Ottawa, ON — Canadian industries reduced their use of production capacity in the fourth quarter, with the utilization rate falling to its lowest level in more than 10 years. The manufacturing sector, which continues to be hard hit by the appreciation of the Canadian dollar, was a major factor in this decline, reports Statistics Canada in its latest survey of industrial capacity utilization rates.
Industries operated at 81.8% of their capacity, down from 83.4% in the third quarter. The current rate is well below the most recent high of 87.1% reached in the fourth quarter of 2000.
The industrial capacity utilization rate for a sector of activity is the ratio of its actual output to its estimated potential output. For this release, rates have been revised back to the first quarter of 2005 to reflect the revised source data.
The manufacturing sector, already affected by the negative impact of the soaring Canadian dollar and the high world petroleum prices, which reached a record in December, also suffered a cut in production in the fourth quarter due to many plant closures for retooling and inventory in the automobile assembly plants.
Manufacturers appeared worried about the outlook for production for the first quarter of 2008 and, according to the January 2008 Business Conditions Survey, expect to reduce production in the first three months of 2008.
The rate also fell in the mining, oil and gas extraction, and construction sectors. Growth in the rate in the forestry and logging and electrical power sectors partially offset the slide in the overall rate in the fourth quarter.
THE ANNUAL AVERAGE RATE DECLINES FOR A THIRD CONSECUTIVE YEAR
The annual average rate in 2007 declined for a third consecutive year to 83.3%, down from 84.1% in 2006. This was the lowest level since 1996 when the rate was 82.0%. In 1996, the manufacturing sector also experienced difficulties due to weak exports and a strike at a US brake plant, which had a negative impact on automobile assembly plants in Canada.
In 2007, the annual average rate in the manufacturing sector was 82.2% compared with 82.8% in 2006. The strong results posted in the first six months of 2007 were insufficient to offset production cutbacks in the second half of the year due to the decline in international demand and plant closures in the automobile manufacturing sector.
Weak production growth in Canadian industries, combined with increased production capacity resulting from investments by businesses in facilities and equipment, drove the overall rate down in 2007. The oil and gas extraction sector provided a strong boost to the growth in production capacity. The Capital and Repair Expenditures Survey predicts increased investment in this sector in 2008 to meet world demand, which is sustaining the high prices of natural resources and raw materials. On the other hand, the forestry and manufacturing sectors reduced their production capacity in 2007.
SHARP DROP IN THE RATE IN THE MANUFACTURING SECTOR
Manufacturers reduced their production capacity utilization for a second straight quarter, operating at 80.3%, down from 82.4% in the third quarter. Although the decline was due mainly to a slowdown in two major sectors (transportation equipment and wood products manufacturing) the vast majority of the other industry groups also experienced reductions. Of the 21 major groups in the manufacturing sector, 18 reduced their industrial capacity utilization.
In the transportation equipment manufacturing sector, the rate fell 3.0 points to 83.4% in the fourth quarter, as a result of extended plant closures for retooling and inventory control in the automobile sector.
Among wood products manufacturers, capacity utilization, which has been sliding steadily since the second quarter of 2006, fell from 76.2% to 71.0% in the fourth quarter. The major slowdown in residential construction in the United States was a key factor in this decline. The annual average rate of 77.3% for 2007 was 14.8 points below the record of 92.1% posted for 2004.
Plastic and rubber products manufacturers saw their capacity utilization rate fall from 77.6% to 73.4%. This was the largest decline in the rate since the second quarter of 1995 when it dropped 6.3 points. The production of plastic pieces for motor vehicles, which fell 7.6% due to plant closures in the automobile sector, was a major cause of the decline in plastic and rubber production.
In the food manufacturing industry, the rate slipped 1.4 points to 79.0% in the fourth quarter. Most of the main components in this group have cut their production levels. Despite the reduction in the rate in the fourth quarter, the annual average rate for 2007 remained unchanged from the previous year at 80.1%.
After posting good results in the first six months of 2007, machinery manufacturers reduced their industrial capacity utilization for a second straight quarter between October and December. The rate fell from 83.8% to 82.2%. Production by most of the main components of this group contracted in the fourth quarter in response to the cooling of foreign demand.
Among petroleum and coal product manufacturers, production declined 5.3% in the fourth quarter due mainly to an interruption in production by refineries for maintenance in October. Capacity utilization dropped sharply, falling 6.5 points to 78.8%. The annual average rate for 2007, however, was 84.6%, up from the annual average rate of 83.2% for 2006.
The rate of the paper product manufacturing industry slipped 1.6 points in the fourth quarter to 86.6%, its lowest level since the fourth quarter of 2003 when the rate was 86.3%. The cooling of international demand for newsprint products strongly contributed to this situation. Capacity utilization in the paper manufacturing industry has remained relatively high, despite a steady slowdown in production in the past three years. Plant closures have reduced production capacity and kept the rate above 85.0%.
MIXED RESULTS IN OTHER SECTORS
In the oil and gas extraction sector, the rate dropped 3.4 points in the fourth quarter to 80.2%, with production activities slowing 4.1% during the last three months of 2007.
The mining sector also experienced a slowdown, although to a lesser degree. The upswing in production for non-metal mines was unable to offset the decline in production of metal mines. As a result, the rate decreased 0.3 points to 77.2%
In the construction sector, which accounts for 21.0% of total production, growth in production capacity remained higher than production output and capacity utilization posted its fourth straight quarterly decrease. The rate fell from 86.5% to 85.5%.
In the forestry and logging sector, capacity utilization climbed 2.4 points to 79.6%. Production in this sector increased 1.2% in the fourth quarter after declining sharply in the previous two quarters. The annual average rate for 2007 was 80.9%. This represents a slide of 9.5 points from the peak of 90.4% posted in 2004.
Production of electricity rose 1.8% in the fourth quarter due to earlier than usual winter weather. The rate for the electrical power sector was 88.3%, up from 87.0% in the previous quarter.