Singapore’s factories may be in for a rougher ride this year if manufacturers ramped up output in anticipation of a pick-up in global demand, and caused stocks to swell.

That worry is underscored by the city-state’s firm industrial output growth that contrasts with its weak exports.

If electronics and other goods have been built up in warehouses, analysts say it raises the risk of an inventory adjustment that may temporarily weigh on industrial production in the trade-reliant economy.

Singapore’s manufacturing industry is anchored by electronics and pharmaceuticals but has lagged the rest of the region in recent years as the economy has become increasingly reliant on trade, financial services, tourism and property development.

The divergence between output and exports widened last year as total manufacturing output on an annual basis expanded while non-oil domestic exports fell.

The gap has been even more obvious in the electronics sector, which accounts for a third of Singapore’s output.

In the electronics sector, total production in January-November 2013 rose 1.8 percent from the same period a year earlier, according to the Singapore Economic Development Board.

But total domestic electronics exports in the first 11 months of 2013 slid 11.9 percent year-on-year, International Enterprise Singapore data shows.

Industrial production data for December, due on Friday, is expected to show a 0.4 percent annual drop in total output, a Reuters poll found. Non-oil domestic exports rose more than expected in December but exports of electronics fell 3.1 percent year-on-year.

Rising Stocks

Inventories have increased in each of the first three quarters of 2013 within the city-state’s economy as a whole, according to gross domestic product data.

“Starting from the latter half of 2012 until recently, I think there has been a quite a bit of inventory build-up on a macro basis,” said Hayato Nakamura, Singapore-based senior economist for Bank of Tokyo-Mitsubishi UFJ.

The Singapore Institute of Purchasing & Materials Management’s purchasing managers’ index (PMI) shows that electronics inventories expanded during much of 2013.

To be sure, economists including Nakamura say that a build-up of inventories is just one of the possible factors behind the divergence in output and exports.

The data is also a bit patchy.

The PMI survey shows that stocks of finished goods in the electronics sector have contracted for months, and the GDP data can reflect changes in inventories in the non-manufacturing sector as well as among manufacturers.

Another reason for the gap may be a drop in the prices of exported goods that thus caused a fall in nominal exports, which are measured at current prices.

According to data from the Ministry of Trade and Industry, export prices for machinery and transport equipment fell on an annual basis in each of the first seven months of 2013.

But not all agree that weak prices explain the disparity between the firmness of output and the weakness of exports.

“If you check semiconductor chip prices, it’s not as if they are collapsing or anything,” said Chua Hak Bin, Singapore-based economist for Bank of America Merrill Lynch. “To me, it’s probably the inventory argument.”

One pocket of strength in output has been semiconductor production, which alone accounts for 20 percent of the city-state’s total manufacturing output.

Asked if an inventory build-up in the chip industry may have been a factor behind the output/export gap, Russell Tham, regional president, South East Asia for top chip gear-maker Applied Materials Inc, said Singapore is not a place where semiconductor firms tend to keep a lot of their inventory.

“We don’t have a large domestic market, so I don’t think the inventory stacks around here,” Tham said.

Jagadish C.V., chief executive officer for Singapore-based semiconductor manufacturer Systems on Silicon Manufacturing Co Pte Ltd, said there was likely some typical year-end accumulation of inventory among semiconductor firms in Singapore in the fourth quarter of 2013.

“I would say 2014, maybe in general in Singapore for the semiconductor industry, quarter one may be a little bit flat or slower,” said Jagadish, adding that semiconductor production was likely to turn stronger later in 2014.

If an inventory build-up has taken place, that could weigh on output, especially if global growth disappoints. It could be a risk factor for the general view among economists, who expect growth in Singapore’s manufacturing sector to accelerate in 2014. (Reuters)