How have the U.S. Inventory-to-Sales Ratios affected Import Freight Rates

November 17, 2015

U.S. Inventory-to-Sales Ratios historically impact the importing community. As 2010 came to a close, the U.S. Inventory-to-Sales Ratios were at historic lows. The economy was bruised from the recession. Purchasing managers had never seen a recession such as the one the economy had experienced. Forecasting demand was impossible. Purchasing managers held purchasing to a minimum in 2010, but by Christmas, consumer spending began waking up. The combination of historically low inventories pre-Christmas 2010 and an unexpected pickup in spending that same Christmas led to a buying binge by Purchasing Managers in the first quarter of 2011.

In January 2011, I called 75 importers in the Denver area. I remember every importer sounding giddy with unexpected customer orders! They were frantically placing orders with their overseas suppliers. I quickly called my shipping division and alerted them to expect a severe pickup in container bookings at the end of February and well into the 2nd quarter. Not only had the importers been operating with low inventory, but the steamship lines had parked vessels and were “slow steaming”. Demand was going to hit a shipping industry that had laid off equipment and people.

What ensued in 2011 was a series of rate increases as high as $1800.00 per 40′ container from January to November of that year. Not only did rates go up, but space was so tight, in some cases it took 3 weeks to get onto a ship. Thankfully, due to our early sensing of this issue in January, we had not only locked in fixed rates for many of our customers, but we had locked in space, avoiding the rate spikes and delayed shipments.

As we head into the end of 2015, we are experiencing the exact opposite of 2010-2011. We have historically high inventories that grew even more in October. The inventory of mega-ships are adding to capacity in the market, and consumer spending has slowed. Unless we have some Black Swan event, this should keep containerized freight rates at the lower end of the range through at least mid-2016. We should also not experience capacity and lift issues.

Below is this month’s release of the U.S. Inventory-to-Sales Ratios and an analysis by the JOC.

111615-CHART-INVENTORYSALESRATIOS_0

Piles of warehoused goods don’t seem to be shrinking that fast, despite the much ballyhooed destocking of U.S. inventory. Data released by the U.S. Census Bureau Nov. 13 show U.S. total inventories, both total inventories and retail stocks, rose in September from August.

That could mean lower than expected U.S. freight demand, at least for long-haul domestic carriers, in the fourth quarter, though carriers specializing in smaller shipments could make gains, along with local and regional hauling companies that can replenish stores rapidly in small lots.

Slower than expected sales kept inventories high at major retailers in the third quarter.

At Macy’s, inventories rose 4.6 percent year-over-year. “We will need to liquidate this inventory in the fourth quarter so that we can maintain the flow of fresh, new merchandise,” Karen M. Hoguet, the retailer’s CFO, told Wall Street analysts in a conference call transcribed by Seeking Alpha.

Other retailers, such as JC Penney’s, are bolstering inventories to prevent “stock outs” that hurt sales during last year’s holiday season from repeating. “We made a strategic decision to invest in inventory,” Ed Records, Penney’s CFO, told analysts, raising inventory 9.3 percent.

Total U.S. business inventories rose by $5.1 billion in September to $1.82 trillion, a 2.5 percent annualized increase that pushed the U.S. inventory-to-sales ratio up to 1.38, compared with 1.37 in August, the Census Bureau said. Last September the inventory-to-sales ratio was 1.31.

For U.S. retailers, inventories rose 0.8 percent from August and 5.1 percent year-over-year to $584.3 billion, pushing the retail inventory-to-sales ratio up from 1.47 to 1.48. In September 2014, the retail ratio was 1.43. The ratio has ranged between 1.45 and 1.48 throughout this year.

Total U.S. business sales were essentially flat with August in September at $1.32 trillion, down 2.8 percent from September 2014, while retail sales were flat at $477 billion, according to the seasonally adjusted Census figures. In October, retail sales rose 0.1 percent to $447.2 billion.

For truckload and intermodal operators, high inventory levels mean diminished or weaker demand. In September and October of 2014, intermodal container volumes rose 4.5 and 4.9 percent, respectively, according to data from the American Association of Railroads. This year, intermodal volume rose 1.6 percent in September and dropped 1.4 percent in October.

For-hire truck tonnage rose 0.7 percent in September, but American Trucking Associations Chief Economist Bob Costello warned that high level of inventories throughout the supply chain “could have a negative impact on truck freight volumes” for U.S. carriers in the fourth quarter.

High levels of excess inventory have a ripple effect across supply chains and transportation networks. As the need to reorder merchandise or components drops, so does port activity. For example, imports rose only 3 percent in October at Georgia’s port of Savannah, which saw double-digit growth in containerized imports for much of the year. Containerized imports in Los Angeles, the largest U.S. container port, fell 3.3 percent year-over-year in October.

U.S. containerized imports peaked in July at 1,781,373 20-foot-equivalent-unit containers, according to JOC Senior Economist Mario O. Moreno, who last week scaled back his forecast for U.S. containerized imports this year to 5.4 percent from his previous forecast of 6.6 percent.

This year’s inventory bulge can be traced to the West Coast port labor dispute that practically shut down ports from Southern California to Washington state from November through March. U.S. sales-to-inventory ratios jumped significantly during that period, with the retail ratio rising from 1.42 in November to 1.47 in February. The ratio has been stuck between 1.45 and 1.48 since.

The increase in retail inventory in September also may reflect some shift of inventory within supply chains, as goods flow from manufacturers and suppliers in the U.S. through third-party warehouses and wholesalers to retail distribution centers and stores and eventually consumers.

Manufacturing inventories fell $2.4 billion to $645.1 billion, with the manufacturing inventory-to-sales ratio flat at 1.35. Merchant wholesaler inventories rose 0.5 percent to $588.1 billion, and the wholesaler inventory-to-sales ratio in September was flat at 1.31.

It’s going to take some time —  and possibly steep discount sales —  to bring those retail inventory levels down to the point where replenishment stimulates long-haul freight demand. In a story last week, Reuters estimated it would take retailers 1.38 months to clear through inventories with sales at September’s pace. The third-quarter inventory buildup could make fourth-quarter shipping demand seem flatter.

Carriers that handle smaller shipments — such as less-than-truckload carriers — may see some benefit, however, as shippers replenish goods in smaller lots from regional DCs or nearby warehouses. YRC Freight believes cautious shippers are more likely to restock in small bites, rather than big gulps, until consumers open their wallets wider. That could mean a larger number of smaller, palletized shipments moving in fast-cycle replenishment, the company said.

“Demand for LTL, parcel and expedited services are typically strong in Q4, but these services will be even more popular in the two remaining months of 2015,” the carrier said in a statement. “Until U.S. businesses experience sell-through of current inventories, the marketplace will remain in this cycle. Reorder cycles will be abnormal, and the use of LTL should increase.”

For a truckload carrier the trailer may be half empty, but for an LTL operator, it’s half full.

Contact William B. Cassidy at bill.cassidy@ihs.com and follow him on Twitter: @wbcassidy_joc

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