EEF blog

Insights into UK manufacturing

What do manufacturers see as the biggest risk to growth in 2012?

Felicity Burch January 23, 2012 15:48

For manufacturers, 2011 was a year of significant upward pressure on input costs.

But in the last couple of weeks, data releases on consumer prices and producer prices would suggest that inflation is now starting to come off the boil. The year to December saw the slowest annual increase in producer input prices since October 2010.

High and volatile input prices can cause significant problems for manufacturers, so it is good news that price pressures are starting to ease. However, since the global recovery began, another problem has emerged: that of availability.

Over 80% of manufacturing executives said that a shortage of raw materials was a significant risk in 2012.

Our survey of manufacturing executives found that concern about the availability of raw materials is pervasive, across all sizes of business and industry sectors. In fact raw material shortages are such an issue that two thirds of companies saw this as the top risk to their business plans in the year ahead – considerably more than any other issue.

Why is this?

While some risks may dent growth, or cause less concrete knocks to business, being able to business, being unable to secure or fulfil orders, or having to run below optimum capacity are real and tangible outcomes that can arise quickly when there is a lack of raw materials. 

Outlook for prices and availability

Slower global growth as a result of the Eurozone crisis and the Chinese government’s attempts to engineer a ‘soft landing’ may have abated pressure on input prices, but availability and price of specialist materials such as metals and rare earths remain an issue.

The weaker economic outlook may alleviate commodity prices, but with global demand for inputs continuing to rise, the issue of raw materials prices and shortages is set to be a perennial one.

New Publication Manufacturing Focus highlights price rises climbing up list of manufacturers' concerns

Andrew Johnson August 22, 2011 10:01

This week, in partnership with RBS, we’ve launched our latest publication series, Manufacturing Focus.

Manufacturing Focus is a twice-yearly publication focusing in-depth on current issues of importance to manufacturers. Our first issue looks at managing materials prices - something that's been in the news a lot in the year so far.

Why is this such a big deal to manufacturers?

Because materials constitute a large proportion of manufacturers costs – often over 50% and for some as high as 80%.

And what we’ve seen over the last 18-24 months (perhaps further if you include the period pre-financial crisis) is an environment where prices have been quite out of the ordinary.

Firstly attention was focused on strong rises that gathered pace in 2010 and spilled over into 2011 – well over 50% year-on-year price increases for many key industrial inputs. For one electronics manufacturer, a basket of rare earth metals have increased an astonishing four to six fold.

Rising prices have had consequences not just for producers but consumers too and this can be seen in the correlation between input prices and both export and domestic price increases, as shown on the below chart (industrial materials index RHS, balance of companies reporting increase in prices LHS). Indeed given the increase in their own costs its remarkable manufacturers' have not increased their own prices more than they have.

More recently some drop-offs in prices have fed concerns the global economy may be slowing.

While a global economic slowdown is cause for concern in itself, recent price falls have meant volatility is also proving a challenging issue for manufacturers to manage.

Lags in responses or adjustments to contracts can mean manufacturers wearing the difference on some cost movements.

Managing materials prices is moving up the agenda for manufacturers, with 48% of companies citing managing prices as one of their top three challenge to growing their business (second only to skills shortages as a top three challenge).

This compares with 33% of companies that saw managing price and availability of materials as an issue in 2010.
Availability rates a separate mention this year too with 15% of companies rating it as one of their top three challenges.

Week in Review - 11th March, 2011

Felicity Burch March 11, 2011 09:41

↑ EEF’s Business Trends EEF’s business trends survey for 2011q1 showed that manufacturers had another better-than-expected quarter. A balance of 25% of companies saw output expand in the last three months, and a balance of 20% saw increased orders. Orders growth was largely driven by strength in export demand.
 UK Trade The total trade deficit improved to £3.0bn in January, compared with a deficit of £5.5bn in December. The trade in goods deficit also improved, to £7.1bn in January, compared with £9.7bn in December.
↑ Index of Production Manufacturing output rose by 1% in January, more than making up for the slight dip in output in December. Output of the total production industries also rose, by 0.5% between December and January.
↔ MPC rate decision Once again, the MPC voted to maintain the Bank Rate at 0.5% and the stock of asset purchases at £200 billion.
↑ Producer prices In the year to February input prices for manufacturers rose 14.6%, this is the fastest rate since October 2008. Price rises were largely driven by oil and imported metals.Output prices also rose over the year, by 5.3%.
The week ahead
Wed 16th: Labour Market Statistics
Fri 18th: Public Sector Finances

This is an informal blog about manufacturing and the economy written by EEF's policy and representation staff. While it is written from an EEF perspective, contributions should not be taken as formal statements of EEF policy, unless stated otherwise. Nor does it cover all the issues on which we campaign - you can check these out in more detail at our main site.

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