Corporate efforts to slash
inventories — or "destock" — amid sliding demand have added
significantly to the economic uncertainty facing the industrial sector heading
into 2009.
A roster of big-name manufacturers and industrial
conglomerates, including 3M Co., DuPont Co. and Illinois Tool Works Inc., say
customers have sharply reduced orders in recent weeks, which has caused them to
ratchet back production and contributed to downbeat forecasts for 2009. "As we talk to a lot of customers, they
would much rather be out of inventory at the end of [2008] rather than have
excess inventory around," 3M Chief Financial Officer Patrick Campbell told
analysts and investors during the company's outlook meeting.
Mr. Campbell said 3M's sales plummeted about 17% in November,
and he predicted more of the same for December. 3M held out some optimism that
an estimated 10% slide in fourth-quarter volume will start to slow after the
2009 first quarter, although the company predicted volume next year still will
be off 3% to 7%.
But the speed and breadth of the current inventory
correction makes it unusual. Analysts say it is under way throughout the supply
chain — at manufacturers and distributors alike — and it is being exacerbated
by the slumping global economy and the credit crisis.
"There's a huge focus on managing for cash" in
light of the credit crisis, said Tim Hanley, a Deloitte & Touche LLP vice
chairman who leads the firm's process and industrial products section.
Corporate executives "are taking all the steps they can, and one of those
steps is to manage inventory levels" downward.
Eli Lustgarten, a Longbow Research analyst who follows the manufacturing
sector, said the destocking is likely to reverberate in order rates over the
next several quarters, although he said he thinks the biggest impact is being
felt now, with global manufacturing activity essentially shut down for the time
being. "The biggest uncertainty today is that the [economic] outlook is
clouded [and]) there's no visibility. So nobody is quite sure once you get to
where you want [on inventories] how to bring things back up."
"People are operating for cash all along the value chain," Ellen
J. Kullman, DuPont's president and CEO-designate, told analysts. Customers
"are absolutely taking their inventories down sharply in line with their
sales decline."
Overseas bellwethers, such as Swedish bearing maker SKF AB, have been
echoing much the same sentiment, and the duration of the trend could go a long
way toward determining the ultimate depth of the anticipated slump in the
industrial sector next year.
Source: Sechler, Bob, “Orders Slow As Business Tap Inventory” Wall Street Journal, December 17, 2008.