Asia factory activity slows amid surging energy costs

Factory activity across Asia weakened in March as a sharp surge in energy prices significantly raised the cost of manufacturing industrial products. The spike in input costs, particularly for fuel-intensive sectors, squeezed margins and disrupted production cycles, forcing many manufacturers to scale back operations. Rising prices of fuel oil, natural gas, and other critical energy inputs translated into higher operating expenses, dampening overall industrial momentum across key Asian economies. Brent crude oil prices have risen by a staggering 64 percent while gas prices moved up by 60 percent in March.

Import-dependent countries in the region faced an acute energy crisis, grappling with constrained availability of fuel oil and industrial gases. The situation was exacerbated by production cuts in the Middle East following Iranian missile strikes and the closure of the Strait of Hormuz, a vital artery for global energy supplies. The resulting supply shock triggered production cuts across several industries, intensifying concerns over supply chain disruptions and weakening manufacturing output in the region. The energy risk is likely to significantly impact Asia’s economy, given its dependence of up to 80 percent on energy imports.

“Factory activity across several Asian economies slowed in March as rising fuel costs and geopolitical tensions stemming from the Iran conflict weighed on business conditions. While China’s manufacturing sector remained in expansion territory, growth moderated amid rising input costs and supply chain disruptions. Countries such as Indonesia, Vietnam, Japan, and Taiwan reported weaker PMI readings, reflecting mounting economic pressure. Higher oil prices, driven by disruptions in the Strait of Hormuz, have increased inflation risks across the region. Meanwhile, a stronger US dollar has further strained emerging Asian currencies, complicating policy responses. South Korea stood out as an exception, with robust factory growth,” said an economist at Kedia Stocks and Commodities Research.

China’s performance
The RatingDog China General Manufacturing PMI fell to 50.8 in March 2026 from 52.1 in February, signalling a slowdown in factory expansion and coming in below the expected 51.6. This reflects softer demand conditions, alongside rising input costs and ongoing supply chain constraints. The data indicates that while activity remains in expansion territory, underlying momentum is weakening.

Output and new orders continued to rise, though at a slower pace, with production expanding for the fourth consecutive month. Backlogs increased as demand outpaced production, while employment rose for the third month, marking the longest stretch of job creation since mid-2021. Buying activity also continued to expand, lifting input stocks slightly, though finished goods inventories contracted marginally. Supplier delivery times lengthened to the greatest extent since December 2022.

Regional challenges
Across the broader region, manufacturing conditions deteriorated in several key economies. Japan’s factory activity slowed, with its PMI declining to 51.6 amid a sharp rise in input prices, marking the fastest increase since August 2024. Similarly, Indonesia and Vietnam recorded notable declines in PMI readings, highlighting the widespread impact of higher fuel costs and global uncertainty on industrial output.

The Bank of Japan’s sentiment index for large manufacturers edged up to 17 in the January–March 2026 quarter, beating market estimates of 16 and marking the highest level since October–December 2021. The uptick suggests that Middle East conflict risks have yet to dent business morale. Confidence strengthened across firms producing pulp (44 versus 40 in the October–December 2025 quarter), electrical machinery (22 versus 21), processed metals (16 versus 10), general-purpose machinery (34 versus 27), production machinery (26 versus 16), motor vehicles (13 versus 9), and business-oriented machinery (15 versus 9).

The economic strain is particularly pronounced in Asia, which relies heavily on oil imports routed through the Strait of Hormuz. With nearly 80 percent of shipments passing through this corridor, supply disruptions have amplified inflation risks and increased production costs for manufacturers. Additionally, a strengthening US dollar has exerted downward pressure on regional currencies, further complicating monetary policy responses.

In contrast, South Korea emerged as a bright spot, with factory activity expanding at its fastest pace in over four years, supported by strong semiconductor demand and new product cycles. Rising energy costs and geopolitical tensions are dampening Asia’s manufacturing momentum, with inflation risks mounting, although pockets of resilience, such as South Korea, highlight uneven regional economic performance. The Middle East conflict could trigger a wide spectrum of impacts on Indian corporates, ranging from logistics bottlenecks and fuel shortages to inflationary pressures and capital reallocation.

Wood Mackenzie’s findings
A glimmer of hope emerged in week four of the war, with reports of talks between the US and Iran initially pushing Brent below US$ 100 a barrel. A Wood Mackenzie analysis suggests that a scenario in which Brent averages US$ 125 a barrel through 2026 would lead to a global recession, a view broadly echoed this week by BlackRock CEO Larry Fink. No economy is immune to the fallout from sustained high crude prices, but some are affected more than others. The major oil-importing countries of Asia are among those feeling the pain most acutely.

The region’s governments have rapidly deployed an unprecedented array of measures to cushion the hardest-hit sectors and consumers. The Indian government announced export incentives to support corporates, along with lower excise duty on diesel for industrial users. Other countries in Asia have also introduced measures to protect local manufacturers.

However, such interventions come at a staggering cost and, if oil prices remain elevated, some Asian governments could soon hit a fiscal breaking point. Asia’s dependence on Middle Eastern oil is a long-established structural reality. Before the war, around 80 percent of the crude that passed through the Strait of Hormuz was delivered to Asian refineries.

Changing strategy
Japan and South Korea sourced more than 90 percent and 70 percent, respectively, of their oil imports from the Gulf before the outbreak of the war. China and India, the world’s two largest oil importers, have actively diversified their supplies to include Russia and the US, but still depend on the Middle East for around half of their crude supplies.

Developing economies across Southeast and South Asia, where economic growth typically depends on manufacturing and exports, are particularly vulnerable. Most have limited foreign currency reserves to pay for soaring oil import bills. In 2026, the “war premium” is no longer a theoretical risk but is expected to hit national balance sheets hard.

DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com