De-stocking worries for industrial goods
Updated: 2011-06-28 07:36
(HK Edition)
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The recent deceleration in the country's retail sales and industrial output has prompted rising concerns over potential de-stocking in many manufacturing sectors and a further slowdown in industrial production in the third quarter.
The concerns also come as inventory investment has been strong since 2010, underpinned by increasing inflation expectations and solid industrial output. After examining the sales and inventory changes in the raw materials, capital goods and consumer goods sectors over the past few years, I have summarized the following findings:
The raw materials sector, which has started the de-stocking process, may shrug off such pressure. Both the steel and copper segments commenced de-stocking in the first quarter of this year. As a result, steel inventory in trader channels has decreased by 23 percent to around 1.4 million tons from its year-to-date high posted in mid February. Meanwhile, copper inventory in both warehouses and the Shanghai Futures Exchange (SHFE) has declined by roughly 50 percent from its year-to-date high posted in early February as a result of decreasing imports and strong copper consumption. The inventory of coal has been decreasing and currently is at a low level of around 5 million tons.
Industrial goods are likely to begin de-stocking in the third quarter of this year. Major industrial goods sectors have been building up inventories since the late first quarter of this year, while their sales growth started to slow from the second quarter. In particular, inventories of transportation equipment, mainly automobiles, and special-purpose equipment including building machinery have accumulated to a historical high over the past three years.
Anticipating a further slowdown in fixed asset investment (FAI) in the third quarter of this year, I expect industrial production in these sectors to continue to decelerate during the period.
Consumer goods sectors have a mixed picture, with varying inventory levels. We see inventory accumulation in the textile and garment sectors starting from the second quarter, despite their strong sales growth of more than 30 percent year-on-year (YoY) in May. Inventory levels in the food and beverage sectors have been low due to robust sales growth of over 32 percent YoY in April. As for the home appliances sector, sales for air conditioners and refrigerators maintained solid growth at 32 percent and 17 percent YoY, respectively, in May and their inventory levels stayed at the lower end of their historical range during the period.
Meanwhile, although LCD TV saw a substantial slowdown in sales, its inventory remained due to production deceleration.
The results of the inventory analysis favor selective upstream and consumer sectors, while slowing revenue growth and a weakening margin is forecast for the industrial goods sector in the third quarter of this year. In the upstream sector, copper, coal and cement producers should be able to sustain their strong revenue growth and strengthen their margins in the second half of this year. In the consumer goods sector, I favor food and beverage producers and leading air-conditioner players.
The author is an associate director and economist at CCB International Securities Ltd. The opinions expressed here are entirely his own.
(HK Edition 06/28/2011 page2)