Manufacturing sector grapples with rising input costs

Late last month the Vietnam Cashew Association said its members only received 50% of the contracted raw cashew from West African suppliers because prices have soared in the region due to poor harvests, prompting some countries there to temporarily halt exports.

Import prices of the nut have shot up from US$1,000-1,050 in February to $1,500-1,550 in May.

Input costs for several industries have also been rising since the beginning of the year, some significantly, according to U.S. data platform Trading Economics.

Food processing firm Orion Food Vina said most of its inputs such as cocoa, sugar, dairy products, and flour have seen their prices skyrocket this year.

For instance, cocoa prices have quadrupled from a year ago, it said.

In the year to date input costs have grown in double digits, it added.

Nguyen Ngoc Luan, founder of the Meet More coffee brand, said it is struggling since coffee prices have doubled from a year ago.

"In previous years coffee prices did not fluctuate so much, and so procuring raw materials was never as challenging as this year."

A survey by American market intelligence firm S&P Global for its purchasing managers' index (PMI) found that in May the number of new orders received by Vietnamese businesses rose for the second month in a row in May.

But meanwhile their input costs grew at the fastest pace since June 2022.

A fourth of firms reported an increase in input costs.

Manufacturing businesses are seeking to cut costs elsewhere, reduce output or hike prices.

In May they increased prices for the first time since February, according to the PMI.

Meet More had to reduce its output by 30-40% amid a slump in exports as high prices have caused buyers to switch to buying from India and Indonesia.

In the domestic market, it is enduring losses in order not to hike prices, Luan said.

"If our prices rise as much as our input costs, consumers will turn away."

Orion Food Vina has adopted green solutions and eco-friendly packaging to reduce costs.

This year it also plans to lower advertising expenses, invest in its distribution network and develop local raw material sources to lessen its reliance on imports.

Many firms have resorted to using less labor. In HCMC, the labor usage index for the manufacturing sector dropped by 5.7% in the first five months from the same period in 2023, according to the municipal Statistics Office.

Employment in the sector declined for a second consecutive month in May, S&P Global said.

According to Andrew Harker, economics director at S&P Global, Vietnam’s PMI data shows mixed signals.

On the positive side, the number of new orders has been rising sharply, indicating growing demand, he said.

But a reduction in the workforce could limit firms’ production capacity while higher input costs could cause a rise in prices, leading to reduced demand, he warned.

Looking at the remainder of 2024, prices of raw materials and fuels are likely to be highly volatile, according to international organizations.

If conflicts in the Middle East escalate, the prices of energy, which is crucial to production and transportation, and other critical goods might increase, the World Bank said in April.

Besides, the strong dollar will continue to keep import prices high until the U.S. central bank provides clear guidance on when it will lower interest rates.

Yun Liu, ASEAN economist at HSBC, said many Southeast Asian currencies, including the Vietnamese dong, are under pressure from the strong dollar.

"Everyone is still waiting for the [U.S.’s] final decision."

HSBC said the interest rates might be cut once this year and possibly three times next year, but possibly not until the end of the third or fourth quarter.

The Economist Intelligence Unit predicted the U.S. would not cut rates until September.