Andelsblatt: Why German companies are accumulating stocks – The consequences for the economy

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With its extensive analysis, Handelsblatt shows how German companies are increasing their inventories, thus worsening bottlenecks: Basf recorded 19% more sales to BASF, Lanxess 44% and Salzgitter 60%.

The situation of orders in key industries could not be better. In recent weeks, manufacturers of chemical and metal products have informed their investors with ad hoc announcements that their business results for the first three months of the year will be significantly higher than forecast.

Producers of important commodities such as plastics, steel or adhesives, which are needed in many manufacturing sectors, can hardly be “saved” from orders at this time. Materials are in short supply almost everywhere. Seventy-five percent of manufacturing companies today report “congestion” in intermediate products, the Ifo Institute said on Friday in a recent survey.

Those who can, therefore, are supplied with stocks. The “hamster” phenomenon is particularly strong in the chemical industry: According to industry experts, what happened in the field in April was largely determined by the customers who created their stocks. “The manufacturing industry is full of order books and is trying to secure every available input product,” said Markus Mayer, a chemical expert at Baader Bank. “It wants to be able to deliver and is afraid of even more price increases.”

Whereas in previous years it was considered a “high art” among the heads of financial services to keep stocks as low as possible and thus reduce the freezing of funds, now resilience now takes precedence over efficiency, due to the uncertain global situation. “Many companies have said goodbye to just-in-time and have a just-in-time plus x months,” says Carsten Brzeski, Global Head of Macro at ING. “That means stocks need to be replenished.”

Companies have several reasons for hoarding. On the one hand, in the chemical industry, for example, many customers had counted on a easing of the situation in the last quarter of last year after the price rally for chemicals and plastics and had kept stocks relatively low. But even before the outbreak of war, the opposite happened: According to official statistics, products became 27% more expensive in February.

The situation is similar in the steel industry, where prices have reached a new record after a slight decline at the beginning of the year. While a ton of hot-rolled steel in Europe cost less than 920 euros at the beginning of the year, today it costs more than 1,300 euros. In the construction industry, materials are already in short supply – also because two major suppliers, Russia and Ukraine, will not be available in the near future.

Even the screws are stored

Meanwhile, the construction companies themselves store screws. Robert Friedmann, head of the Würth Group, which supplies craftsmen and the industry with tools, fastening technology and micromaterials such as screws, told Handelsblatt: “Customers are picking up and filling their warehouses. in delivery and, consequently, in an increase in construction and supply prices “.

In the chemical and metal industries, however, this situation brought manufacturers record sales in the first quarter. The leading company in the BASF industry, for example, saw its adjusted profits soar by 21% to 2.8 billion euros and its sales by 19% to 23 billion euros. Evonik earned € 735 million in the first quarter, 10% more than analysts’ average estimates. The steel trader Klöckner & Co. It also recently revised its first-quarter earnings forecasts significantly upwards.

The data show that during the first quarter the demand from the manufacturing industry was uninterruptedly high and many companies from the preliminary stages of the manufacturing industry were practically working at full capacity. Although they also had to buy raw materials and intermediates at much higher prices, they were able to pass on these charges to customers through price increases without any problems.

Industry experts expect that this pricing power will remain with the companies for some time. Due to the rather robust global economy, demand remains high at present and is now driven further by customer inventory. For them, the outlook for the supply and cost of primary products has deteriorated.

Fear of new padlocks in China

The start of the war in Ukraine was not the only event for this. There is no relief in global logistics either. Many companies fear the impact of the new lockdown in Shanghai and the further growth of the coronavirus there and thus China’s ability to deliver products. At this stage, companies want to ensure their productivity.

Storage of chemicals and plastics – if available – is therefore likely to continue for at least two more quarters, according to chemical expert Mayer. “The big question is when the wave of demand will break out again,” he says.

Many chemical companies are currently increasing their own stocks, provided the products are not snatched from their hands, as is still the case with plastics company Covestro. Evonik, for example, prepares for unbalanced agents. “We have created higher stocks as a precautionary measure to prepare for possible supply chain disruptions,” said Ute Wolf, chief financial officer.

How strong the current market situation is in the chemical industry is shown by the still ambitious profit forecasts for 2022. Even after the start of the war and the lockout in China, there was no reason for the manufacturers to make a downward correction.

Economists do not expect the supply chain to ease any time soon – also because new padlocks in China are causing new problems for already tight supply chains.

“Apart from the war in Ukraine, the outlook on China is increasingly worrying,” said Klaus Wohlrabe, head of research at the Ifo Institute. “At the moment there are no signs of substantial relief in the coming months.” And so many companies continue to accumulate despite the uncertain prospects.

An example is the forestry and garden tool maker Stihl, which had already stepped up its storage during the pandemic. Stihl CEO Michael Traub, who has been in office since February, adheres to this tried-and-true method: in the best possible way, “Traub said in his first public appearance a few days ago.

Stihl relies on full stock

Traub wants to alleviate delivery difficulties, which have worsened significantly due to the war and the blockade of Shanghai, with high inventories and the company’s traditionally high vertical production range. “Our warehouses are well stocked, but there are individual components that are bottlenecks,” confirms production and materials manager Martin Schwarz.

One of the backup methods is the replacement supply. Stihl teams are working desperately to find alternative components.

The company had good experience with its method since the beginning of the pandemic: by 2020, then-boss Bertram Kandziora had not reduced production like many competitors, but had filled warehouses to the brim. With this investment, Kandziora had boldly bet that the ability to deliver would become the decisive factor in success – and he was right when demand returned faster and stronger than expected.

Similarly, sensor maker Sick had already expanded its stock last year. “In fact, this is not to the liking of a chief financial officer,” said Markus Vatter, chief financial officer of the industrial equipment maker from Baden-Württemberg. “But we have increased our reserves by a fifth to 475 million euros in 2021.”

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Source: Capital

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