FTSE 350: Cost pressures weigh on manufacturers

The UK Manufacturing PMI index hit a 13-month low of 55.2 in March, still comfortably above the neutral 50 level separating expansion from contraction, but well below the 58.0 reading recorded in February. Optimism among survey respondents also fell to a 14-month low.

“Manufacturers are being hit by several headwinds simultaneously, as supply shortages, greater caution among clients, escalating inflationary pressures, ongoing Brexit factors and rising geopolitical tensions all hamper the upturn,” Rob Dobson, a director at S&P Global, said.

New orders grew at their slowest rate for 14 months, led almost entirely by domestic demand. Export orders fell for the sixth time in seven months.

Costs rose for the 28th consecutive month and at their fastest pace in three months. A survey by BDO and trade body Make UK found 21 per cent more manufacturers reported shrinking margins than those witnessing stable or growing levels of profitability. The survey, published in March, was conducted before Russia’s invasion of Ukraine, which caused energy prices to soar.

Brent crude prices have slipped back since touching $130 a barrel in early March, but remain at elevated levels of around $108. The UK gas price spiked to a record high of over 500p per therm, but is now back to its pre-invasion price of 185p – although this is almost four times the 50p level it traded at a year earlier.

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Furious lobbying by industry led to the government announcing the extension of a scheme to subsidise energy bills for intensive energy users for a further three years on 8 April.

It provides relief offered against obligations under the UK’s emissions trading and carbon price support mechanisms and will help “to protect British industry from volatile global gas markets”, business secretary Kwasi Kwarteng said.

The measures were announced as part of the UK’s new energy security strategy, which is still in its consultation phase until July.

Gareth Stace, director-general of steel industry trade body UK Steel, described it as a “key step” in tackling higher energy prices that prevent the nation’s steel industry from more effectively competing with European counterparts.

The Energy Intensive Users Group, an industry lobbying body, said the strategy needed to be underpinned by measures that will reduce energy prices throughout the 2020s to help manufacturers decarbonise. [ENDS]

High energy prices hit some companies harder than others. The likes of heat treatment specialist Bodycote (BOY) or molten metal flow treatment companies Vesuvius (VSVS) and RHI Magnesita (RHIM) are likely to incur higher costs, but if, like Weir Group (WEIR), they can convince clients to spend on new products, that will reduce their energy consumption, and there may also be beneficial tailwinds.

Manufacturers' ability to pass on expenses will depend on the markets they serve, whose fortunes vary. Aviation has taken a battering as a result of the pandemic and air passenger traffic will not fully recover until 2025, so companies such as Melrose Industries (MRO) that serve planemakers are having to cut their cloth accordingly.

For the automotive sector, demand for new cars is strong, but this is partly due to production being hobbled by a lack of semiconductor availability. The UK produced 850,575 cars last year, the lowest number since 1956 and more than one-third lower than the pre-pandemic level of more than 1.3mn, according to the Society of Motor Manufacturers and Traders. Supply chain snarl-ups were expected to ease this year, but the war in Ukraine, where a number of plants producing wiring harnesses are based, complicates matters.