Industrial production rebounded in March from a seasonally weak Lunar New Year month, which fell in February this year. The jump in the main Industrial Production Index (IPI) of 6.9% YoY was more than expected by consensus and our estimates which called for an increase of 4.5% and 4.4% respectively. Manufacturing output, accounting for about two-thirds of the IPI, also performed much better than expected. We estimated growth of 3.5% YoY but actual March numbers for manufacturing came in higher at 6.3% led by double-digit gains in Electrical & Electronic (E&E) Products. Mining output, the next most important contributor to the IPI, recorded an eighth consecutive month of YoY growth on higher production from new offshore fields. For the first quarter or 1Q15, the IPI grew by 6.4% YoY compared to 5.8% for 4Q14 and 5.1% for the whole of 2014. Manufacturing output grew by 5.6% YoY. The healthy expansion in industrial activity during the quarter is supportive of our 1Q15 GDP growth estimate of 5.0% YoY, which also assumes private consumption still performs reasonably well pre-GST implementation.

The IPI grew 6.9% YoY in March (Feb: 5.2%), surpassing consensus and our estimates of 4.5% and 4.4% respectively. The three-month moving average (3mma) of the IPI for March was at 6.4% YoY, similar to February’s 6.5%. Compared to the previous month, the index gained 12.1% MoM as production ramped up after the seasonally weak Lunar New Year month, which fell in February this year. The change in seasonally adjusted terms is 0.6% MoM. All three component indices of the IPI recorded YoY growth of at least 4.0%.

More surprisingly, manufacturing output expanded 6.3% YoY in March (Feb: 4.0%), well above our estimate of 3.5% on a stronger than expected rebound in production from a seasonal low. From the preceding month, manufacturing output grew 12.4% MoM and the 3mma for manufacturing output was up 5.6% YoY (Feb: 6.2%).

After seasonal adjustment, manufacturing activity increased 1.2% MoM. Manufacturing output accounts for a 65.9% majority share of the IPI.

Going by manufacturing sectors, Electrical & Electronic (E&E) Products, the biggest export earner, led growth at 13.0% YoY followed by Petroleum, Chemical, Rubber & Plastic Products at 4.5%.

Reported manufacturing sales for March was at RM58.4b which is 4.4% higher YoY. The biggest increase in sales value was seen in the E&E and rubber glove manufacturing sectors. It wasn’t a surprise that these export-driven products led manufacturing sales and output given continued strong global demand for consumer electronics as well as rubber glove products.

Mining output continued to stay in positive growth territory in March for the eighth consecutive month and was similar to February’s growth of 9.2% YoY. The monthly mining numbers repeatedly surpass our modest expectations but can be attributed to higher production volume from new fields such as the 135,000 barrel a day Gumusut-Kakap offshore field in Sabah waters and increased efficiency in older fields. Previously, mining activity grew at an much slower average rate of just 0.8% in 2013 and 2.2% in 9M14 before picking up pace in 4Q14.

Electricity output, which has the smallest weightage in the IPI, grew 3.8% YoY in March (Feb: 1.9%).

For the first quarter or 1Q15, the IPI grew by 6.4% YoY compared to 5.8% for 4Q14 and 5.2% for the whole of

2014. Manufacturing output grew by 5.6% YoY. The healthy expansion in industrial activity during the quarter is supportive of our 1Q15 GDP growth estimate of 5.0% YoY (4Q14: 5.8%), which also assumes private consumption still performs reasonably well on pre-GST spending.

Outlook

Moderating global demand and the impact of GST could lead to IPI growth moderating over the next few months to average 4.6% for the full year, slower than the 5.2% growth in 2014. This is reflective of slowing GDP growth which we forecast at 5.1% for 2015 compared with 6.0% in 2014.

Source: Kenanga Research - 12 May 2015