Taiwan factory output surges as firms stockpile amidst Middle East conflict

Input costs and selling prices saw amongst their steepest rise in 22 years of survey data.

Taiwan’s manufacturing sector roared ahead in May, recording its strongest expansion in nearly five years — but the headline figures masked a more precarious reality, with much of the growth driven by war-induced stockpiling that analysts cautioned could unwind rapidly once inventories are replenished.

The S&P Global Taiwan Manufacturing PMI rose to 56.1 in May from 55.3 in April, its highest reading since August 2021 and the sixth successive month of improving business conditions. Both output and new orders expanded at rates matching or approaching their fastest since July 2021, fuelled by manufacturers and their clients rushing to build up safety stocks against the backdrop of ongoing conflict in the Middle East.

Output growth was the steepest since July 2021, driven by the twin pressures of rising new work and deliberate efforts to bolster inventory levels. New orders expanded at a sharp and accelerated pace — joint-quickest since July 2021 — with firms attributing the surge to firmer domestic and overseas demand, much of it motivated by clients seeking to insulate themselves against future product shortages and price hikes. Export orders held up well, growing at a solid pace matching April’s rate, with stronger demand reported across key markets including the United States, Europe, Japan and mainland China.

To support higher production and expand their own safety stocks, Taiwanese manufacturers stepped up purchasing activity at the second-sharpest rate since November 2021. Inventories of purchased inputs rose at the second-fastest pace in over four years, while stocks of finished goods also expanded solidly after a slight reduction at the start of the second quarter.

Supply chains, however, came under their most severe strain since March 2022. Delivery times for inputs lengthened substantially, with manufacturers frequently citing shipping delays and product shortages linked to the Middle East conflict. The backlog of outstanding work accumulated at a rate matching the joint-quickest since August 2021, as both rising order volumes and raw material shortages prevented firms from keeping pace with incoming demand.

Despite the pressure on capacity, manufacturers adopted a cautious approach to hiring. Employment was broadly unchanged in May after a slight reduction in April, as firms appeared reluctant to take on permanent staff in an uncertain environment.

Cost pressures remained ferocious. Input price inflation eased only marginally from April’s multi-year record, with the rate of increase amongst the steepest recorded in more than 22 years of data collection. Dearer raw materials — driven in part by the conflict — were the most commonly cited factor. Selling prices were raised again in May to protect margins, with the rate of output price inflation also ranking amongst the sharpest in the survey’s history, even as it remained below the rate of overall cost increases.

Business sentiment improved nonetheless, with confidence in the twelve-month outlook rising to its second-highest level in two years and above the long-run series average. Manufacturers pointed to anticipated growth in customer demand, particularly in electronics and artificial intelligence, as potential drivers of further production gains.

“The survey revealed that much of this growth stems from stockpiling activities by both manufacturers and their clients, as they looked to safeguard against any future product shortages and price rises due to the war in the Middle East,” said Annabel Fiddes, Economics Associate Director at S&P Global Market Intelligence. “This suggests that the current momentum could soon fade once inventories are replenished, especially if cost pressures continue to build. While stock building activities are likely to boost Taiwan’s manufacturing sector performance in the short-term, conditions could weaken in the months ahead as global inflationary pressures persist, and customer budgets come under greater strain.”