This article first appeared in The Edge Financial Daily on March 3, 2020

KUALA LUMPUR: Malaysia’s Manufacturing Purchasing Managers’ Index (PMI) fell to 48.5 in February, from 48.8 in January, as the manufacturing sector was adversely impacted by shortfalls of inputs and falling export orders from China due to the Covid-19 outbreak.

When the IHS Markit’s PMI drops below the 50 mark points to a contraction in the sector’s activity.

In a report yesterday, IHS Markit said the latest survey data showed Malaysia’s manufacturing sector facing a challenging February as deliveries of key raw materials from China were disrupted by the Covid-19 outbreak.

“Overseas demand was also adversely impacted, causing the steepest fall in new export orders in over seven years. These negative demand- and supply-side factors led to a softening trend in manufacturing production,” it added.

IHS Markit noted supply-side disruptions heavily impacted businesses in February.

“Supplier delivery times lengthened to the greatest extent since survey data were first collected in July 2012. Panel members reported shortages of key raw materials due to the Covid-19 outbreak in mainland China, with shipments delayed and even cancelled in some cases.

“Consequently, production across the Malaysian manufacturing sector was adversely impacted by shortfalls of inputs. The survey’s output index slipped to an eight-month low in February, signalling a softening momentum.”

Headwinds also came from external markets as new export orders fell at the steepest rate since November 2012, said IHS Markit.

“According to anecdotal evidence, demand from clients in China, a key overseas market for Malaysia, fell due to the Covid-19 outbreak, acting as a principal cause of falling export sales during the month.

“Total new order intakes were subsequently under pressure due to the unfavourable external environment. Overall, the survey’s new order index fell to its lowest since last September. There were also mentions of a general underlying market weakness leading to subdued sales performances,” it said.

Employment among Malaysian manufacturers was reduced as well as some firms opted to not renew contracts for some employees given the possibility of production being constrained by an uncertain supply of inputs.

“In some cases, firms reported supply shortages had exerted an upward pressure on raw material prices,” said IHS Markit.

IHS Markit said the manufacturing output outlook for 12 months ahead remained positive in February as some companies foresee a pickup in economic growth.

“However, optimism slid to a 20-month low as uncertainties concerning raw material supplies and demand conditions weighed on confidence.

“Malaysia’s manufacturing sector reported a double hit from Covid-19 in February. Supply shortages for many imported inputs constrained output, while foreign sales were also dampened by virus-related slowdowns in key export markets, notably China, where the extended [Lunar] New Year holiday appears to have played a major role in limiting supply and hitting demand for Malaysia’s exports,” IHS Markit chief business economist Chris Williamson said.

“With delivery delays for inputs more widespread than at any [other] time in the survey’s 7½-year history, leading to sharp falls in purchasing and inventories, production is likely affected in coming months too unless fresh supplies can be sourced.

“Unsurprisingly, producers have become less optimistic about future growth. Much of course depends on how long the Covid-19 outbreak persists, but with China’s factories returning to work, there’s a good chance the worst of the supply shortages is over,” he added.