Waiting to Exhale
Taking stock of recent reports, news articles and economic data on myriad inventories in an attempt to interpret maladies across sectors and understand whether the current crisis is ‘A Temporary Matter’ (due apologies to Jhumpa Lahiri)
The 1995 movie “Waiting to Exhale” centres around four female friends and their relations. All of them are “holding their breath” until the day they can feel comfortable in a committed relation with a man, and get on with their lives. Global economy in recent times has similarly been waiting for some sign from the heavens indicating directional change and the first signs of recovery.
Since the unwinding of the US housing market and growing rigor mortis in global financial markets, the US economy registered a 3.8% in the 4th quarter. GDP has four main components: consumption, investment, government spending and net export. The biggest component, consumer spending, has dropped 3.5% in the US, driven by a reluctance to buy automobiles, appliances, furniture and other durable goods arising out of lack of consumer confidence, a moribund job market and lack of credit. Business inventories swelled as consumer appetites waned, suggesting that companies will cut their excess stockpiles and curtail new orders this year, pulling down growth in the months ahead. Interestingly, because a rise in inventory counts as growth in calculating GDP, the overall figure did not decline as much as it otherwise would have. The story in the rest of the world is not too different.
A new report on Indian retail released on 3rd April by KPMG reveals a decline in inventory turnover as declining sales and footfalls lead to piling up of inventory.
Surging inventories have afflicted commodity markets as well. Oil prices slumped as the Energy Information Agency reported crude inventories rose 1.94 million barrels for the week ended March 13, in line with analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos. The 353.3 million barrels of crude is the highest reported level in U.S. inventories since June 29, 2007.
Interestingly, US Census data for March Housing reports a 4.7% increase in new home sales. This has meant that housing inventory (number of units for sale at end of period, divided by number of units sold during a period) has reduced by nearly 5.4%.
Cost optimization and LCC sourcing has extended product supply chains across geographies, resulting in higher lead times, and lower responsiveness. One such example is computer equipment maker Logitech, grappling with higher inventories. Its chief financial officer, Mark Hawkins, told analysts recently, "As the extent of demand deterioration became clear, lead times of some products made it impossible to quickly offset such a rapid deterioration in demand."
The US Census Bureau report on Manufacturing & Trade Inventories and Sales for Jan 2009 highlights the different extents to which entities across the supply chain have got afflicted.
Inventory at manufacturers has increased from 1.23 months to 1.46 months. Merchant wholesalers, caught in the middle have seen nominal off-take, resulting in increased inventory from 1.09 months in Jan’08 to 1.3 months in Jan ’09. Retailers have been able to unwind inventories faster than upstream entities by minimal procurement and large-scale discounts- inventories have only increased from 1.47 months to 1.55 during the same period.
A segment-wise peek at retail sales for above period gives insight into consumer demand (and extent of malaise):
The automotive sector is the worst effected, though sales have picked up in recent times. However, production and inventories at manufacturers will have to wait as retail inventory first unwind.
At the other end of the spectrum, sales at food & beverage stores have increased. Upstream FMCG companies across the world have by and large bucked the downward trend, and India is no different. Apart from stable sales, more responsive supply chains as compared to other sectors have also meant that the amplifying effects up the value chain will be felt to a lesser extent.
Above data buffets the arguments put forth by Eli Goldratt in late February- retail inventories fell more sharply than retail sales as retailers started unwinding inventories fearing a slowdown. Because of this, original equipment manufacturers (OEMs) were experiencing a substantial decrease in orders. The amplifying effect continues further up the value chain to component suppliers.
With gradual flushing out of inventories, the situation should normalize as orders start flowing in, says Eli. Indeed, US Census data released on 2nd April 2009 reports better tidings for manufacturers-
Inventories of manufactured durable goods in February, down two consecutive months, decreased $3.6 billion or 1.1 percent to $336.1 billion. New orders for manufactured durable goods in February, up following six consecutive monthly decreases, increased $5.6 billion or 3.5 percent to $164.7 billion.
Diminishing inventory levels can be seen across Indian industry as well. Recent news articles report that the inventory levels at JSW Steel, for instance, have come down from a peak of one month, in November-December, to two-and-a-half weeks. The company's production is up 40% from December levels.
While taking stock of stock in industry, trade and retail reveals there is light at the end of the tunnel, a recent 2nd April article by Paul Krugman takes stock of another stockpile- China’s $2 trillion dollar stash of foreign assets. Far from comforting China, the high salience of dollar denominations are giving sleepless nights to the mandarins, as any erosion in dollar value will lead to large-scale capital losses (and any sale to unwind dollar positions will only help trigger a dollar fall and capital loss). Ergo, the proposal for a new reserve currency.
Post the recent G-20 summit and its trillion-dollar impetus and the ensuing rally in equity markets, much hope rests on fourth quarter results from India Inc in the days ahead. It remains to be seen whether turnarounds can be expected by April, as Goldratt has predicted, or the crisis continues for much longer, as Krugman argues.
One does hope that the storyline in the days ahead will play out closer to the “Waiting to Exhale” plot, rather than Samuel Beckett’s epochal play “Waiting for Godot”. Monitoring inventory data in the months ahead remains a better alternative to reading tea leaves as the world waits with bated breath for the denouement of the plot.
7th April 2009