South Korea’s factory boom hits 4-year high but stockpiling distorts growth story

Strait of Hormuz disruption and near-record cost inflation expose the fragility beneath the headline surge.

South Korea’s manufacturing sector accelerated sharply in May, posting its strongest performance since early 2021 — though analysts cautioned that a significant portion of the gains reflected panic buying and inventory-building rather than genuine end demand, as the Middle East conflict continued to batter supply chains and drive costs to near-record levels.

The S&P Global South Korea Manufacturing PMI climbed to 54.8 in May from 53.6 in April, its highest reading since March 2021 and well above the long-run average of 50.3. Both output and new orders grew at their fastest rates in around five years, figures that would ordinarily signal a robust and broad-based recovery. In practice, however, manufacturers and their clients were frequently reported to be placing orders ahead of need, building safety stocks in anticipation of further price rises and supply shortfalls attributable to the war.

New orders rose for a sixth consecutive month, with the pace of growth the strongest since June 2021. The gains were concentrated in the domestic market, as clients sought to lock in supplies before conditions worsened further. Export orders, by contrast, fell for the first time since last November, albeit marginally.

Output expanded at the sharpest rate in just over five years to meet the surge in demand. Yet even here, manufacturers acknowledged that production was partly directed towards replenishing inventories rather than fulfilling immediate customer requirements. Stocks of finished goods were nonetheless run down at a sharper rate than in April, as existing holdings were used to satisfy incoming orders while raw material shortages and delivery delays held up fresh replenishment.

Employment grew at the strongest pace since March 2013, rising for a third successive month as firms took on staff to cope with elevated production requirements. Backlogs of work accumulated for a fifth month running, increasing at the sharpest rate since February, as capacity was stretched across the sector.

Supply chains remained under severe strain. Delivery times for inputs lengthened at a pace little changed from April’s recent record, with manufacturers pointing specifically to the effective closure of the Strait of Hormuz as a significant factor disrupting the timely arrival of goods. In response, purchasing activity was stepped up at the fastest rate since July 2021 — well above the long-run survey average — and stocks of purchased inputs rose for the second time in three months.

Cost pressures remained the sector’s most pressing concern. Input price inflation eased only fractionally from April’s survey record, with manufacturers widely attributing elevated costs to dearer oil and raw materials driven by the war, compounded by weakness in the Korean won. Selling prices were raised at a similarly steep pace, with output price inflation remaining amongst the highest in the survey’s history.

Business confidence nonetheless improved, reaching its highest level in three months. Firms expressed hope that price and supply pressures would ease and that exchange rate conditions would stabilise, though analysts noted that the timing of any such recovery remained deeply uncertain.

“Both new orders and production growth hit the highest for around five years, but anecdotal evidence from respondents often linked expansions to stock building efforts as the war in the Middle East continued to cause price increases and disrupt supply conditions,” said Usamah Bhatti, Economist at S&P Global Market Intelligence. “Cost pressures were little-changed from April’s survey record, amid widespread reports of higher raw material prices which were exacerbated by exchange rate weakness. The timing of any recovery appears uncertain.”