Australia's manufacturing sector is slowing down as surging energy costs start to bite

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After rollicking start to the year, Australia’s manufacturing industry is slowing down fast as soaring energy costs, a higher Australian dollar and closures in the automotive industry create headwinds for the sector.

The latest manufacturing Purchasing Managers Index (PMI) from the Ai Group fell 3.1 points to 51.1 in October in seasonally adjusted terms, leaving it at the lowest level in a year.

Only two months ago the PMI sat at 59.8, the highest level since May 2002.

The PMI measures perceived 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.

So at 51.1, while activity levels still improved over the month, they did so at the slowest pace since October 2016.

Not terrible, but not exactly great, indicating that the sector has lost a lot of momentum in the past few months. Still, the index has now held above 50 for 13 consecutive months, the longest stretch of continuous improvement since 2007.

The Ai Group said the closures in the automotive industry may have contributed to the weak result.

“October marked the end of automotive assembly in Australia, with the closure of the last car assembly lines at Holden in Adelaide and Toyota in Melbourne,” it said. “This was reflected in lower results in the PMI in South Australia.”

However, outside the automotive sector, it described conditions as “relatively buoyant, if a touch slower”.

“Positive sources of local demand for manufacturers included apartment and infrastructure construction; defence, mining and agricultural equipment; renewables and utilities.”

Offsetting those positives, it added that higher input costs for electricity and gas were biting into margins for all manufacturers.

Six of the eight sectors tracked by the group expanded in October, led by the non-metallic minerals sub-sector which held at a record high of 72.2 points. The large food and beverages sector also performed well, helping to offset a slowdown in other areas.

Mirroring the soft headline PMI figure, the activity subindices weren’t overly flash either with three expanding, three contracting and one remaining steady.

“New orders and sales expanded, but at slower rates than in September,” the Ai Group said. “Employment expanded more strongly, while supplier deliveries were stable for a second month.”

However, exports, production and inventories levels all fell during the month.

The weakness in the exports measure may reflect previous strength in the Australian dollar, something that has partially reversed in recent weeks.

Despite the mixed report card, the new orders subindex — at 55.1 — still points to reasonable activity levels in the month ahead.

Source: CoreLogic

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