Manufacturing industry reports higher capacity utilization since 2011

The manufacturing industry showed, in July, the highest capacity use in over 10 years with inventories at their lowest level in more than two years. The data was revealed by a Fundação Getulio Vargas (FGV) study carried out at Valor’s request based on data from the foundation’s Manufacturing Industry Survey. In the study, the Installed Capacity Utilization Level (NUCI) was 83.40% last month, the highest since May 2011 (83.60%). The level of stocks reached 96.2 points in the survey—the lowest since March 2022 (95.5 points). According to Stefano Pacini, an FGV economist in charge of the surveys, reduced stock on industry average led to accelerated capacity utilization in July.

“That happened in a context of rising demand [for industrial products],” he added. “If the stock level is low, that’s because the shelf is empty. If the shelf is empty, we must produce [more] to fill the shelf. That is unquestionable,” he pointed out.

The FGV data came in line with the most recent official data. Brazilian industry production grew 4.1% in June compared to May, according to the Brazilian Institute of Geography and Statistics (IBGE). The increase was the strongest since July 2020 (9.1%) and interrupted two consecutive months of negative rates, when it accumulated a 1.8% loss. Mr. Pacini pointed out that the performance was also influenced by the rebound effect of the recovery of Rio Grande do Sul’s industry after the losses in May due to heavy rains and floods.

From January to June, the industry rose 2.6% compared to the same period last year, with emphasis on capital goods, with a 5% increase.

Even with high production, high NUCI, and low stocks, the industry was still 14.3% below the record level in May 2011, according to the June results announced by IBGE. Capacity utilization in July was 83.40%, second only to May 2011 (83.60%).

When asked why the industry is still far from record levels, despite the positive data on capacity utilization and stocks, Mr. Pacini pointed out that 2011 and 2024 are years with very different contexts. Thirteen years ago, industry stocks were much lower than in July this year. In May 2011, the level of stocks was at 92.2 points, according to a study by the economist. In 2011, investment allocation was high and the Industrialized Products Tax (IPI) was low, which favored production, he pointed out. Mr. Pacini admitted that the industry may have lost production capacity during the period.

However, the sector’s official data, measured by IBGE, also reinforce another of Mr. Pacini’s conclusions: lower stocks are not due to a shortage of inputs. That occurred in 2021 and 2022, with the global rise in prices and costs, he pointed out. During the period, the onset of the war between Russia and Ukraine, in 2021, led to a disruption in the global input supply chain. “[Low stocks] could mean that companies are unable to produce. A supply shortage has occurred in the past. That’s not what we see now, we have no problems related to [lack of] inputs,” he said.

Mr. Pacini mapped stock levels by segments of the manufacturing industry. Of 17 segments studied in the FGV Survey, 10 had stock levels below 100 points [the equilibrium level]. He cited some sectors that contributed to lower stocks in the total industrial average and, consequently, to greater capacity utilization. Some examples are the machinery and equipment and plastic material industries.

“But I believe the improvement [in reducing stocks] was diffuse. Only a few segments remained at a high level [of stocks, until July],” he said. “Most have improved their stock levels a lot. That was thanks to an improvement in demand. Until September or October last year, the industry was moving sideways, just filling the shelves,” he pointed out. “It was a gradual and very consistent improvement in demand and stock levels,” he said.

Mr. Pacini added that the macroeconomic context until July was key for a more favorable scenario in demand for industrial products. “Macroeconomic factors including improved income, employment levels, and confidence in other segments [played a role] as well. That has greatly contributed to the improvement in demand.”

The FGV economist pointed out that the evolution of the Selic policy interest rate also had an influence. The Central Bank started to cut the Selic policy interest rate in August 2023 and, although the downward cycle was halted this year, the cuts affected the economy. The Selic guides interest rates on loans taken both by industry and consumers to buy industrialized products.

Mr. Pacini says the industry was not understocked in July—that would be below 94 points. The stock level is close to 100 points—an equilibrium standard when the level matches demand.

The signs of a good industry performance were seen not only by FGV. MB Associados projects a 2% increase in industrial production this year, according to chief economist Sergio Vale. In 2023, there was an expansion of only 0.2% over 2022. However, Mr. Vale pointed out that, even with good results, it doesn’t mean that the industry will attempt a sustainable recovery from July onwards. “This sector has been suffering for at least four decades due to structural issues,” he said. “Getting back on track will involve the tax reform we are seeing now, which will play a key role over the next few years in re-starting the industry,” he said. Bradesco estimates a 3% increase in industrial production this year.

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