Factories Face Soaring Costs as Iran War Causes Supply Shocks

  • The fallout from the Iran war is splitting global manufacturing, squeezing European factories with soaring costs and weak demand even as U.S. and Asian producers ramp up output to stockpile against further supply-chain disruption.
  • The economic shock from the Iran war hit European factories last month, suppressing demand for their goods and pushing up raw material costs at the fastest rate in four years, while U.S. and Asian peers saw activity expand due to stockpiling with global supply chains under strain from the conflict, surveys showed on Monday. The U.S.-Israeli-led conflict, which began in late February, has upended trade, rattled financial markets and raised concerns over global energy and commodity supplies, particularly through the Strait of Hormuz.
  • S&P Global's Eurozone Manufacturing PMI fell to 51.6 in May from April's near four-year high of 52.2, though ahead of a preliminary estimate of 51.4 (a reading above 50.0 indicates growth). Germany's manufacturing sector stalled while French factories contracted for the first time since November. British factories raised their prices at the fastest rate since June 2022 in response to a sharp increase in costs.
  • S. factory output hit its highest level in four years, likely driven by businesses front-loading orders amid rising prices and shortages. The ISM manufacturing PMI rose to 54.0 in May, the highest reading since May 2022, from 52.7 in April, with new orders at a four-month high and supplier delivery times at their longest in four years.
  • In Asia, China's private-sector RatingDog1 General Manufacturing PMI eased to 51.8 in May from 52.2 but beat forecasts, even as an official survey showed factory activity stalling. Japan's PMI came in at 54.5, and South Korea's rose to 54.8, its highest since March 2021, while Vietnam (52.8), Taiwan (56.1) and the Philippines (50.8) all expanded, underscoring a region-wide push to build buffers against conflict-led disruptions.
  • Taken together, the surveys point to building inflationary pressure worldwide, as war-driven energy and raw material costs feed through supply chains into the prices manufacturers charge. The European Central Bank is expected to keep raising rates this year to stop higher energy prices seeping into core inflation, with euro area inflation seen pushing further above its 2% target, and British, Japanese and other producers all reporting some of their steepest input-cost increases in years, a sign that central banks may face renewed difficulty bringing inflation back to target while the conflict persists.

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1RatingDog is an independent private-sector financial data and research provider in China, best known for publishing closely watched monthly Purchasing Managers' Index (PMI) surveys.

(Source: Reuters and NCBCM Research)