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Economic downturn forces Western firms to speed up inventory clearance.

TraderKnows
TraderKnows
05-06

Company executives and analysts say that businesses that stockpiled goods last year are finding it increasingly difficult to reduce inventories as borrowing costs rise and inflation dampens consumer demand.

In an economic environment where demand stagnation and tough times may last longer than expected, many U.S. and European businesses are attempting to sell off their increasingly inflated inventories of goods and merchandise.

In recent years, influenced by adverse factors such as the COVID-19 pandemic and the Russia-Ukraine conflict, impacting supply and demand as well as supply chains, businesses ranging from retailers, wholesalers to manufacturers have been stockpiling various goods including beer, DIY tools, chemicals, and clothing. With central banks significantly raising interest rates to curb inflation, factors like rising borrowing costs and declining global demand are forcing businesses to reduce their inventories. However, due to a progressively pessimistic economic outlook and weakening end demand, this process might take longer than anticipated.

Vincent Clerc, CEO of Maersk, expressed being caught off guard by how long it takes for businesses to reduce their inventories. The company had initially expected its clients to reduce their inventories around the middle of the year, but it now seems this might occur in the early part of next year.

Maersk is the world's largest container shipping company, controlling about one-sixth of global container trade. The company has offices in 135 countries or regions, providing customers with export logistics, warehousing, distribution, air freight, sea freight agency, customs brokerage, and towing services in activities including container transportation, logistics, port operations, oil and gas exploration and production.

As China's economic recovery post-pandemic has been below expectations, data indicate that U.S. and European companies may announce their worst quarterly performance in years. More than 30 U.S. and European companies, including HUGO BOSS, Heineken, Maersk, 3M, and Stanley Black & Decker, have complained that de-stocking has impacted their second-quarter performance.

Business executives and analysts say that companies that stockpiled goods or merchandise last year will find it increasingly difficult to reduce their inventories, given rising borrowing costs and inflation curbing consumer demand. Data shows that Eurozone goods inventories reached a record high in August last year, and Eurozone companies only began to gradually reduce their inventories in May this year.

In the U.S., CFRA Research's analysis of Bureau of Labor Statistics data indicated that U.S. businesses' inventories soared by 20% in 2022, marking the largest increase since records began in 1993. Retailers led this trend, with their inventories increasing by a quarter compared to the previous year.

Arun Sundaram, vice president of stock research at CFRA Research, said that the savings accumulated by consumers since the outbreak of the global pandemic are depleting, and he expects these savings may be completely exhausted by the end of this year or early next year. Due to concerns over demand during the U.S. holiday season, many companies are reducing their inventory purchases to avoid further stockpiling.

Parul Jain, a professor of finance and economics at Rutgers University, believes the inventory problem for U.S. companies could worsen. Data shows that the U.S. inventory-to-sales ratio in May was 1.4, higher than the 1.33 ratio from the same period last year. This suggests that retailers, manufacturers, and wholesalers have higher inventories than their sales capacities, and also higher than the previous year’s level.

Guillermo Novo, chairman and CEO of Ashland, stated that hoping to end de-stocking by the end of June was overly optimistic. It is difficult to assess current changes in end demand before the inventory control measures taken by clients are concluded.

However, not all companies are facing inventory pressures. For Coats Group, listed in London, the situation is improving. The company's CEO, Rajiv Sharma, stated that although it is currently impossible to predict the precise timing and scale of the demand recovery, based on client inventory and sales data, the company expects to see a peak in orders before the end of the year.

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The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at one's own responsibility.

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Carrying Charge

Storage charges refer to the total cost incurred for storing and safeguarding a specific quantity of goods, which includes both warehousing costs and the administrative expenses that the business must bear.

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