Manufacturing industry faces problems due to strong growth and Suez congestion

The Nevi Purchasing Managers’ Index for the Dutch manufacturing industry rose from 59.6 to a record-breaking 64.7 in March 2021. Despite tough lockdowns, this was the biggest-ever increase in new orders placed at home and abroad. There is also a downside to the rapid growth, however: shortages in all kinds of materials and components, such as chipboard, plastic, bicycle parts and computer chips. As a result, manufacturers are encountering delivery problems while purchase prices are skyrocketing too. The congestion in the Suez Canal is not helping the situation either.

Last month, the Netherlands experienced the biggest-ever rise in both purchasing activities and stocks of materials, while the inventory of finished products fell sharply. There was also a record-breaking lengthening of lead times, with the greatest increase in unfinished or pending work since July 2006. Additionally, the employment level rose by the biggest leap since January 2019 and inflation in both purchase prices and sales prices reached the highest peak in a decade, according to Dutch purchasing industry association Nevi.

Chaos at European ports

The Purchasing Managers’ Index is based on data collected up to 23 March this year, which is when the container ship Ever Given ran aground in the Suez Canal. This caused other ships to take a detour around the Cape of Good Hope, which added five to six days to their voyage. “Now that ships can pass through the canal again, they will arrive at the same time as the ships that have sailed around the Cape, which will probably cause chaos in European ports and even more delays,” predicts Albert Jan Swart, Manufacturing Sector Economist at ABN-Amro.

There is no doubt, according to Swart, that this will cause delivery times and purchase prices to increase further in April. “Purchase prices have been rising sharply since the autumn. In February they were just 0.9% lower than in the same month last year, just before the coronavirus crisis started in Europe. The further increase in purchase prices, accelerated by longer delivery times due to the hold-ups in the Suez Canal, means that prices in April will probably exceed the levels from before the coronavirus crisis,” states Swart.

Steep rise in sales prices

In March, the number of new orders placed rose for the eighth consecutive month and was the largest increase since the Nevi survey first began in early 2000. The higher sales levels reflect improved consumer confidence and a larger number of customer projects following an easing of COVID-19 restrictions. The report also notes that customers are holding more stock due to shortages and transport delays.

Additionally, the strong demand has led to a significant increase in sales prices. Swart: “It appears that many businesses are succeeding in passing on the higher purchase costs to their customers, but I suspect that’s not the case for everyone. Higher purchase costs can put pressure on margins, especially for small companies that supply to large customers with a lot of market power because their sales prices are already contractually agreed.”

Even more supply chain disruption

The latest data reveals evidence of even more supply chain disruption in March, with the biggest-ever lengthening of average lead times. These problems are blamed on material shortages at suppliers and on capacity issues, as well as logistics problems caused by the pandemic. “Delivery times have been getting ever-longer at record rates in recent months. The big question is whether businesses will manage to further scale up their production activities in the months ahead,” says Swart.