Last week, German specialty chemical maker Lanxess AG warned recent declines in sales volumes were more severe than during the 2008/2009 recession. To bludgeon home his point, Chief Executive Officer Matthias Zachert added: “This feels like Lehman II.” Gulp.
Lanxess’s European and US chemical peers, plus a host of companies in other cyclical sectors, face similar problems as elevated customer inventories meet the most rapid interest rate hiking cycle in decades, as well as a stuttering Chinese economy.
Whether you call it the “Great Destocking,” an “inventory recession,” or just a plain old recession, it looks increasingly like the materials and industrial world is either in, or heading for one – an impression reinforced by last week’s bleak US and European manufacturing purchasing managers’ data.
Lanxess expected customer destocking that began last year to be short-lived, but the slump has instead become more pronounced. Demand weakness has spread from construction and electronics to typically resilient consumer-facing segments; the expected rebound in China has not materialised.
European fragrance and vitamins giant DSM-Firmenich AG joined the profit-warning stampede on Wednesday, citing pricing pressure and destocking for a roughly 30 percent year-on-year drop in second-quarter adjusted earnings. Earlier this month, UK polymers producer Victrex Plc warned of a 40 percent decline in sales volume in the April to June quarter compared with last year’s record haul. In the same week, US specialty chemical maker Cabot Corp withdrew guidance for its fiscal year ending in September, blaming a “prolonged destocking cycle” and the weak recovery in China.
The chemicals sector is in an “08/09-style deep recession” and the mood is “atrocious,” Exane analyst Laurent Favre told clients.
Companies in adjacent industries, such as packaging and logistics, have also warned on profits as customers deplete inventories rather than place new orders. Mentions of “destocking” on corporate earnings calls have soared.
The positive spin on these recent profit warnings is they’re just another example of the supply chain “bullwhip effect” that affected retailers and memory-chip manufacturers last year.
Unfortunately, the arrival of that rebound keeps getting pushed back, which increases my concern that this isn’t just inventory overhang but rather a problem with underlying demand. “Having a year and a half of destocking, I’ve never heard of that,” one bemused analyst commented when chemical company Croda International Plc warned on profits earlier this month.
Demand weakness wouldn’t be surprising given central banks remain hellbent on crushing inflation via rate hikes, and businesses may wish to preserve cash by optimising working capital.
Although consumers have so far continued to splurge on travel, music events and socialising, durable goods purchases such as home appliances and electronics have been more muted. Massive government subsides such as those made available by the US Inflation Reduction Act are stoking a capex boom, and automotive and aerospace still look relatively resilient. Even so, capital goods could be the next sector to experience inventory problems once order backlogs are depleted, say analysts at Morgan Stanley.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Views are personal and do not represent the stand of this publication.
Credit: Bloomberg
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