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Inventory Tug-of-War: Destockers vs. Restockers


Endless back-and-forth sign of an atypical recovery.

CSX Corp (CSX) April 15 conference call: "Destocking activity through will continue through the second quarter at some of the major industrial segments."
Customer destocking

Alcoa (AA) April 7 conference call: "The collapse and demand was due not only to weaker end markets, but also to the significant destocking occurring throughout the supply chain." Customer destocking

In summary, what we're likely experiencing is a restocking in consumer electronics and other industries that have short order-lead times and tightly control their inventory; while at the same time, undergoing a continued destocking by long-cycle industrial companies that arguably started last November.

The markets have traditionally keyed off of short-lead-time industries for signs of recovery (e.g. technology). The problem with this is that any signs of short-order strength or industrial strength are merely a result of temporary inventory restocking or inventory hoarding, ala China - more on that below.

The chart below is the US Inventory to Sales Ratio (Inventory/Sales). You can see the persistent trending down of this ratio dating back 17 years until June 2008. Either companies have universally chosen to keep more inventory on hand since summer of 2008 (insert loud laughter), or we have a huge amount of excess inventory to work off before any meaningful restocking can occur.

Manufacturers' only hope at the moment is that global economic growth will revive itself and chew through said excess inventory. Good luck with that. There's little doubt in my mind that the inventory will be slowly worked off with respect to time rather than a sudden burst of growth.

The wild card in this is the US dollar. If the formerly almighty buck drops low enough to make consumption of these inventories much cheaper for foreigners to import rather than produce domestically, then the unwinding process will be quicker, but not by much. The US Capacity Utilization numbers that came out yesterday at 69.1% (new lows) also reaffirm that demand for new or additional plant and equipment won't be coming to fruition any time soon.

Click to enlarge

Click to enlarge

You can also find similar comments in the April ISM Manufacturers Index (formerly known as the NAPM Index) press release from May 1, where the Chairman of the ISM Committee stated:

"The Customers' Inventories Index indicates that channels are paring inventories to acceptable levels after reporting inventories as 'too high' for 8 consecutive months. The prices manufacturers pay for their goods and services continue to decline; however, copper prices have bottomed and are now starting to rise. This is definitely a good start for the second quarter."
No positions in stocks mentioned.
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