10% drop in the output of motor vehicles and parts, influenced by strikes at several major manufacturers. However, the manufacturing index, excluding motor vehicles and parts, saw a marginal increase of 0.1%. Meanwhile, China reported a significant 4.6% YoY growth in its industrial production index for October. Within the three major sectors, the mining sector and the manufacturing sector expanded by 2.9% and 5.1%, respectively. Additionally, the production and supply of electricity, heat, gas, and water increased by 1.5%. Notably, the auto manufacturing sector demonstrated exceptional performance in October, with its output surging by 10.8%.

China's economy faced challenges in achieving a robust post-pandemic recovery in the early part of this year. However, the reopening of the Chinese economy has contributed to the enhancement of the global economic outlook. Hence, going ahead we expect a sustained improvement in supply conditions in 2024, especially for manufacturing goods.

We maintain our 2023 IPI forecast at 1.1%, anticipating restrained growth in manufacturing output in 4Q23. Additionally, we are projecting a 3.5% IPI expansion in 2024. This forecast is based on our expectation of improving demand conditions, which we believe will enhance confidence in production prospects over the coming year.

Source: BIMB Securities Research - 11 Dec 2023