KEY POINTS:
Manufacturing activity dropped in June to its third lowest level since 2002, according to a survey released yesterday.
The Bank of New Zealand - Business NZ seasonally adjusted performance of manufacturing index (PMI) was at 45.7 points last month, with anything below 50 points indicating activity is contracting.
BNZ senior markets economist Craig Ebert said the notable outcome of the survey was the reports of soaring input costs.
It would seem that raw material costs were trumping ongoing rises in staffing and other costs as the topical concern for many manufacturers. "We are, let's face it, amid one of the biggest commodity booms the world has seen in decades. And it's not just oil," Ebert said.
"While it would be a bold person to take big bets, either way, on commodities right now, our gut feel is the global economy will find the huge run-ups in prices much too much to stomach."
In time, demand would adjust, and extra supply would come on stream.
That combination was a recipe for a correction in commodity prices, in due course - "and a potentially large and immediate one ... ", he said. But for now raw material prices were hitting firms hard, and were one of the reasons profitability in the manufacturing sector was being hammered.
Profits were also being squeezed by waning revenue, as demand growth diminished and pricing power faded along with it, Ebert said. The 45.7 June PMI reading was down from 47.9 in May, and lower than every other monthly reading apart from 43.7 and 45.6 in November and October 2005, respectively.
In the survey, four of the five main diffusion indexes recorded ongoing weakening. Production fell to its lowest result of 42.3, new orders at 44.8 was similar to March, and employment remained in decline with its second lowest value of 45.6. Deliveries of raw materials at 41.9 had the lowest value of any main index for the history of the survey.
- NZPA
