• December IPI recorded slightly negative growth to -0.1% from 0.6% in November
• Manufacturing component down further to -1.4% dragged by E&E subcomponent (Dec: -6.7%)
• Full-year 2023 IPI averaged at 0.9% (vs 6.7% in 2022)
• Reiterate our forecast for IPI growth, we expect a 3.5% growth in 2024F

Overview

Malaysia's Industrial Production Index (IPI) registered marginal contraction of -0.1% in December. December’s IPI marked the first month of contraction after 2 months of positive growth. The contraction in IPI for December 2023 was dragged by manufacturing index (-1.4%). However, mining and electricity posted positive growth of +3.6% and +4.6% respectively.

The IPI for 4Q 2023 improved by 1.0% YoY, reversing a contraction of -0.05% in the previous quarter. This positive growth was attributable to an incline of +4.3% in mining and +4.9% in electricity which offset a downfall of -0.2% in manufacturing.

Malaysia’s full-year 2023 IPI averaged 0.9%, matching our projection and coming off from 6.7% in the preceding year. This positive growth was driven by an increase of 0.7% in manufacturing, 2.5% in electricity, and 0.8% in mining.

Manufacturing. The manufacturing component experienced a negative growth in December. Manufacturing segment edged down by -1.4% in December compared to -0.1% in November as output was mainly dragged by subdued performance from E&E sector which decreased by -6.7% on the back of gloomy global demand and geopolitical issues.

IPI for export-oriented sectors continued to fall at a faster pace of -4.1% YoY in December (Nov: -2.7%), in line with the weaker export performance which continuously fell to a larger negative of 10.0% in December 2023. The decline in December was the 7th straight month of drop and the steepest contraction in the post-pandemic period since the recovery in Jun 2020. On a month-on-month comparison, the export-oriented industries weakened by 3.3%. Meanwhile, the sustained growth in output for domestic-oriented sectors supported overall IPI growth in December and countered the weak output in export-oriented sectors. The domestic-oriented industries maintained a steady performance although the pace of growth moderated further to +4.2% YoY (Nov: +5.8%). The domestic-oriented production has been growing for the 8th consecutive month. In comparison with the preceding month, the domestic-oriented industries turned downward to a negative 1.1% as opposed to the 3.7% increase in November 2023.

Mining: In December, the mining sector experienced an increase in production, grew by +3.6% YoY compared to +1.9% increase in November. 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 4.6% in December, compared to 4.3% in November.

SECTOR ANALYSIS

The manufacturing performance during the month was contradicted with the Manufacturing PMI form. Malaysia's PMI climbed to 49.0 in January (compared to 47.9 in December), marking the highest level since September 2022. As demand improved, manufacturers reduced input purchases and inventory levels, while delivery times showed the first improvement in seven months. Average cost pressures persisted but at a milder pace, leading to the slowest increase in output charges since August of the previous year.

Despite the subdued performance of the Malaysian manufacturing sector in 2023, we anticipate a gradual recovery in production during 2024 due to enhanced consumer confidence. We are projecting a consumer confidence index of 88.81 for the 4Q23, marking an improvement from 78.90 in the 3Q23. We expect this momentum of improvement to persist. Aside to that, US consumer sentiment surged in January, experiencing the most significant increase since 2005, fueled by receding inflation, which bolstered perceptions about the economy and household finances. Consequently, we anticipate some positive spill-over effects on Malaysia’s consumer sentiment.

Looking at mining sector, earlier this week, oil prices surged following the U.S. launch of retaliatory strikes in Iraq and Syria against Iranian forces and their allies. This action heightened concerns about the potential escalation of conflict in the Middle East. The strikes, which occurred on Friday, targeted Iran’s Islamic Revolutionary Guard Corps and associated militias, striking over 85 locations. They were conducted in response to the deaths of three U.S. troops in a drone strike carried out by militants allied with Iran.

In December, the output of the mining sector grew at a faster rate, increasing by 3.6% YoY, compared to a 1.9% in November. This improvement was primarily attributed to the continued expansion in the crude oil and condensate index (+1.6%) as well as growth in the natural gas index by +5.0%. Overall, we anticipate that mining output growth will remain stable in the upcoming months. For the current year, the mining sector is expected to see a 2.7% improvement, driven by significant advancements in the natural gas, crude oil, and condensate subsectors.

As for electricity component, we observed that the sector achieved its fastest growth in 4Q23, expanding by 4.3% (compared to 2.1% in 1Q23, -2.8% in 2Q23, and -0.4% in 3Q23). We believe that this significant growth can be attributed to hotter weather conditions, as Malaysia experienced weak El Niño conditions in 4Q23. The Malaysian Meteorological Department (MetMalaysia) forecasted drier days, as the northeast monsoon was expected to conclude in March, coinciding with the presence of El Niño conditions. Therefore, we anticipate that electricity output will continue its positive momentum.

OUTLOOK

Looking at global IPI data, several countries demonstrated mixed performances in December. In the United States, industrial production saw a marginal increase of 0.1% across factories, mines, and utilities, following a month of no change. This uptick was driven by growth in manufacturing and mining, offsetting a substantial decline in utility output. Meanwhile, China recorded a YoY industrial production growth of 6.8% in December, marking the most significant increase since February 2022. The rise was primarily attributed to a 7.1% increase in manufacturing (vs 6.7% in November) and a 4.7% uptick in mining (vs 3.9% in November). Although utilities experienced a slight decrease to 7.3% in December from 9.9% in November, oil and gas production surged to 3.5% from 1.8%. In Vietnam, industrial production in December witnessed a 5.8% increase compared to the corresponding month of the previous year, mirroring the identical growth observed in November. However, December experienced a more pronounced decrease in mining and quarrying activity, along with subdued growth in electricity production.

Moving forward, we recognize the potential for ongoing challenges in external demand to hinder monthly production momentum in the 1H24. However, we expect that improved production in the domestically oriented sector will continue, driven by rising demand from both domestic and external markets, thereby contributing to the IPI. We believe that production in domestically oriented sectors such as food-related industries, non-metallic mineral products, basic metals, and fabricated metal products will see enhancements in 2024, aligning with the anticipated improvement in consumer confidence. On the other hand, export demand may face various challenges, including slower global growth, diminishing commodity advantages, and persistent geopolitical tensions. All in all, we maintain our forecast for the 2024 IPI at 3.5%.

Source: BIMB Securities Research - 8 Feb 2024