May 11, 2009
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Spur from stockpile clearance seen muted

May 11, 2009

By Eric Onstad and Helen Massy-Beresford

LONDON/PARIS (Reuters) - Stockpiles of cars, mobile phones and beauty products that piled up during the global downturn are being whittled away but restocking will do little to boost growth as cautious firms adjust to lower inventories.

Global inventory data this week and recent comments by company officials show that a trend by firms to use up stocks instead of churning out new orders is coming to an end.

Low inventories could spark some growth as companies cautiously begin to replenish stocks, but this will be muted while sustained healthy demand is probably distant.

"It's too early to be talking about broad-based production volume uplift because of restocking," said David Arnold, analyst at Credit Suisse, referring to the hard-hit auto sector.

In cosmetics, the pace of destocking was slowing in North America and Europe, but this did not mean that sales were expected to rebound, Chief Executive William Lauder of Estee Lauder told a results briefing on Monday 11 May.

"We've probably we've got another 12 months to go," Lauder said.

"Certainly right now I think what you're seeing is both the consumer as well as retailer with whom we trade are adjusting to a level."

Recent data has indicated that the worst of slashing inventories to cope with weak growth is probably over.

A world index complied by Markit Economics showed raw material inventories at manufacturers ticked higher in April after touching a record low the previous month.

A ratio -- used as a leading indicator -- of stocks levels to new orders is pointing to more rises in manufacturing output after the output figure for April reached a seven-month high.

"What we've been seeing recently at the global level and for most of our national surveys is that this inventory ratio has been improving," said Rob Dobson, senior economist at Markit, adding that the global ratio reached a 17-month high in April.

"We're still talking rates of contraction which have been almost unprecedented, so we're still at a low point, but we might be past the worst."


Heavyweights ranging from mobile phone giant Nokia to confectionery group Cadbury have said recently that destocking is over or will soon come to an end.

"We saw a lot of destocking happening in Q1... I think the destocking impact has, in most markets, now reached the bottom," Nokia Chief Executive Olli-Pekka Kallasvuo said.

Cadbury reported last week underlying sales growth of 2 percent for its first-quarter, but this would have been 4 percent but for the effect of destocking.

This occurred mainly in the United States and Canada and three-quarters of the effect there was due to one distributor cutting its stock levels to 17 days from 30 days to reduce its working capital ahead of its own year-end on January 31.

U.S. household product group Procter & Gamble Co said last week that destocking was expected to continue in the second quarter.

"It's the distributors that are under real cash and bank line pressure... the easiest way for them to improve in the short term is to pull down their inventories," Chief Executive A.G. Lafley said.


In the auto sector, firms made drastic production cuts late last year to battle a costly build-up of stocks of vehicles.

Daimler said on Thursday 7 May its inventory of unsold Mercedes-Benz cars dropped to the lowest level for the month of April in seven years.

France's Renault and PSA Peugeot Citroen both achieved their year-end targets of cutting stocks of unsold vehicles to the same levels they held at the end of 2007 and since then, they have both gone further.

Other sectors are also likely to adjust to lower inventory levels so restocking effects are likely to be modest for now.

"The natural level of inventory holdings will more than likely be reassessed and be lower than it was before," said Dobson. "We may not see a full inventory building process going on until we actually start seeing output and new orders show proper recovery or gains."

German firms still see their inventories as too high, so a boost was not expected from stock building, an economist at a think tank said on Wednesday 6 May.

Many firms are wary after they were forced to take huge writedowns last year as the value of inventories fell.

A report by Moody's Investors Service estimated that 20 companies with the largest inventories were forced to write down 10.6 billion euros (9.5 billion pounds) last year when the value of those stocks slid.

While more such writedowns could be seen this year, oil and chemical firms might post inventory gains rather than losses as prices recover, it added.

(Additional reporting by David Jones; Editing by David Cowell)

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