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China's inventory mist lifts, slowly
By Stephen Green, Erwin Sanft, Li Wei and Shen Lan |
00:02 UTC+8 April 15, 2013
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IF China's manufacturing sector is to grow in 2013, the inventory problem has to be solved. From construction equipment to sportswear to watches, inventories filled warehouses and shops throughout 2011 to 2012, locking up cash, damaging sentiment and constraining new orders.
The good news is that the inventory fog appears to be fading; since the fourth quarter of 2012, an increasing number of companies are reporting that inventories levels are returning to more "normal" levels.
Of course, some sectors are out in front of the trend, and different companies have dealt with inventories differently. But overall, the situation is improving.
Textiles
Inventory destocking has come a long way, and some of the production lines that were shut down last year have been restarted. Selling prices are keeping pace with cotton price increases, an indication of healthy end-user demand. Margins rebounded strongly in the second half of 2012 and have been maintained at these levels so far in 2013. Mills producing for overseas clothing firms have stocked up on cotton as orders have recovered and cotton prices firm. Our analyst estimates that some three to four production months of cotton is now stocked up, against about two months normally.
Clothing
Domestic sportswear brands are still struggling to bring down inventory at their own warehouses and within sales channels they do not control. International sportswear brands appear to have moved more quickly to solve the inventory problem over 2010 to 2011, though some of them are still working through the issue. Over in luxury, one local company we cover is struggling with some 600 days of inventory turnover at present.
Watches
Luxury-watch sales have been hit since the fourth quarter of 2012 by the central government's anti-corruption campaign, after slower sales in 2012 thanks to a weak economy.
Inventories are rising. One large retailer reported a rise in inventory turnover days in 2012 to 212 from 170. Net margins at the retailers are thin, watches rarely depreciate in value, and watchmakers control discounting; the sector therefore tends to build inventory.
In the first quarter of 2013, watch sales in Hong Kong (where prices are 20-25 percent lower than Chinese mainland) picked up, while the mainland sales continued to disappoint.
Steel
Factories began the year optimistic about end demand, and end-product inventories have grown in anticipation of a strong recovery. However, prices have weakened in recent weeks as end demand has struggled to rise as quickly as factories hoped.
Prices for steel delivery in April are weak, suggesting that the market is not strong. Within the sector, consumer-related steel demand (from home appliances, cars and other manufacturers) has seen orders rise, but infrastructure-related steel demand is weak.
Desperate to improve cash flow, steel producers have reduced raw-material inventories. One major producer we spoke with has cut imported iron ore inventory to 1.2 million tons from 3.2 million tons and is holding only 10 days of coking coal inventory.
Construction equipment
Domestic wheel-loader and other construction equipment companies are still full of machines they cannot shift. One large listed manufacturer has absorbed inventory onto its parent's balance sheet to help the financials, but it still appears that the sector will struggle in 2013.
Power equipment
Wind equipment destocking is complete; inventories have fallen 60 percent from their 2011 peak, and are now lower than 2010 levels. A 30 percent recovery in demand is underway, as grid issues are now resolved and new sites have opened up. Thermal equipment demand is now picking up as China faces power shortages in some regions.
Machinery
Port machinery destocking has largely finished, although global demand for the product still remains weak. In contrast, plastic-moulding-machinery producers are already in restocking mode thanks to the pick-up in both export and domestic demand.
Cement
Cement prices have recovered since September as destocking was completed and some capacity was shut down. First quarter saw some seasonal weakness, but prices should move up for the rest of 2013 due to the lack of new supply in all regions except western and southern China. Manufacturers our analysts visited in recent months report lower levels of inventories in their silos (40 to 50 percent full, against 60 to 70 percent more normally), which suggests that prices can rise as orders come in.
Rail equipment
The big issue facing rail equipment manufacturers, who usually carry little inventory, is the lack of a pick-up in orders.
This is explained by the Ministry of Railways lack of a restructuring plan. It is still unclear how the new corporate shell being established under the Ministry of Finance will operate, and how much of the debt and assets of the Ministry of Railways it will inherit.
Until that is determined, no cash or orders will flow, which means that receivables levels at some manufacturers will remain elevated.
IT hardware
The sector is moving into a restocking phase as the recovery in the US continues and domestic demand begins to improve. Upstream inventory levels declined last year.
Auto
Destocking at many dealerships was completed in the second half of 2012, and sales momentum has picked up in the past three months; the new-car gross margin has therefore seen a significant rebound.
Stephen Green, Erwin Sanft, Li Wei, and Shen Lan are economists of Standard Chartered Bank. The opinions are their own.
The good news is that the inventory fog appears to be fading; since the fourth quarter of 2012, an increasing number of companies are reporting that inventories levels are returning to more "normal" levels.
Of course, some sectors are out in front of the trend, and different companies have dealt with inventories differently. But overall, the situation is improving.
Textiles
Inventory destocking has come a long way, and some of the production lines that were shut down last year have been restarted. Selling prices are keeping pace with cotton price increases, an indication of healthy end-user demand. Margins rebounded strongly in the second half of 2012 and have been maintained at these levels so far in 2013. Mills producing for overseas clothing firms have stocked up on cotton as orders have recovered and cotton prices firm. Our analyst estimates that some three to four production months of cotton is now stocked up, against about two months normally.
Clothing
Domestic sportswear brands are still struggling to bring down inventory at their own warehouses and within sales channels they do not control. International sportswear brands appear to have moved more quickly to solve the inventory problem over 2010 to 2011, though some of them are still working through the issue. Over in luxury, one local company we cover is struggling with some 600 days of inventory turnover at present.
Watches
Luxury-watch sales have been hit since the fourth quarter of 2012 by the central government's anti-corruption campaign, after slower sales in 2012 thanks to a weak economy.
Inventories are rising. One large retailer reported a rise in inventory turnover days in 2012 to 212 from 170. Net margins at the retailers are thin, watches rarely depreciate in value, and watchmakers control discounting; the sector therefore tends to build inventory.
In the first quarter of 2013, watch sales in Hong Kong (where prices are 20-25 percent lower than Chinese mainland) picked up, while the mainland sales continued to disappoint.
Steel
Factories began the year optimistic about end demand, and end-product inventories have grown in anticipation of a strong recovery. However, prices have weakened in recent weeks as end demand has struggled to rise as quickly as factories hoped.
Prices for steel delivery in April are weak, suggesting that the market is not strong. Within the sector, consumer-related steel demand (from home appliances, cars and other manufacturers) has seen orders rise, but infrastructure-related steel demand is weak.
Desperate to improve cash flow, steel producers have reduced raw-material inventories. One major producer we spoke with has cut imported iron ore inventory to 1.2 million tons from 3.2 million tons and is holding only 10 days of coking coal inventory.
Construction equipment
Domestic wheel-loader and other construction equipment companies are still full of machines they cannot shift. One large listed manufacturer has absorbed inventory onto its parent's balance sheet to help the financials, but it still appears that the sector will struggle in 2013.
Power equipment
Wind equipment destocking is complete; inventories have fallen 60 percent from their 2011 peak, and are now lower than 2010 levels. A 30 percent recovery in demand is underway, as grid issues are now resolved and new sites have opened up. Thermal equipment demand is now picking up as China faces power shortages in some regions.
Machinery
Port machinery destocking has largely finished, although global demand for the product still remains weak. In contrast, plastic-moulding-machinery producers are already in restocking mode thanks to the pick-up in both export and domestic demand.
Cement
Cement prices have recovered since September as destocking was completed and some capacity was shut down. First quarter saw some seasonal weakness, but prices should move up for the rest of 2013 due to the lack of new supply in all regions except western and southern China. Manufacturers our analysts visited in recent months report lower levels of inventories in their silos (40 to 50 percent full, against 60 to 70 percent more normally), which suggests that prices can rise as orders come in.
Rail equipment
The big issue facing rail equipment manufacturers, who usually carry little inventory, is the lack of a pick-up in orders.
This is explained by the Ministry of Railways lack of a restructuring plan. It is still unclear how the new corporate shell being established under the Ministry of Finance will operate, and how much of the debt and assets of the Ministry of Railways it will inherit.
Until that is determined, no cash or orders will flow, which means that receivables levels at some manufacturers will remain elevated.
IT hardware
The sector is moving into a restocking phase as the recovery in the US continues and domestic demand begins to improve. Upstream inventory levels declined last year.
Auto
Destocking at many dealerships was completed in the second half of 2012, and sales momentum has picked up in the past three months; the new-car gross margin has therefore seen a significant rebound.
Stephen Green, Erwin Sanft, Li Wei, and Shen Lan are economists of Standard Chartered Bank. The opinions are their own.
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