Manufacturing still seeking raw materials despite growth slowdown

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The latest manufacturing indices for June 2018
Vietnam and India are enjoying manufacturing growth while the UK remains stable,

Globally, the manufacturing sector is suffering from a shortage of raw materials and lengthening supplier delivery times. Increases in oil prices and market uncertainty have led to higher input costs, some of which have been passed on to the customer.

Purchasing activity is mainly stable, although Vietnam and India are currently showing strong growth. By contrast, activity in China, the United States and the eurozone is down. The UK remains stable.

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UK: subdued by stable

The UK’s manufacturing sector remained relatively subdued in June by comparison to the growth experienced earlier in the year.  At 54.4, the IHS Markit/CIPS Purchasing Managers’ Index was 0.1 above May’s level but almost four points below the 51-month high reached in November last year.

At 54.2, the average reading over quarter two is the weakest outcome since the final quarter of 2016.

New orders grew slightly, but this was offset by a slight fall in output growth. The overall rate of expansion in manufacturing output slowed, as growth of new order inflows improved only mildly. Some companies noted that higher output had been partly sustained through inventory building and clearing backlogs of work.

Although the rate of increase in new business edged up to a three-month high, it remained among the weakest registered over the past 18 months. Increases in new export business was partly linked to increased sales to mainland Europe, China, South America and Australia.

Input cost inflation reached a four-month high and covered a wide range of materials. This situation was made worse by shortages of certain materials.

Although optimism remained good, it dipped to a seven-month low due to concerns about input price increases, future trade tariffs, the exchange rate and continued Brexit uncertainty.

China: raw material prices increase

Manufacturing performance in China weakened slightly, with its official PMI dropping back by 0.5 to 51.4, the same level as it had been in April this year. New orders also fell slightly by 0.6 to 53.2 as did the import index which was down 0.9 to 50.0.

The price for main raw materials continued to increase, up by 1.0 on last month, reaching 57.7, its highest point since January 2018.

At the same time, the raw materials inventory sub-index fell by 0.8 to 48.8. Its lowest level over the last year was 48, so while the inventory may fall a little further, demand may increase in the coming months.

US: lowest level in four months

In the United States, the PMI dipped to its lowest level in four months, down to 55.4 from 56.4 last month.

Although output and new orders increased at the slowest rates since November 2017, this was the strongest quarterly performance since the third quarter of 2014.

Tariffs, trade wars and supplier shortages have once again had an impact, although to a lesser extent than was experienced in May. Input cost inflation eased but was still said to be ‘sharp’. Material lead times were at their highest ever recorded level.

Factory gate prices also increased sharply, with some of these costs passed on to clients. Difficulties in sourcing raw materials meant that buying activity and stock inventories weakened in June.

Eurozone: growth slows

In the eurozone, the manufacturing PMI fell to an 18-month low of 54.9, down from 55.5 in May. Since January, the IHS Markit Eurozone Manufacturing PMI has signalled a monthly weakening in the pace of expansion. This is the result of a slowing down in growth of production and new order volumes.

In June, the rates of expansion in production and new business were the weakest since November 2016 and August 2016 respectively. This had a negative impact on business optimism, which fell to its lowest level in over two-and-a-half years.

Input price inflation rose to a four-month high and this was coupled with a widespread increase in suppliers’ delivery times, with vendors often able to raise charges. Higher oil and fuel costs also had an impact.

PMI readings fell in the Netherlands, Austria, Germany, France and Greece, with France dropping to the bottom of the growth league table. By contrast, Ireland saw growth pick up to a five-month high.

Netherlands 60.1 9-month low

Austria 56.6 18-month low

Ireland 56.6 5-month high

Germany 55.9 18-month low

Greece 53.5 2-month low

Spain 53.4 unchanged

Italy 53.3 2-month high

France 52.5 16-month low

India: manufacturing levels jump

The Nikkei India Manufacturing PMI reported improvements to the country’s manufacturing conditions at their strongest level since December 2017. The PMI rose from 51.2 in May to 53.1 in June, with production growing for the eleventh consecutive month. This is the biggest jump in production since last December.

In addition, India experienced its sharpest gains in output and new orders in 2018 to date. New orders from overseas rose for the eighth consecutive month

Input costs continued to follow a 33-month rising pattern, with inflation at its highest level since July 2014. However, output charges rose at a stronger pace.

Following a fractional decline in May, firms raised their purchasing activity at the end of the quarter.

Despite this, business confidence fell to its weakest level since last October.

Vietnam: output, orders and confidence rise

Business conditions in Vietnam improved sharply during June, and to one of the largest extents since the survey began in March 2011.

Strong and accelerated increases were seen for both output and new orders. This resulted in a substantial increase in purchasing activity. The PMI for Vietnam increased by 1.8 in June to 55.7. This is a significant increase, second only to the series record seen in March 2011.

Importantly, business conditions in Vietnam have now strengthened in each of the past 31 months.

Manufacturing output increased at a substantial pace as the rate of growth accelerated for the third consecutive month. Again, the rise was the second-fastest since the survey began, behind that recorded in March 2011.

New orders have risen continuously since December 2015, although new business from abroad has not matched the pace of home grown opportunities.

As with other markets, input costs rose sharply and supplier delivery times increased, with higher oil prices and shortages of raw materials given as contributing factors.

Confidence among manufacturers remained strong with new order growth set to support increases in output over the coming year.

Indonesia: confidence slumps

In contrast to Vietnam, the Indonesian manufacturing sector saw a loss of growth momentum in June against a backdrop of slower rises in output and new orders. The headline Nikkei Indonesia Manufacturing Purchasing Managers’ Index was 50.3 in June, down from 51.7 in May.

Firms were also less confident regarding the 12-month outlook, with confidence at its lowest since October 2012.

Although manufacturing output rose for the fifth month running, the rate of expansion in June was only marginal and the weakest since March. The rate of expansion in new orders was also only marginal. New export business decreased for the seventh successive month. All of these factors mean that manufacturers have been working through their backlog to slightly increase production levels.

This marginal increase in production has encouraged firms to expand purchasing activity. Input buying has now risen in each of the past five months, but the latest expansion was the weakest since March. This has meant that stocks have fallen, as have finished good inventories.

Input prices continued to increase, but inflation slowed to its weakest level since January. Transport issues were said to be the reason for an increase in supplier delivery times.

Malaysia: cost inflation slows

The best that can be said about Malaysia is that the manufacturing sector deteriorated at a slower pace in June. Rates of contraction in output and new business both eased to the weakest since March.

The Malaysian PMI, reported by Nikkei Malaysia Manufacturing Purchasing Managers’ Index, showed a rise from 47.6 in May to 49.5 in June, indicating that the Malaysian market may be about to turn a corner.

However, it should be noted that both output and new business declined in June, albeit at a slower pace, following a five-month trend.

On the plus side, input cost inflation eased to the weakest since March 2015, while output charges were unchanged.

Input costs have been increasing in Malaysia for 41 months, and June was no exception. By contrast, output costs remained stable, bringing to an end a 19-month period of successive increases.

For the seventh month in a row, Malaysian companies were discouraged from buying input materials, but raw material inventories were also noted as falling.

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