Manufacturers sell off stock as Middle East conflict leads to sharp drop in revenue

New Zealand SME manufacturers have seen a sharp drop in revenue and profits, with diminished inventories as disruption from the Middle East conflict ripples through markets.

The first quarter Manufacturing Health Index indicates small and medium sized (SME) manufactures saw average profit margins drop 31.5 percent, to the lowest point since records began in 2018, when margins averaged 41.3 percent.

The last data compliled by software company Unleashed was based on data from hundreds of New Zealand firms representing a range of manufacturing categories, such as food and beverage, clothing and fashion, and construction.

However, some sectors were doing better than average.

Beverages, electronics, food, energy and industrial machinery sectors saw margins improve over the fourth quarter.

Still, overall sales fell 58 percent on average in the first quarter over the year earlier to $129,653, which was 47 percent down on December quarter sales of $245,758 for in the three months ended December.

Stock-on-hand dropped to an average of $123,626 -- the lowest level since 2018 -- and well below average levels of $261k, as maufacturers ran down inventory and took a cautious approach to making further investments.

While that was considered low, Unleashed head of product Jarrod Adam said manufacturers learned the lessons of Covid and were much better at managing stock levels, with lead times for restocking down to 13 days on average.

"That's ... lower than it's been in a long, long time. It's definitely lower than the 2025 averages," he said.

"What that means is these businesses are able to take this deliberate approach to see what happens.

"They've got confidence that they can reorder and restock when they need to to fulfill orders, and that also just allows them to preserve that cash flow and really be confident with navigating pretty tricky situation."

Adam said many manufacturers were ensuring they were not sitting on excess cash tied up in inventory, as the value of purchase orders were also down across all sectors.

"It's been a really challenging five or six years of trading for these businesses, and the way that they're navigating it and using the stock that they have, and the ability to get this new stock in is really allowing them to hopefully navigate through in a healthy way."

Manufacturers ordered an average of $154,391 in raw materials in the first quarter compared with $207,198 in Q4 2025 and $268,486 the year earlier.

"The challenge for 2026 is uncertainty. Manufacturers must leverage technology to manage rising costs and mitigate the challenges which are out of their control," Adam said.

"In such a volatile environment, those who invest in efficiency, data and adaptability will be best placed to protect margins and compete in an increasingly constrained market."

He said supply chain disruptions as well as energy price increases were eating into material input and eroding margins.

Closer to home, inflation and interest pressures would continue to play a central role.

"The Reserve Bank of New Zealand (RBNZ) has kept the OCR at 2.25 percent as of April but with inflation holding at 3.1 percent, further rate hikes may become necessary if inflationary pressure increases," Adam said.

"This is very much early days and an evolving dynamic, so we'll have to keep our eyes on this data and see how how it evolves."

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