Malaysia Industrial Production Continues to beat forecasts – up 7.6% in Maytitle

Industrial production for May grew by 7.6% YoY, beating market expectations of a 4.6% increase. This is due to a gain in all the main IPI components and a particularly strong rebound in the mining sector. Compared to the previous month, the total production pace grew by 3.5% while the 3-month moving average (a method to remove seasonal factors) increased by 4.0%. For the first five months of the year, production expanded by 4.1%, a vast improvement from last year’s 0.2%.

Analysing the main components show that the manufacturing sector’s growth quickened by 6.5% YoY from 5.7% previously. As the trend has been since 2010, much of any gains in manufacturing are backed up by commodity based manufacturing. In the month of May, there was a 10.5% increase in the production of petroleum, chemical, rubber & plastic manufacturing and a 3.9% growth in the production of non- metallic mineral products, basis metal & fabricated metal. This is followed by a 6.7% increase in the production of E&E manufacturing, making it the second consecutive month of expansion. Moving very closely in tandem with exports (where exports in May are finally within positive territory, up by 6.7% following a 5.7% gain in IPI in April), we continue to be optimistic for a positive trade performance moving forward.

Moving on to the mining sector, after months of predominant contractions due to upgrading and maintenance works, there is finally a 11.5% YoY rebound. The crude oil index expanded by 14.6% while the natural gas index increased by 5.2%. We expect a continued expansion, especially from Japan for LNG, despite the gradual reactivation of nuclear power stations. It will be a while yet before the remaining stations begin production once again. With much protest against the use of nuclear energy after the Fukushima incident, alternative fuel will be in high demand for the next few months.

With strong production from both the manufacturing and mining sectors, electricity production increased by 6.6% YoY. Compared to the previous month, it expanded by 5.7%.

Even though we are already seeing a rebound in mid-2Q12, the global situation remains precarious. Europe remains in a crisis, with soaring unemployment rates (17.56 million jobless) as effects of dire attempts to reduce debt has led to further downturns in manufacturing. The ECB has opted to slash interest rates to the lowest level on record (0.75%). The recovery that was expected from the USA is now looking ever dimmer, as the service sector is at its slowest pace since January 2010. China is forced to reduce its interest rates once again following a seven- month low of 48.2 in its manufacturing index.

Even though the situation in Malaysia remains on track with our optimism of a more bullish 2H12, there is every reason to be cautious. Thankfully, strong boosts from major projects under ETP initiation as well as strong domestic consumption will buffer the external effects of the global economy. As our domestic situation remains resilient, we continue to retain our 2012 GDP forecast at 5.0%.

Source: Kenanga