Australia's manufacturing sector is looking strong, but there are growing concerns over energy costs

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Activity levels across Australia’s manufacturing sector improved for an eighth consecutive month in June, driven by solid readings on sales, production levels and new orders.

But it wasn’t enough to help boost employment levels which fell after a solid increase in May.

The latest Australia Purchasing Managers Index (PMI) released by the Ai Group came in at 55.0 in June, a small improvement in the 54.8 level of May.

The PMI measures changes in activity levels across Australia’s manufacturing sector from one month to the next. Anything above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

At 55.0, that indicates that activity levels not only improved in June, they did so at a slightly faster pace than May.

Looking through the details, the Ai Group said that activity levels improved in five of the survey’s seven subindices in June.

“New orders strengthened to 59.5 points and sales surged to 60.9 points, indicating healthy demand and positive near term growth,” the group said.

Supplier deliveries (57.4), exports (54.6) and production (57.3) also strengthened from May, helping to offset declines in employment (49.0) and inventory levels (44.3 points).

While a mixed result, the strength in the new orders index is a good sign for activity levels in the months ahead given it is regarded as a lead indicator.

This table from the Ai Group reveals the internal movements in the survey’s subindices in June.

Source: Ai Group

Adding to the positive June report, the Ai Group said the strength was broad-based in nature with activity levels in seven of the eight sub-sectors monitored in the survey expanding from a month earlier in trend terms.

“Expansions continued across all sub-sectors except textiles & clothing,” the group said. “Wood and paper products strengthened further (65.3), as did printing and recorded media (61.2) and machinery and equipment (60.1).”

Activity levels for petroleum, coal and chemical products (54.1), non-metallic mineral products (58.8), food and beverages (56.9) and metal products (59.0) all improved at a slower pace than what was the case in May.

All in all it was a pretty solid report card, underpinned by what manufacturers described as “steadily rising demand”.

“Large construction projects are buoying activity, including in transport, defence and commercial construction, while stronger activity in agriculture and renewable energy is creating other opportunities,” the Ai Group said, citing responses from survey participants.

However, while those factors continued to underpin activity levels, challenges still remain.

“Some manufacturers markets are oversupplied, keeping prices depressed,” said the Ai Group.

“Other challenges noted by manufacturers in June included energy supply and costs, energy policy uncertainty, rising input prices, exchange rate fluctuations, strong international competition and struggling local retail customers.”

The concerns surrounding energy, in particular, are noteworthy given the high energy usage required across the sector.

Looking ahead, markets will await the release of upcoming services and construction PMI reports in the coming days to determine whether the strength in the manufacturing survey will be replicated across larger sectors of the Australian economy.

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