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IP – stronger than expected 2.8% YoY growth in September

IP growth printed a stronger than expected 2.8% YoY gain in September (vs. 0.0% YoY in August), which came as a positive surprise for both the consensus (0.1%) and our estimates (-0.4% YoY). Component-wise, utilities output dropped a mere 0.8% while mining production saw an unexpected improvement (partly due to a mix of 3.7% and 0.8 YoY advances in coal and oil output, respectively, despite deeper drop in gas production to -16.9% YoY) and manufacturing bounced back with a gain of 3.6% YoY, the highest since May, after a month of contraction in August.

The persistent ups and downs since May make September’s recovery in the headline IP somewhat routine. A technically favourable calendar factor (the additional working day vs. September 2013) played a hand, but it certainly cannot explain the entire upturn. Last month, as in the previous months this year when IP growth was above 1%, the strongest driver was a reacceleration across manufacturing industries on the back of well-known factors:

- the import substitution in food and metals that is underway; it is particularly noticeable that iron output jumped 9.5% YoY, the highest after a blip in May 2012;

- a temporally strong performance in oil processing (oil input added 3.9% YoY and gasoline increased 1.8% YoY, the fastest pace since October 2013) and chemicals (fertilizers printed a 11.2% YoY pick-up following four months of single-digit growth);

- advance preparations for the construction of the Russia-China gas pipeline that might have further bolstered pipes output, which added a heavy 23.7% YoY last month.

At the same time, even though car output improved by half it remained deeply in the red, registering an 18.1% YoY decline (vs. -38.1% YoY in August). This bodes well for the abruptly falling sales of new vehicles (-13% YoY on average during 9mo14), but we see few reasons to believe in a sustainable reversal in that market anytime soon.

Across other (non-manufacturing) sectors, electricity production, which dipped back below the waterline, was a marginal drag (shaving 0.1pp from the headline IP). Mining surprised to the upside, despite plunging gas output, as the production of crude oil, which accelerated, weighed more than that of gas. In total, mining added near 0.7pp into the headline speed-up.

Overall, once the impact from temporary drivers fades, we think IP growth is to moderate closer to 1.0% YoY, with softening domestic and fragile export demand likely to take their toll on the supply side.

Daria Isakova, Vladimir Kolychev
VTB Capital analyst

IP, Russia

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