Air conditioner unit (ACU) remainders is an issue of the day

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The climate market players faced with a problem of ACU sales last autumn. Because of the cold summer they happened to be significantly lower as it was expected. As a result the bulk of equipment stayed in Europe and a great deal of ACUs brought through customs remained in the Russian storehouses. These are trading houses which suffered most of all. Their remainders appeared to be practically equal to sales because their key customers are individuals who are very sensitive to weather conditions. At the same time specializing companies were in a better situation. It is worth noting that the bigger a company the more successful it was in sales (see Table 1).

TABLE 1

Distributor	Remainders of sales, %	Remainders of supplies, %
Big-size companies*	38%	32%
Mid-size companies*	59%	45%
Small-size companies*	83%	58%
Trading hoses	99%	59%
Total	57%	43%

* Big-size companies are companies with more than 10,000 Splits sales per year, small-size companies are companies with less than 2,000 Splits sales per year. The rest companies are comprised in mid-size companies group. Sales of 2003 were taken into account.

It is important to define what amount of remainders can be considered as normal. It depends on a number of factors.

First, an optimal amount of ACUs which a company could not sell within a season can be defined by a distributor’s profile. For a trading house it is desirable to close a season with a zero number of remainders that is practically unreal. As for a specializing company, its ideal amount of remainders should be 20-25% of annual sales.

Second, the more sales of certain brands the less percentage share of its remainders should be. For example, a company sells 30,000 Splits of a certain brand with a wide range of models. In this case the remainders in amount of 4,000-5,000 Splits can be considered as normal. However, in case it sells equal amount, say, of four brands, the normal amount of remainders would increase up to 7,000-8,000 Splits.

Third, remainders of small-size companies certainly exceed its sales by 20-25% since they have to store minimum 600-700 or even 1,000-1,500 Splits at best to be successful in sales of a brand with a wide range of models. In case a company supplies only household models its remainders may amount to about 400-500 ACUs.

Even in case a company does its best to sell each of the supplied 1,000 Splits of a certain brand its non-liquid remainders would be about 20-30%. For example, it sold out all 9,000 BTU/h and 18,000 BTU/h models but 7,000 BTU/h, 12,000 BTU/h and 24,000 BTU/h models remained unsold. In this case the company has to complete its range of models to be successful in wholesales. Thus, a small-size specializing company making up to 2,000 Splits sales per year closes a season with about 30-35% and some times even more remainders of total sales.

Fourth, an amount of remainders also depends on the forecasted sales for the next season. That is why it is increasing under the condition of the growing market. In case a company pursues aggressive sale policy its remainders should exceed 20-25% which market players usually consider as normal.

Fifth, introducing equipment of new brands a company increases its remainders amount even in case the market does not grow. The reason is that there are no previous season remainders of these brands and all the equipment unsold within a season increases an amount of company’s remainders.

Thus, remainders should be treated as "excessive". Ideally it is necessary to review separately unsold non-liquid equipment and equipment which can be easily sold early spring. For example, at the end of 2002 season these were 93,000 Splits remained unsold, of which 11,000 were unpopular Akai models most of which stayed in the storehouses till 2004. As a result the market starts new season with about 14,000 non-liquid Splits of the mentioned above Akai brand, as well as Vitek, Scarlett, Bork and other not very profitable OEM brands stuffed into the stores of trading houses.

So, the following Table 2 presents the preliminarily estimations of companies’ remainders.

	Remainders of sales, % (non-liquid equipment is not taken into account)
Seller	2002	2003
Trading houses	18%	84%
Specializing companies	24%	50%
Total	23%	60%

So at the end of 2002 having remainders in amount of about 24% of total sales the specializing companies had a feeling that they are short of climate equipment. Early 2003 a lack of climate equipment in May already proved their anxieties to be true.

In 2003 the remainders of specializing companies were estimated at 46% of total sales. A part of them was evidently "excessive". Thus, the remainders in amount of 33-35% of total sales can be considered as optimal for specializing companies under the condition of the growing market.

Thus, it is clear that these are mainly mid-size and small-size companies that have problems with a great deal of remainders. Big companies are more successful in this respect. Speaking of specializing companies on the whole, their remainders were 1,4-1,5 times as many as required at the beginning of 2004 season.

Trading houses are in a completely different situation. It is unreal to sell all the equipment they supplied so that the remainders were less than 15% of total sales. In any case some of models will go off more rapidly than others. So trading houses may have problems with wholesales.

In 2003 the remainders of the trading houses were close to minimal possible (with no account of non-liquid equipment) due to a lack of climate equipment. But in 2004 they were evidently "excessive". It is worth also taking into account that at the end of season a number of the trading houses were selling equipment at dumping prices and managed to get rid of a good portion of remainders. However, this equipment was not sold to end consumer and stayed in the storehouses of regional trading networks. This means that these sales are of no practical importance for the market capacity.

To say the truth a number of regional dealers also had a great deal of equipment they bought from distributors but could not sell to end consumer by the end of season. If in 2002 a company selling up to 200 Splits closed the season with 7-15 remainders, this year these were 20-30 Splits and more remained unsold and stayed at storehouses of many regional companies making the same sales. Regional trading houses also had a great deal of remainders. One should take into account that a number of regional companies is increasing approximately by 20% every year. That is why an amount of equipment unsold in regions increases even in case the remainders of each company are normal. Thus, this year about 15% of ACUs sold by distributors did not come to end consumer while they were less than 5% the previous season. This tendency is hardly expected to have a dramatic influence on the market. Of course, in case spring is not record cold.

The trading houses’ remainders are also not expected to have a negative influence on the market. In most cases these are LG and SAMSUNG ACUs which prices are close to minimal. Moreover, there are at the least four reasons why experts do not expect the further fall in prices in 2004 season.

First, at the end of 2003 there was an increase in customs duties. As a result a total cost of a baggage van customs duties increased from $17,000 up $25,000 on average. It looks like its further growth can be expected.

Second, after joining the World Trade Organization China has changed the procedure of tax reimbursement to exporting companies. Previously, these companies had 18% reimbursement and now – only 13%. This already led to increase in factory prices.

Third, in 2003 the fact that the price of household Splits compressors increased by $8-10 on average also forced all ACU manufacturers to raise their factory prices.

At last, the fourth reason. The world copper market has a rather uncommon developing behavior now. The London Metal Exchange (LME) has never experienced such a rapid growth in available copper prices – from $1,900 to $2,450 per a ton for the last three months. Such level of copper price was registered last time in the summer of 1997.

According to 19 leading analytics of metallurgy industry interviewed by the Bloomberg agency the further 18% increase in copper prices is expected in 2004 after their 48% growth witnessed by London in 2003. They also expect nickel prices to grow by about 33% and aluminum – by 8%.

According to analysts of the "Barclays Capital", the prices for all metals are expected to increase by 37% in 2004 against 17% registered in 2003.

At the same time ferrous metals prices have also advanced. So the price of a ton of 3 mm hot-rolled sheets increased from $8,600 to $13,500 within a year. And it is expected to continue growing. The directors of the biggest metallurgical works of Russia announced at their recent meeting that steel prices would increase as minimum by 10% from 1 March.

As a result ACU component parts prices have also advanced. Copper pipe price increased by 5%. In March it is expected to grow other 18% as minimum. Copper wire prices are also expected to grow in the same proportion. At the same time conditioner holder and metal (hardware) prices have increased by 20% and 15% respectively for the last few weeks.

Slower growth rates of ACU component parts prices as compared to that ones of raw materials prices can be explained by the fact that ACU works still produce component part using previously stocked raw materials. However, these stocks are limited to some extend.

That is why one can expect a significant increase in prices for ACU component parts including air pipes, as well as in prices for ACUs themselves 90% of which is made from metals. Therefore, the "excessive" remainders stayed nowadays in the storehouses of Russian companies should be considered as a kind of price – damper rather than a factor of possible price collapse.