Tales of meltdown

Posted on 18 Aug 2008 by The Manufacturer

British manufacturers are scaling back production to an extent unseen since December 1998, states the latest CIPS report. But it is not all gloom on the ground. Colin Chinery reports

With manufacturing spiked in a pincer movement of soaring input costs and weakening demand, the CIPS output index tumbled to 43.5 in June – the lowest for 10 years.

Meantime, the input price index surged to a record 82.1 with the output price index increasing for the 35th successive month – 62.0 to 62.6.

“Faced with a relentless onslaught of ever weaker domestic demand, slower global economic growth and record cost inflationary pressure, manufacturers scaled back production, which contracted at the most severe levels in nearly a decade,” said Roy Ayliffe, CIPS’ director of professional practice.

On cue came the news that JCB is to shed 500 manufacturing jobs across its UK sites owing to a significant decline in demand and a resulting 20 per cent decrease in 2008 production forecast. Yet, while acknowledging that life is getting tougher, a less bearish response came from the EEF. “While firms are more wary about the outlook going forward, we have yet to pick up any serious signs of distress beyond those sectors closely linked to construction and the consumer which may have exacerbated these figures,” said chief economist Steve Radley.

And a week later, in a comparatively bullish study, EEF and BDO Stoy Hayward were reporting large parts of UK manufacturing “outperforming the rest of the economy and well prepared to weather the current economic situation,” many with “stronger growth rates than their equivalents in France and Germany.” “The reality,” responded EEF chairman Martin Temple, “is a dynamic, innovative and increasingly high value sector that is competing successfully across the globe.”

This sectoral variation in performance within an overall worsening picture emerged from manufacturers with whom I spoke. “Serious caution,” was the response of world leader Sheffield Forgemasters International Limited (SFIL) director Peter Birtles. “Our order intake remains at a very high level and the forward order commitment is very strong. In the majority of cases our contracts include surcharge mechanisms covering issues like changing exchange rates and energy and raw material costs.”

SFIL is fortunate in its niche, lying well outside retail consumable-type markets, and centred on major capital goods equipment in global power generation projects. “We are playing in the best markets, ones which at the moment would expect to weather a recession situation more than most.”

For the present, says Birtles, his company is undeterred from a “fairly optimistic look at the short-term,” or from trimming capital investment programmes. “But there are serious concerns over the speed and extent of energy and raw materials price hikes.”

Martek Marine of Rotherham is another niche manufacturer operating in a buoyant market, 80 per cent of it overseas, with growth up 60 per cent last year and a further 40 per centplus anticipated for 2008.

“We are doing very, very well,” says managing director Paul Luen. “Yes, we are seeing price rises generally – and more so across our UK suppliers – but we are passing a lot of it on to our customers – around 10 per cent – without any loss of business.”

Martek is trading on strong margins without a great exposure to steel, raw materials and energy price increases – “an absolutely key factor,” admits Luen. “By continuing to innovate, looking to becoming leaner and at ways of increasing the added value of our products, we can mitigate the effects of a recession.”

Luen had just returned from a monthly meeting with a group of 16 manufacturing managing directors, all but one of whom were positive. “We are all forward-looking, and recessionary pressures and how we are going to react to them is an issue we discuss on a monthly basis. Conserving cash is key, but we are also looking at innovatory processes to keep us lean, to steal a march on the competition, and look at new opportunities that may be created by recessionary pressures.”

For Ford UK’s Oliver Rowe, economies of scale seem likely to help balance raw material price increases. “So far prices haven’t been hugely affected and vehicles are increasingly keenly priced.”

The latest CIPS figures give no indication of consumer caution. “For Ford specifically, sales are still – modestly – going up. But for the industry, the June SMMT figures and commentary indicate the monthly market is flattening out.”

Annette Getty, operations director at high precision engineering firm PDS of Nelson, Lancs, says the company’s order book is still strong, with new enquiries from the aerospace sector coming through all the time.

“We are aware, of course, of the wider economic forces and the cost pressures. Our first tier customers are beginning to talk about inventory reduction to ensure they are as ready as they can be for any coming hard times.

“We have had to absorb much of the rising cost and have implemented a lean programme focusing on waste reduction. With the massive shortage in skilled CNC machinists we do not intend to make any lay-offs, and we have invested in new machinery and intend to continue our investment plans.”

But for the Hanson Group – core products; cement, bricks, aggregates and concrete – life is at its most difficult for 30 years. Brick manufacturing, especially hit by the credit crunch, has seen a 30 per cent fall in demand in the last 12 months, with four factories closing so far this year.

“Brick manufacturing is a high energy intensive process, and although we have traded well and got some good prices, we have still been hit by something like a 30 per cent increase in gas prices,” says Hanson’s David Weeks.

“The other issue is our products have a very high weight to value ratio and the transport cost is huge, so the price increases in road fuel have made it much more difficult for us. It’s just a question of riding out this storm and making sure we are in the right shape to tackle the upsurge when it comes.”

This is a reference to the Government-directed three million house building programme. But brick making is highly labour intensive and many kilns are 50 years old – in Weeks’ words, ‘incredibly inefficient’. Hanson is looking at energy reduction and conservation strategies, and, eying the eventual turnaround, pressing on with modernisation, investing £30 million in areas such as robotic brick setting. “There will be huge efficiencies in terms of unit costs,” says Weeks.

Food is another sector under siege, with most manufacturers struggling to see any increase in prices paid for their products.

“The only way they can make ends meet is to look hard at their cost base. But with the main costs of food production being energy and labour their options are very limited,” says Richard Bruce, consultant to the food industry.

“Even highly mechanised plants find it difficult to make any savings without reducing their efficiency.

One of the areas they are looking at is better buying, and a move towards more centralised and co-ordinated purchasing strategies which will probably help in the long-term. But you are talking about fairly marginal savings.”

The other big factor, says Bruce, is the movement of the euro to the pound. “This is hurting, and more and more businesses are starting to look at financial solutions; hedging, both on energy and currency in a way that many of them have never done before.

“The whole way of thinking is changing, but they are fighting against a tide which is trying to keep prices down. And without a resolution I think a lot of food manufacturers will cease to be in existence after perhaps another six to eight months.”

As energy intensive users, the glass, steel, aluminium and chemicals industries, are all facing the full fury of wholesale price increases. “We are still suffering from the higher prices in the UK than on the Continent, and since the beginning of the year that gap has tended to widen. And this is worrying,” says Alan Eastwood, economic advisor to the Chemical Industries Association. “As of July 2008 UK gas prices are around 16 per cent above those in continental Europe, and UK electricity prices around 38 per cent higher than those in Germany on the basis of buying in the forward market for the next 12 months. The irony is that we supposedly have the most liberalised energy market in Europe, and yet it is delivering the highest prices.”

One result is that companies with the ability to move production around plants within Europe are moving out of Britain, and Eastwood speaks of a “slow steady process of attrition and a future of huge uncertainty.

“To your question ‘are we going to absorb these costs?’, the answer is emphatically no – if we can possibly avoid it. There simply isn’t any fat left in the system.”

In the glass sector Pilkington has announced it is pulling out of Doncaster, and David Workman, director general of the manufacturers’ association British Glass, says many of his SME members are reporting that “so horrendous are the cost increases, they are putting the future viability of their businesses into jeopardy.

“One major international company has told me that as a result of the cost increases in the UK this year they are unlikely to hit their profit target, which will in turn affect the money available for investment next year. This is a sign that in terms of international competitiveness we may now be falling backwards.”