IPI moderated to +3.2% YoY (Dec: +3.4% YoY), but was higher than the +2.3% YoY consensus estimate. The slower growth was attributed to slower manufacturing production (+4.2% YoY; Dec: +4.4% YoY) alongside a contraction in mining production (-0.9% YoY; Dec: +1.0% YoY) which offset the acceleration in electricity production (+7.8% YoY; Dec: +2.7% YoY). In the immediate term, IPI manufacturing sector is expected to moderate due to ongoing trade uncertainty between US and China.

DATA HIGHLIGHTS

IPI grew at a slower pace of +3.2% YoY in January (Dec: +3.4% YoY), but was higher than the consensus estimate of +2.3% YoY. This was due to moderation in manufacturing production (+4.2% YoY; Dec: +4.4% YoY) and decline in mining activity (-0.9% YoY; Dec: +1.0% YoY) which offset the acceleration in electricity production (+7.8% YoY; Dec: +2.7% YoY) (refer to Figure #1).

Electricity production accelerated to +7.8% YoY (Dec: +2.7% YoY), recording the strongest growth since July 2017.

The moderation in manufacturing sector was due to slower growth in the export oriented sector amid stronger growth in the domestic-oriented sector. The domestic oriented sector grew +4.2% YoY (Dec: +2.6% YoY) as ‘food, beverages & tobacco’ production rebounded by +2.6% YoY (Dec: -1.1% YoY) while ‘non-metallic mineral products, basic metal and & fabricated metal’ products climbed +4.3% YoY (Dec: +4.1% YoY). However, transport equipment slowed to +6.3% YoY (Dec: +7.0% YoY) despite the rebound in car sales, due to base effect.

In the export-oriented sector, growth slowed to +4.2% YoY (Dec: +5.3% YoY), which was in line with slower exports growth during the month (+3.1% YoY; Dec: +5.1% YoY). Notwithstanding the faster growth in ‘‘textiles, wearing apparel, leather products and footwear’ (+5.4% YoY; Dec: +4.2% YoY), ‘wood products, furniture, paper products, printing’ (+5.7% YoY; Dec: +5.0% YoY) and ‘petroleum, chemical, rubber and plastic products’ (+4.0% YoY; Dec: +3.6% YoY), the export-oriented sector was weighed down by a deceleration in ‘electrical and electronics’ products (+3.9% YoY; Dec: +7.2% YoY). This was consistent with the deceleration in global chip sales (+0.8% YoY; Nov: +9.8% YoY).

The mining sector registered a contraction of -0.9% YoY (Dec: +1.0% YoY) amid a decline in crude petroleum production (-2.2% YoY; Dec: +2.5% YoY) which offset the slight rebound in natural gas production (+0.3% YoY; Dec: -0.2% YoY). Crude petroleum production is expected to remain volatile following Petronas commitment to reduce oil output by 15,000 bpd till June 2019. For LNG, we expect a gradual recovery as production at the Kebabangan gas field in Sabah is expected to return to full capacity by August 2019.

HLIB’s VIEW

Following the latest trade development, optimism is on the rise for a trade agreement to be reached. Nevertheless, we remain cautious on the success of the talks and we await details of the agreement in end-March/early April. As uncertainty remains, we expect sentiment and investment activity to be curtailed. In the immediate term, we expect further moderation in manufacturing production, in line with slower global manufacturing PMI which hit a 32-month low (Feb: 50.6; Jan: 50.8) amid stagnant new order growth.

Source: Hong Leong Investment Bank Research - 15 Mar 2019