Ireland’s “traditional” Industrial and Food Manufacturing Sectors

Some of the recent industrial production data has pointed to a slowdown in the Irish economy.  This is particularly true of the “traditional” sub-index in the data.  Here are the annual changes in the volume of production in this sector since 2011.

Annual growth rates have declined from around 10 per cent in late-2014/early 2015 to showing contraction in the most recently available data.

The “traditional” sector is simply the residual of the sectors that are included in the “modern” sector.  Sectors are included in the modern sector if 85 per cent or more of the turnover in that sector is generated by foreign-owned companies.  The sectors in the modern sector are:

• NACE 20: Chemical products
• NACE 21: Basic Pharmaceutical products and preparation
• NACE 26: Computer, electronic and optical equipment 
• NACE 27: Electrical equipment
• NACE 18.20: Reproduction of recorded media
• NACE 32.50: Medical and dental instruments and supplies

Under the current weightings these sectors comprise around 60 per cent of the overall index so the remaining sectors which give us the “traditional” sector make up the other 40 per cent.

The main sectors of the traditional sector are:

• NACE 10: Manufacture of food products (0.65)
• NACE 11: Beverages (0.28)
• NACE 24-25: Basic metals and fabricated metal products (0.54)
• NACE 28: Machinery and equipment, not elsewhere classified (0.41)
• NACE 35: Electricity, gas, steam and air conditioning supply (0.33)

Between them, these categories make up around three-quarters of the “traditional” sector so whatever if driving the pattern in the chart above show be identifiable in one or more of these categories.

The numbers in the brackets give the correlations between the annual growth rates for these categories and the annual growth rates of the “traditional” sector.  The two that probably stand out are those for food products and basic metals and the weighting for food products is about ten times greater than that for basic metals.

The growth rates for each of the five sectors can be seen here but just taking the first category above, i.e. the manufacture of food, gives the following:

And this, it seems likely,  is where the pattern for the overall “traditional” sector comes from.  As the manufacture of food products makes up about one-third of the “traditional” sector, naturally the swings in this category are larger than for the overall sector.  The change in the growth rates is from annual growth of 20 per cent in early 2015 to negative growth approaching minus 10 per cent in the most recent data.

The data break go further and break the food sector into the following sub-categories:

• NACE 101: Meat and meat products (0.52)
• NACE 105: Dairy products (0.10)
• NACE 107: Bakery and farinaceous products (0.60)
• NACE 106,109: Grain mill and starch products; Prepared animal feeds (0.29)
• NACE 102-104, 108: Other food products (0.92)

All the annual growth rates are shown here but it is pretty obvious (from the correlations which are again shown in brackets) which category to focus on.  That is ‘Other Food Products’ which by weighting makes up about three-quarters of the manufacture of food category. 

This could be fish (NACE 102), fruit and vegetables (NACE 103) or oils and fats (NACE 104) but we are probably looking at something in the broad other category (NACE 108).  With retail sales for food not showing anything like the volatility described above we should probably turn to the export data to see where these patterns are reflected. But nothing in the food export data (commodities categories 00 to 09) fits what we have seen here.

However, there is another export category that seems to fit the bill.  Here is the quarterly industrial production turnover index for Other Food with a quarterly index of exports for commodity category 55. 

I think we found a match.  The output from “Other Foods” in the Industrial Production data is sold under Category 55 in the External Trade data.  Category 55 is listed in the trade data as “Essential oils, perfume materials, toilet preparations etc.” which doesn’t seem to match.

If we look at the more detailed Trade Statistics releases we can see that Category 551: Essential Oil, Perfume and Flavour Materials is where most of the exports in Category 55 arise from with the bit “Flavour Materials” getting us back to something food related.  Going a little further it can be seen that all the action is in Category 551.41: Mixtures of odoriferous substances for use in food/drink.  In 2015, exports in Category 551.41 were €7.3 billion.  The use of “odoriferous” suggests something that smells but it’s much more likely to be related to some form of concentrate.  Total exports for Category 55 in 2015 were €8.0 billion so we can see that 551.41 provided over 90 per cent of those.

I’m not going to check the Trade Statistics release but item 551.41 seems to one of our most widely dispersed exports with country data provided for 56 countries.  Exports for Jan-Oct for recent years are:

• 2013: €4,743 million
• 2014: €5,274 million
• 2015: €6,234 million
• 2016: €6,132 million

And we see strong growth in 2015 of near 20 per cent with a steep slowdown resulting in a contraction in 2016.  Just as has been described as happening in Ireland’s “Traditional” manufacturing sector.

This suggests it is probably worth taking a broad look at the “food manufacturing” sector in Ireland.  Here is some aggregate data for the sector.

Unfortunately, the data only go up to 2012 but by then we can see that we have an industry with an output of €20 billion from over 500 companies with 35,000 employees.  [The data cover enterprises with 10 or more employees.]  These companies generated a gross value added of nearly €6.5 billion,with around €1.5 billion going in pay to employees leaving a Gross Operating Surplus of €5 billion.  Ireland’s food industry seems remarkably profitable.

However, the analysis of the industrial production and export data means that it is probably worthwhile to sub-divide the industry into domestically-owned and foreign-owned sectors.  Here is the contribution of foreign-owned enterprises to Ireland’s food manufacturing industry.

We can see that almost half of the production arose in just 30 foreign-owned companies who have about 15 per cent of the persons employed in the industry.  These are higher-paying companies as they contribute 25 per cent of the personnel costs of the industry with an average cost per employee of €62,500. 

These companies generate around 70 per cent of the gross value added in the industry and earn about 85 per cent of the gross operating surplus (with a gross operating rate of over 35 per cent in 2012).  It turns out the Irish food sector is so Irish after all.  Inclusion in the “modern” sector as defined by the CSO requires 85 per cent of the turnover from a sector to come from foreign-owned firms.  Although the manufacture of food products achieves this for gross operating surplus, the proportion of turnover generated by foreign-owned firms is around 50 per cent.

In 2012, exports in category 551.41 were €5.7 billion which is 60 per cent of the production value shown above.  The  manufacture of food products industry in Ireland is very concentrated.

For completeness, here is the contribution of domestically-owned enterprises to the Irish food manufacturing industry.

In contrast to the foreign-owned companies, domestically-owned companies had a gross operating rate of 7 per cent in 2012 (GOS as a per cent of turnover).  The labour share of gross value added was almost 60 per cent though average personnel costs per person employed were €35,000 – almost 45 per cent lower than in foreign-owned companies in the sector.

What should we take from all this?  Simply that Ireland’s “traditional” manufacturing sector may be subject to many of the same MNC effects we see in the “modern” sector so interpreting changes as reflective of the economy outside the MNCs may not be appropriate.

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Exports: Dipped in Chemicals but Driven by Dollars

This week’s monthly External Trade data from the CSO showed that goods exports in April reached an all-time high of €9.2 billion.  Here are the monthly export and import figures for goods since January 2010.

The rise in exports has also seen the trade balance increase though the recent movement in imports is also important.

As is well understood around 60 per cent of Irish exports come from one sector: chemical and related products and it is this sector which accounts for the recent surge in overall exports.  Chemical exports in the first four months of 2015 are 26 per cent greater than in the equivalent period in 2014.

So what explains this recent increase in pharmaceutical exports?  Typically we could look to Industrial Production data to track what is being produced but those figures data (and for the pharmaceutical sector in particular) are polluted by the effect of external ‘contract manufacturing’.  Here are the monthly industrial production indices for chemical and pharmaceutical products since the start of 2010.

The ‘volume’ index measures the output actually produced in a given month, while the ‘turnover’ index measure output sold in a given month (regardless of when it was produced).  Both measures show a 50 per cent year-to-date increase but a lot of the rise (and volatility) is due to the impact of ‘contract manufacturing’ – this is manufacturing that takes place elsewhere but is booked in Ireland because key parts of the value-adding risks, functions and assets are based here. 

There might have been an increase in pharmaceutical output produced in Ireland (and only goods which physically leave the country are included in the External Trade data) but we can’t see that from the noisy Industrial Production figures.

Is there something else that accounts for the increase in chemical exports? Yes, prices. Or more particularly the currency in which those prices are denominated.  A huge amount of the pharmaceutical output produced in Ireland is generated by US MNCs and these companies price their products in dollars in their transfer pricing agreements.  And what has happened to the USD-EUR exchange rate recently?

Yip, the dollar has appreciated by about 20 per cent against the euro since the middle of 2014.  Thus dollar-denominated prices will have a higher nominal euro value.  And that is precisely what we see if we look at the industrial price index for pharmaceuticals.

Since the middle of 2014 the wholesale price of pharmaceuticals has risen by 15 per cent (which was likely driven by the depreciation of the euro).  It is this factor which accounts for most of the recent rise in the value of pharmaceutical exports shown in the External Trade data.

Will this have much of an impact on GDP? Real GDP growth should not be affected by the price/currency factors shown above.  And there probably won’t be much impact on nominal GDP as the increased value of goods exports pushing up the balance of trade will be offset by increased outbound royalty payments (which will also be dollar denominated) that will reduce the balance of services.  The net effect will be small.  And of course the impact on GNP will be nil unless there is an increase in employment and/or corporation tax payments – but somebody is paying more Corporation Tax.

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Industrial Production drops back slightly

After the big gain seen in January, the latest CSO release shows that industrial production volume has fallen back slightly for the last two months.  Even with these slight falls the long-term trend appears to be heading upwards.  However, this may not hold up to closer scrutiny.

The CSO have revised the slight increase shown in the provisional figures for February to a slight decrease.  The initial 1.2% monthly increase has been revised to a 1.3% decrease.  There was also a monthly decrease of 2.6% in March.   Even with these drops, the huge increase in January means the annual change in  industrial production is still positive. 

However it could be that the one-off monthly increase of 20% that occurred in January is masking the actual trend.  If we look at the monthly changes, these have been negative for five of the past six months.

Industrial production has shown monthly decreases for 15 of the past 24 months.  While the annual change remained positive in March, as it has for the first three months of the year, if the recent month on month trend continues (excluding the January blip) we could find industrial production dropping back below the levels seen last year.  The release of the April figures in a month’s time will shed light on this. Tweet

Industrial Production maintains January gains

After following a downward trend for two years the CSO’s index of Industrial Production volume jumped up in January.  Provisional February figures were released today and show that the increases in January have been maintained.  Here is a graph of the index for all industries (NACE 0 to 35).  Click graphs to enlarge.

In looking at annual changes production volume in January 2010 was 5.8% higher than in January 2009.  The corresponding February increase is 11.7%.  The annual changes can be seen here.

This is the first time there has been two consecutive months of positive annual change since September 2008.  In 12 of the 15 months beginning in October 2008 the annual change was negative.
This is good news.  But let’s look at the sectors driving this change in a little more detail.
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