Given China’s role in the global economy, the country’s fortunes significantly impact materials and equipment pricing worldwide.

The current condition of China’s manufacturing industry is evident in the Purchasing Manager’s Index (PMI).

The diffusion index has failed to reach an expansionary territory since March 2023, as the country emerges from several years of strict restrictions to contain the pandemic.

A weak domestic economy, paired with sluggish growth in the rest of the world, has hindered any significant recovery.

This is well reflected in the inflationary pressures seen across the world right now.

The global price of the industrial metals index is down almost 15% from the peak in February this year, as a tepid recovery in China has not been able to move the needle upwards in terms of pricing.

Energy Price Risk Hinders Expansion in Industrial Capacity

In China, the world’s manufacturing hub, the composite producer price index has seen 10 consecutive months of declines.

With decreasing energy and materials prices, it is providing some welcome cost relief for companies struggling with inflation over the past few years.

And for the time being, the chances of a reignition of the Chinese economy bringing any extraordinary cost pressures look slim in the short term.

In Europe and parts of Asia, energy prices have devastated costs over the past 18 months, with energy-intensive manufacturing industries suffering the most.

This week offered yet another reminder of how uncertain price risks are in the energy market.

Gas prices in Europe shot up by 30% in a single day due to potential labor strikes at four LNG facilities in Australia.

This continued volatility will likely make any new expansion of industrial activity in Europe riskier from an operator’s side, leading to higher inflation risk in the medium to long term for materials and equipment.

On a positive note, global supply chain bottlenecks continue to ease.

The IFO shortage indicator has fallen from 80.2 in March 2022 to 31.9 in June 2023, which, while still above pre-pandemic levels, marks a significant reduction.

Elevated shortages remain prevalent across automotive, machinery manufacturing and electrical equipment sectors.

However, industries such as metals and chemicals are down to more normal levels.

Impact on the Oil and Gas Industry

While cost pressures ease in many areas, it is important to note that many prices are decreasing from record-high levels.

For most oil and gas industry segments, service price levels are 10-15% higher than the pre-pandemic range.

And while there is little doubt that material prices will continue to impact inflation, Rystad Energy expects rising labor costs to be even more impactful over the next few years.

As activity levels pick up in the oil and gas industry, driving up demand for labor, increasing consumer prices around the world also result in higher wages.

Over the next year, Rystad Energy expects inflation in labor-intensive services segments in the O&G industry to outpace the segment for materials by over 7% as wages catch up with activity and inflation.

In the North Sea, wages will increase upwards of 7% toward 2025, keeping service prices elevated over the next couple of years – wage gains that will not be unique to the rest of the oil and gas industry.