GLOBAL ECONOMY: Factories face soaring costs as Iran war causes supply shocks

LONDON/TOKYO - The economic shock from the Iran war hit European factories last month, suppressing demand for their goods and pushing up raw material costs at the fastest rate in four years, although their Asian peers saw activity expand due to stockpiling, surveys showed on Monday.

The U.S.-Israeli conflict with Iran, which began in late February, has upended trade, rattled financial markets and raised concerns over global energy supplies, particularly through the Strait of Hormuz, a key route for oil and gas shipments.

Monday's surveys came after the heads of the International Energy Agency, International Monetary Fund, World Bank and World Trade Organization warned the war was straining global energy supplies.

S&P Global's Eurozone Manufacturing PMIINPMI=ECI fell to 51.6 in May from April's near four-year high of 52.2, but ahead of a preliminary estimate of 51.4.

A reading above 50.0 indicates growth.

"Although euro area manufacturers reported an expansion for a fourth successive month in May, the sector is showing signs of struggling under the weight of rising prices and supply disruptions emanating from the war in the Middle East," said Chris Williamson, chief business economist at S&P Global Market Intelligence.

In Germany, Europe's largest economy, the manufacturing sector stalled while French factories saw a contraction for the first time since November.

The European Central Bank will hike its deposit rate this month and at least once more this year to try to stop higher energy prices feeding into core inflation, according to a majority of economists polled by Reuters in May.

Official data due on Tuesday is expected to show inflation rose further above the ECB's 2% target last month.

British factories raised their prices at the fastest rate since June 2022 last month in response to a big increase in costs.

ASIAN BUFFERS

Still, factory activity expanded in most Asian economies.

China's private sector gauge grew for a sixth straight month and South Korea's hit the fastest pace in five years, highlighting a region-wide push to build buffers against potential conflict-led disruptions.

The RatingDog China General Manufacturing PMI, compiled by S&P Global, fell to 51.8 in May from 52.2 in April, but was slightly better than analysts' forecast of 51.6.

That outcome contrasted with an official survey showing factory activity in the world's second-largest economy stalled last month as new orders contracted and input costs kept rising.

Japan's factory activity also expanded with the PMI at 54.5 in May, slowing from April's more than four-year high of 55.1, though firms there reported the sharpest rise in input costs since September 2022 due to higher raw material prices.

South Korea's PMI rose to its highest since March 2021 at 54.8 in May, up from 53.6, again underlining firms' drive to lock in supplies.

In Vietnam, the factory PMI gauge rose to 52.8 from 50.5, while Taiwan's rose to 56.1 from 55.3, surveys showed. The index for the Philippines jumped to 50.8 from 48.3.

(Reporting by Leika KiharaEditing by Shri Navaratnam and Toby Chopra)