Wary Firms Are 'Destocking'

While many big industrial companies still sound optimistic about 2012, a few, including 3M Co. and DuPont Co., that typically take it on the chin in the early stages of an economic downturn are starting to warn that they're feeling pain. Their customers, mostly other manufacturers, in some cases are "destocking," or cutting their inventories of raw materials, in the face of increased caution about the year ahead.

A much more pronounced bout of destocking heralded the start of the 2008-2009 recession. This time around, big companies say they don't see as dramatic a change in order flow.

After 3M reported a surprise drop in third-quarter earnings Tuesday, its chief executive, George Buckley, said the weaker demand the company has seen in recent weeks is likely to spread. Many of 3M's products are films, adhesives, abrasives and other raw materials used by other manufacturers.

When those companies see slower demand and rush to trim raw-material inventories, "we always see the effect early, typically one to two quarters before our industrial peers," Mr. Buckley told analysts.

Other executives are also sounding more cautious. "Most companies have got a Plan A and a Plan B," the first for continued modest growth and the second for a slump, said Alexander "Sandy" Cutler, CEO of Eaton Corp., a big maker of electrical and hydraulic equipment, in an interview. "They're not sure which one to put into effect."

For now, Mr. Cutler still expects "modest" global economic growth next year as China subdues inflation without suffering any major slowdown in economic output and the U.S. avoids a double-dip recession.

Earlier this week, Eaton reported weakness in Chinese demand for hydraulic equipment used in construction machinery after Chinese authorities put the brakes on building as part of an effort to control inflation. But Eaton said it expected China's construction market to be brisk again by mid-2012, partly because the Chinese government is pushing for more building of low-income housing.

"It's too early to tell whether there's a general destocking going on," said Don Norman, an economist at the Manufacturers Alliance/MAPI, a research group in Arlington, Va. So far, he sees only an effort by some manufacturers to trim inventories to match a slower rate of output growth.

Corporate griping about the economy is sometimes misleading. Blaming a sudden change in the broader economy can be a convenient excuse for companies like 3M that fall short of their own growth targets. But much of the CEO chatter in recent days has been more cautious than it was at the start of this year, when a surge in business investment was making up for weak consumer spending.

3M reported a 1.6% decline in third-quarter earnings, disappointing analysts who generally expected a rise of around 5%. The St. Paul, Minn.-based company, whose products range from automotive and electronic parts to medical supplies and Post-it notes, blamed weaker demand from European car makers and from producers of TVs and factory-automation equipment.

The recent weakness "could be short and temporary, or it could linger into next year," said Inge Thulin, 3M's chief operating officer. "We are prepared for either." 3M still expects modest global growth next year but will step up cost-cutting efforts if the outlook darkens further.

DuPont beat analysts' forecasts with a 23% jump in third-quarter profit, but CEO Ellen Kullman pointed to weak spots.

Making photo-voltaic cells for solar power projects has been one of DuPont's fastest-growing businesses, but Ms. Kullman said it recently became clear that customers had built up larger-than-expected inventories. She said supplies of the light-sensitive film at customers and distributors were more than double DuPont's previous estimate.

DuPont's titanium dioxide business has been a long-time leading indicator of wider industrial activity because of its use in paint and other coatings. DuPont said it "sold every pound we made" in the latest quarter but expected a "pause" in the final three months of the year, citing slowing demand in China.

The company's consumer electronics side, producing liquid-crystal displays, films and packaging for circuitry, was also hit by what Ms. Kullman said was a lack of confidence among customers about near-term demand for some electronic products.

Commercial-truck maker Paccar Inc. said it will reduce build rates in Europe for its DAF brand of trucks by 5% to 10% in December in anticipation of weakening demand. "There's is a lot of uncertainty out there," Chief Executive Mark Pigott said. Likewise, Sweden's Volvo AB, which expects industry-wide truck sales in Europe to fall by 10% in 2012, plans to reduce its truck manufacturing rates in Europe next year.