Manufacturing sector slowing down

Peteris Strautins, the Economist of Luminor, comments on the industrial production volume in October 2017

In October, production volumes in the manufacturing industry increased by 0.2% comparing to September, yet the sharp rise recorded last October accounts for a reduction of growth rate from 7.1% in September to 5.9% in October. It is very likely that due to the same reason the annual growth rate will still slightly go down in November.

The poor availability of round wood timber affected wood processing operations, and just like in September, the annual growth comprises 1.3%. Since August growth rate in the manufacturing industry has slowed down considerably and to a large extent it is due to a more sluggish growth rate in the food processing sector that went up by only 2.1% in October. It is, however, adversely affected by the fish processing industry, which in spring faced an annual growth between 10-20%, whereas in October declined by 4%. There is no doubt, though, that efforts to replace traditional markets with sale in Western Europe and Japan will continue. Likewise, significant adverse effect on food processing was caused by the decline in meat production by 3%.

Due to the sluggish growth rate in two largest traditional industries, it is difficult to achieve a rapid increase in our manufacturing sector despite the fact that the most promising industries – mechanical engineering, chemical and pharmaceutical sectors – have managed to maintain the same growth rate as in the beginning of the year, increasing their production volumes by one fifth, yet with variable success across various sectors.

The automotive spare parts production sector has grown by 42.7%

In October, the best performing industry was automotive spare parts production sector that increased its production volumes by 42.7%. Today’s newspaper Dienas Bizness (Daily Business) reports that one of operators of this subsector, namely, AKG Termotechnik Lettland will hire 250 more people in Jelgava, that way doubling its number of employees, and it is a typical example of events occurring in the mechanical engineering industry this year, which is sky-rocketing thanks to those companies who talk less and act more. They have hardly any impact on perceptions regarding economic developments, and for this reason some may think that the GDP growth by almost 5% this year is some extraordinary luck. It is rather the end of long series of setbacks and returning to a normal situation with a slightly opposite pendulum effect. Long-term economical processes rarely depend on luck, because they are impacted by a large number of businesses which all share a bit of the success factor.

Electronics manufacturing sector accounts for the lowest growth rate in October since last February, with an annual increase of only 1.4%. This figure is worth attention only as a contrast to the 20-50% rise over several years. It looks like a coincidence, or as a slow-down moment after particularly extensive output in September. The news that LMT will co-operate with the industry leader Mikrotīkls in developing the 5G mobile network is another reason for being optimistic about this sector.

Pharmaceutical sector growth is speeded up by the recovering Russian market

While considering overall results of the manufacturing industry, it is always worth paying attention to events occurring in some of the sectors because ‘the folks should know their heroes’. This year in Latvian economics is certainly not boring in general, however, developments in the chemical and pharmaceutical sectors are particularly interesting.

It is quite easy to describe what is happening in the pharmaceutical sector. There are two large companies who have achieved good results this year, especially Grindeks, mainly thanks to their successful trade in the traditional markets of the former USSR. Oil price has gone up, followed also by the rising rates of Russian rouble and related currencies. Since the Russian GDP is growing quite rapidly also in terms of its national currency – roubles (partly due to inflation), there are better export possibilities to this country again. Grindeks and Olainfarm will still be industry leaders, however, Pharmidea is also growing rapidly — this company has recently increased its production capacity several times and is approaching the level where it might affect the overall industry. In the nearest future this company’s turnover might reach several tens of millions euros.

Chemical sector development is greatly driven by construction

Situation in the chemical sector is much more complicated. It is growing rapidly this year, too, but most probably slightly slower than the pharmaceutical sector which is expected to increase its outputs by one fifth (however, no operational data are available thereof). Production of chemicals is driven by several factors. One of the most significant customers for this industry is construction, which is rapidly growing this year both in Latvia and on a regional scale. Production of cosmetics and detergents is developing successfully, however, data about this sector are quite contradictory. On the one hand, Madara Cosmetics surprised Latvian inhabitants by a really rare development – initial public offering of the stock at the stock exchange, as well as by reporting excellent business results. On the other hand, many people might have been upset by finding out that the company Stenders has been sold. However, we should believe the new investors who are claiming that production will stay in Latvia and will be even expanded because European goods are highly prestigious in China. At the moment, one of the most interesting companies from the perspective of national economy is the automotive chemicals manufacturer CrossChem. It’s quite unlikely that there is any other Latvian company with 9 production facilities outside Latvia including two in Japan, Australia and other countries.

Peteris Strautins
Economist
peteris.strautins@luminorgroup.com

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