Inflationary costs and delays are holding back growing UK Manufacturing

The CBI reported in the latest Barclays Bank Manufacturing Weekly review that industry output grew by 26% in the quarter to February 2022, compared to 14% growth in the quarter to January 2022. Furthermore, 224 manufacturing companies surveyed indicated growth in 13 out of 17 subsectors led by the chemicals and food industries. Internal order books increased by 20% in the quarter to February 2022 but exports still remained negative at -7% due in part to increased administration and costs of export to the EU.

The CBI stated that manufacturers were buoyed by strong order books but due to growing costs pressure, 4/5 firms were expecting to increase selling prices in the next 3 months. UK Manufacturing PMI increased to 57.3 in February 2022 fuelled by production growth due to increased orders and inventory levels. However, further growth was being hampered by staff shortages caused by continuing covid restrictions and a backlog of work caused by supply chain delays.

The critical link in the supply chain identified by SME’s was shipping delays and costs. There had been an easing in shipping container costs post September 2021 but these had recently increased again to around $14,500 per container. Interestingly, the worlds largest shipping container company, AP Moller-Maersk, reported profits of $24bn, a 300% increase versus the previous year. The same trend in profits applied to German shipping company Hapag-Lloyd who reported a $10bn increase in profits. The company responses to these increases in profits were caused by “exceptional market conditions” and they detailed that profits had been matched by increased capacity and productivity.

In the UK, Make UK approached the Competition and Markets Authority (CMA) to investigate whether these extraordinary profits were indeed justified. However, the CMA were unable to report as required, citing that increased shipping costs and profitability generated by shipping companies were the “product of a multiplicity of factors often international in nature”.

It appears that artificially high sea freight costs will continue for the next 12 months and many experts, such as Make UK, were unable to predict when this will end. Increased freight costs will be exacerbated by freight delays in China due to their “Zero Covid” policy which has closed key ports, causing delays of a further on average 6 days. Congestion in major international ports such as Asia, US, Middle East and Europe will have further delaying effects. Increasing costs and delays will make inventory and sales forecasting progressively more challenging with further negative effects on working capital management restricting growth in activity, profits and capital investment.

Should you wish to discuss working capital management, cash flow or capital investment finance please get in contact with Rodney Sutton here.