OVERVIEW

• December IPI was higher than expected, up 4.7% YoY in December but notably lower than the 6.2% increase in November. The consensus and house estimate was 4.4% and 3.7% respectively. On a MoM basis, the IPI rebounded by 4.2% after declining by 2.8% in November’s. For the full year the IPI grew 3.8% versus 4.7% in 2015.
• Mining outshines manufacturing production. By category, manufacturing production moderated to 4.3% after growing 6.5% the previous month. E&E growth remains strongly supportive of manufacturing output. Mining production meanwhile accelerated to 5.8% from November’s 4.6%.
• Cautiously optimistic for 2017. With signs of strengthening external demand – from recent external trade and export new order index – along with the weaker ringgit, we are somewhat upbeat on external demand carrying industrial production.

Modest growth but beat expectations. The Index of Industrial Production (IPI) moderated to 4.7% YoY from 6.2% in November, above the consensus estimate of 4.4% and the house forecast for a 3.7% growth. IPI rebounded by 4.2% on a MoM basis after a 2.8% decline in November, largely from seasonal factors. After seasonal adjustment, the IPI grew at a moderate 0.9% MoM (November: 0.9%). December’s moderation of IPI growth was driven by slower manufacturing sector growth though it was somewhat sustained by stronger growth in the mining sector.

Second year low. December’s figures brings the full year IPI growth to 3.8%, lower than 4.7% growth achieved in 2015, moderating for the second consecutive year since it peaked at 5.2% in 2014. However, 4Q16’s YoY’s growth was significantly higher at 5.0% compared to 3.9% in 3Q16.

Seasonal factors temper factory output. The manufacturing sector, accounting for about 65.9% of the headline IPI, grew at a slower rate of 4.3% YoY after expanding 6.5% in November on account of a higher base a year ago. It rebounded by 3.5% MoM after it contracted by 4.0% in November. However, on seasonally adjusted MoM terms, the manufacturing sector contracted by 1.2%.

E&E holding up manufacturing growth. In spite of a slower manufacturing YoY growth in December, its main components remains strong led by the electrical and electronic (E&E) sub-sector remains strong, expanding 8.9% YoY from 5.3% in November. On a MoM basis, E&E rebounded by 3.6% after it fell by 5.0% in November. Another standout include the petroleum, chemical, rubber and plastic product division which expanded by 6.1% from 3.7% in November. By and large this explains the MoM growth turnaround in the manufacturing sector in December.

Manufacturing sales continue to pick up pace. In a separate report, manufacturing sales ended the year on a high note with a 10.6% YoY growth (November: 8.2%). Manufacturing sales value stands at RM61.5b as at December 2016. However, on a month-on-month basis, manufacturing sales slipped 0.2% after seasonal adjustment of 3.8% growth during November. Nevertheless, manufacturing sales remain at relatively high levels, allowing some support for growth. With recent external trade data suggesting firmer external demand, manufacturing production is likely to remain resilient, supporting overall industrial production.

Mining production accelerates. The mining sector (28.9% of the headline IPI), meanwhile, grew at a faster 5.8% (November: 4.6%). The mining sector displayed similar growth in MoM terms, it jumped 7.0% or 4.4% after seasonal adjustment. Higher mining sector growth came as its natural gas sub-index sustained its double-digit growth for the second consecutive month, rising 12.7% YoY (November: 13.2%). Its crude petroleum sub-index, meanwhile, grew 0.1% YoY after its 1.9% decline during November. Growth in the crude petroleum sub-index, however, may be partially attributed to possible ramping of oil production just before the OPEC’s oil production cut take hold in January-June 2017.

Electricity output slowed. The electricity sector (5.2% of the headline IPI) saw slower growth at 6.1% (November 9.7%). On a seasonally adjusted MoM basis, the sector contracted slightly at 0.5%.

Firmer global manufacturing PMI. Global PMI in the developed economies have been bullish in January with the US and Euro Area’s respective PMI at 55.0 (December 54.3) and 55.2 (December 54.9) respectively, well above the crucial 50.0 threshold. PMI reading in developed Asia were more mixed with Japan’s and Singapore’s headline PMI at at 52.7 in January (December: 52.4) and 51.6 (December: 52.0) though South Korea’s PMI deteriorated to 49.0 in January, down from 49.4 in December. Closer to home, the Philippines posted a strong PMI reading at 52.7, though this was significantly lower than December’s 55.7. Indonesia, meanwhile, crossed the threshold with a PMI reading of 50.4 from 49.0 in December.

Malaysia’s PMI lags. Back home, Malaysia’s PMI remains below the 50.0 threshold at 48.6 in January though January’s reading was a 20 month high, suggesting that the index may have bottomed out and likely to recover into 2017, albeit gradually.

OUTLOOK

Cautiously optimistic. While December’s IPI showed only moderate growth, we are positive on the manufacturing sector outlook, at least for 1Q17. Our positive outlook is underpinned by suggestions of firmer external demand as demonstrated by December’s external trade numbers thanks partly to a weaker ringgit along with the slight expansion in the PMI’s new export orders sub-index. This would add weight to our expectation of a pick up in growth in the early part of the year with a higher GDP growth for 1Q17 projected at 4.4% from an estimated 4.3% in 4Q16.

Downside risk from mining. However, as a participant in OPEC’s voluntary oil production cut, we do see the mining sub-index seeing subdued, if not deteriorating growth, moving into January. Assuming that the production cut remains in place till its expiry, the mining sector will be biased on the downside, at least until its expected expiry in June 2017 (though OPEC’s announcement stipulates a possible 6-month extension)

Source: Kenanga Research - 13 Feb 2017