UK manufacturers are facing a sharp rise in costs as the Russian invasion of Ukraine undermines the progress made towards fixing global supply chains before the conflict broke out, economists have warned.
Factory production jumped in February amid rising domestic demand, fewer raw material shortages and easing global supply chain pressures, according to the latest snapshot from IHS Markit and the Chartered Institute of Procurement and Supply (Cips).
In a sign the worst of the disruption caused by the pandemic could have peaked, companies said the number of delivery delays fell last month to the lowest since November 2020.
However, experts said the conflict in Ukraine – which has triggered a surge in oil and gas prices, as well as renewed supply chain disruption – would hit firms across Europe and drag down industrial production over the coming months.
Mike Thornton, the head of manufacturing at the accountancy firm RSM, said: “As the Russia-Ukraine conflict unfolds, UK manufacturers should brace for some additional headwinds. The surge in energy prices is the most obvious for heavy industry.”
Russia is the world’s largest exporter of natural gas and among the top suppliers of crude oil, commodities such as wheat, and metals including palladium, platinum, gold and aluminium.
“The recent shortages of components, such as microchips, could continue and expand into other areas as sanctions and export restrictions limit supply that feed into the wider supply chain,” Thornton added.
Soaring energy costs and supply chain disruption caused by Covid have driven inflation to the highest levels in three decades. Analysts had hoped the cost-of-living squeeze would fade as pandemic restrictions are removed, although now warn the Russian invasion and western sanctions will add to inflationary pressures.
Although Russia accounts for a relatively small share of the global trade in goods, rising energy prices are expected to further push up factory costs after issues caused by Covid-19.
The manufacturing trade body Make UK said about 3,800 firms exported goods to Russia while 1,200 brought in materials, despite only accounting for 0.8% of total UK goods exports and 2.1% of imports.
As well as driving up costs for energy intensive companies, western sanctions on Russia could hit the availability of materials used in 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 disruptions will be financially unwelcome at a time when many firms are recovering from the impact of the Covid-19 pandemic and the reductions in international trade that followed the UK’s exit from the EU.”
According to the latest snapshot from IHS Markit/Cips, factory output and new orders rose last month, reflecting stronger domestic demand, new customer wins, looser Covid restrictions and improved market conditions.
The purchasing managers’ index, a gauge of manufacturing output, rose to a three-month high of 58.0 in February, up from 57.3 a month earlier. A reading above 50 separates growth from contraction.
Duncan Brock, the group director at Cips, said there had been a welcome boost for manufacturers despite prices for raw materials remaining high and disruption continuing for many firms.
“There were certainly several positives for the UK’s manufacturing sector in February as 64% of manufacturing businesses remained optimistic.” Brock added. “However, this success comes with a health warning as the Ukrainian crisis deepens and the potential for higher commodity prices, disruptions to supply and economic pain must be considered by businesses as they try to build resilience into their supply chains in the coming months.”