UK manufacturers face higher costs as Ukraine crisis hits supply chains | manufacturing sector

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British manufacturers are facing a sharp rise in costs as the Russian invasion of Ukraine undermines progress made in repairing global supply chains before the conflict broke out, economists have warned.

According to the latest snapshot from IHS Markit and the Chartered Institute of Procurement and Supply (Cips), factory production surged in February amid rising domestic demand, lessening commodity shortages and easing pressure on global supply chains.

In a sign the worst disruption caused by the pandemic may have peaked, companies said the number of delivery delays has fallen over the past month to its lowest since November 2020.

But experts said the conflict in Ukraine – which has sparked a surge in oil and gas prices and renewed supply chain disruptions – would hit businesses across Europe and hurt industrial production in the coming months.

Mike Thornton, production manager at accounting firm RSM, said: “British manufacturers should brace themselves for additional headwinds as the Russia-Ukraine conflict unfolds. The rise in energy prices is most evident for heavy industry.”

Russia is the world’s largest exporter of natural gas and one of the top suppliers of crude oil, commodities like wheat and metals like palladium, platinum, gold and aluminum.

“Recent shortages of components like microchips could continue and spread to other areas as sanctions and export restrictions limit supply entering the broader supply chain,” Thornton added.

Rising energy costs and supply chain disruptions caused by Covid have pushed inflation to its highest level in three decades. Analysts had hoped cost-of-living pressures would ease with the lifting of pandemic restrictions but are now warning of the Russian invasion and Western sanctions set to add to inflationary pressures.

Although Russia accounts for a relatively small share of global trade in goods, rising energy prices are expected to further push up factory costs following the problems caused by Covid-19.

Trade organization Make UK said some 3,800 firms exported goods to Russia while 1,200 imported materials, despite accounting for just 0.8% of total UK goods exports and 2.1% of imports.

Western sanctions against Russia could not only drive up costs for energy-intensive companies, but also affect the availability of materials for the aerospace, automotive and electronics industries. The country is a major producer of metals such as titanium, nickel, cobalt and lithium.

Make UK said: “Any trade disruption will be financially undesirable at a time when many companies are recovering from the impact of the Covid-19 pandemic and the slowdown in international trade following the UK’s exit from the EU.”

According to the latest snapshot from IHS Markit/Cips, factory production and orders rose last month, reflecting stronger domestic demand, new customer wins, loosening Covid restrictions and improving market conditions.

The purchasing managers’ index, a measure of manufacturing output, rose to a three-month high of 58.0 in February from 57.3 the previous month. A value above 50 separates growth from contraction.

Duncan Brock, group director at Cips, said there had been a welcome boost for manufacturers, although commodity prices remained high and disruption continued for many businesses.

“February was certainly a month of positives for the UK manufacturing sector as 64% of manufacturing companies remained upbeat. However, this achievement comes with a health warning as the crisis in Ukraine deepens and the potential for higher commodity prices, supply disruptions and economic woes must be considered by companies as they seek to build resilience into their supply chains in the coming months. “

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