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Factories in Asia push increasing costs onto the world’s consumers

Factories in Asia push increasing costs onto the world’s consumers
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First Published: Wed, Jul 02 2008. 12 16 AM IST

Updated: Wed, Jul 02 2008. 12 16 AM IST
Tokyo/ Beijing: Soaring commodity costs are seeping through Asian factories to the world’s consumers, slicing into Japanese manufacturers’ profit and stoking inflation in China and India, surveys showed on Tuesday.
Business confidence is buckling in Asia’s largest export markets. Manufacturing activity shrank in the eurozone in June, according to a similar survey, and will likely contract in the US under the impact of a global credit crisis and record energy and raw materials prices. The rally in commodity prices, driven in part by burgeoning demand from India and China, is feeding inflation across Asia, threatening to push up low labour costs that for a decade helped keep a lid on prices around the world.
With costs rising, Chinese manufacturers were worried that their higher output prices, or the prices at which they sell goods to customers, would hurt demand in export markets as well as at home. Even Japanese manufacturers, who have long struggled to pass on costs, pushed up prices in the last quarter, although not fast enough to offset a rise in costs and to keep profits growing, the Bank of Japan’s tankan corporate survey showed.
“That could indicate more inflationary pressures in the pipeline,” said Magnus Prim, chief Asia currency strategist at SEB in Singapore. “They’re getting squeezed on the profit side and see no alternative but to pass on price increases...”
The tankan’s headline index for big manufacturers’ sentiment dropped to plus 5 from plus 11 in the previous survey in March, signalling their mood has not been darker since 2003. The sales price index for big manufacturers rose 7 points to plus 10, the highest since August 1980, as more companies said they were selling goods at higher prices.
But because input costs are rising even faster, companies expected profits to fall for the first time in seven years and manufacturers responded with the tightest capital spending budgets since 2002.
More companies are paying more to suppliers at a time when European and the US export markets are slowing and Japanese consumers are still skittish after a decade of deflation, the tankan survey showed.
Policymakers elsewhere have tougher choices to make. China and India are both battling their fastest inflation this decade. Chinese firms warned that they were passing rising costs on to consumers, which could hurt domestic demand, and struggling on export sales because of weak global markets, two surveys showed.
The official purchasing managers’ index (PMI), compiled by the China Federation of Logistics and Purchasing, fell to a nearly three-year low of 52.0 in June from 53.3 in May. A reading above 50 signals expansion. The measure for input prices paid by China’s manufacturers rose to its highest since the PMI survey was launched in 2005. Orders in both the domestic market and for export fell to their lowest since January.
A separately published PMI from brokerage CLSA showed that output prices rose at their fastest pace in four years. “The PMI shows a slowdown in orders and production in June. The question is how permanent this is. The businesses questioned suggested that it might be temporary,” said Eric Fishwick, CLSA’s head of economic research.
Slowing foreign demand for its goods has not stopped China exporting inflation, although it remains only a minor factor in the global surge in prices.
The three-month average of growth in Chinese exports to the US has fallen to an annual rate of 3.5% in April, down sharply from 16.9% 12 months ago. However, the annual rise in import prices of Chinese goods was running at 4.31% in April, compared with a decline of 0.3% in April 2007.
In India, purchasing managers were also worried about higher input costs.
The ABN Amro Bank NV PMI was a seasonally adjusted 58.6 in June, its highest reading since February and up from a 10-month low of 57.4 in May. But the survey’s input price index rose to a 19-month high and the rate of increase was the strongest since November 2006.
Saikat Chatterjee in Mumbai, Kevin Yao in Singapore and Zhou Xin in Beijing contributed to this story.
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First Published: Wed, Jul 02 2008. 12 16 AM IST
More Topics: Asia | Japan | Manufacturers | Inflation | India |