South Korea July IP coming to grips with excess inventories

South Korean industrial output fell 3.3% y/y in July is much weaker than expected. On a seasonally adjusted m/m basis, the country's IP fell 0.5%, reversing the 2.5% expansion in June and resuming the prior few months' downward trend (May: -1.6%; April: -1.3%). The key concern is high excess inventories, with the inventory/shipment ratio, which held firm at the recent high of 1.29x in July (Jun: 1.29x; May-April: 1.27x) and just a shade below the record of 1.30x in December 2008, during the global financial crisis, notes Barclays. 

The inventory buildup is mainly driven by electronics (Jul: 1.62x; Jun: 1.53x) and autos (Jul: 1.42x; Jun: 1.32x), with the record high IS ratio leading precautionary trimming of production across the supply chain in July. 

"Therefore, Barclays argues, IP is expected to improve on a sequential basis, as some offsetting factors are seen that are likely to lift production in the coming months: 1) stronger demand in the US for consumer electronics as we approach back-to-school peak season for consumer electronics and the start of year-end festive demand; 2) the gradual destocking of inventories; and 3) new model launches for autos and mobile devices in the coming months."