MRO Magazine

Blackout blackened results for Ontario manufacturers in August, gloom pervades most industries

Ottawa, ON -- The lights dimmed on manufacturers in August, 2003, reports Statistics Canada in its latest monthly s...


Industry

October 21, 2003
By MRO Magazine
MRO Magazine

Ottawa, ON — The lights dimmed on manufacturers in August, 2003, reports Statistics Canada in its latest monthly survey of manufacturing, released Oct. 15, 2003. Shipments fell 4.5% to $40.9 billion, the lowest level since December 2001.

The aftermath of the electrical blackout in mid-August, which cloaked much of Ontario in darkness, was one of several factors contributing to the decline.

Shipments in Ontario plunged 7.8% (-$1.8 billion) to $21.2 billion in August. The decrease was notably due to the electrical blackout of Aug. 14, 2003, and its lingering impact. In the week that followed, Ontarians were requested to conserve power because of low energy supplies. Large decreases in shipments were reported by several industries, including motor vehicles, chemical products and food manufacturing.

Ontario led the six provinces reporting lower shipments in August. Excluding the significant influence of Ontario from the Canada total, manufacturing shipments decreased 0.8%. Quebec manufacturers posted a 2.6% drop (-$260.0 million) in August, the first since May. The transportation equipment and primary metals industries contributed to the decrease.

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The Ontario blackout aside, manufacturers continued to cope with the effects of several short-range but significant shocks in recent months. The Canadian dollar began its ascent at the start of the year. Although the dollar has abated somewhat since the spring, it remains high and continues to jeopardize the profit margins of many Canadian manufacturers reliant on the export market.

In August, Canadian beef remained stalled at the border, as the international ban on exports of beef products continued. The ban was first imposed in late May following the discovery of a single case of bovine spongiform encephalopathy (BSE) in Alberta. In early September, the first shipments of some low-risk cuts of boneless beef crossed the border, as the United States agreed to a partial lifting of the ban.

In addition to these obstacles, market uncertainty remains in the motor vehicle industry. Manufacturers continue to partly gauge production and inventory levels through incentive-induced retail sales. Meanwhile, aerospace manufacturers continue to endure a very depressed global marketplace for new aircraft.

FACTORY JOBS DECLINE IN 2003

On the job front, manufacturing employment edged down 15,000 in September, bringing jobs losses so far in 2003 to 77,000 (-3.3%), according to the latest report of the Labour Force Survey. This contrasts with 2002, when manufacturing was the engine of job growth.

SHIPMENTS ALSO DECLINE

In August, 15 of 21 manufacturing industries, accounting for 68% of total shipments, reported decreases. Manufacturers of both durable and non-durable goods posted declines. Shipments of big-ticket durable goods fell 7.1% to $22.8 billion, the sixth decrease thus far in 2003. Non-durable goods shipments fell back 1.1%, wiping out July’s 0.5% gain.

MOTOR VEHICLE MANUFACTURING PLUMMETS

Motor vehicle manufacturers suffered a major setback in August. Shipments plummeted 23.1% to $4.4 billion, following a healthy gain in July (+10.5%). Meanwhile, year-to-date shipments are down 4.7% from the same period of 2002.

August marked the largest monthly shipment decline in motor vehicles, in terms of percent change, since October 1996’s 29.7% decrease, the result of a three-week strike at General Motors. In June and July of 1998, another GM strike in the United States contributed to a two-month decline in shipments of 31%.

In 2003, production activity in the motor vehicle industry has been volatile. The August 14 blackout, which encompassed much of the manufacturing belt of southern Ontario, resulted in numerous plant closures and production slowdowns. Additionally, some assembly plants were already operating at a reduced capacity for inventory-control measures and for re-tooling purposes, as new models will be launched shortly. Meanwhile, the retail side of the auto sector remains laden with incentives, as manufacturers try to entice consumers to their product.

OTHER INDUSTRIES REPORT SHARP DECREASES

Excluding the motor vehicle and parts industries, shipments fell a sizable 1.6% in August. The chemical products industry reported shipments of $3.1 billion, down 5.3% from July. The electricity blackout reduced shipment levels at many Ontario-based plants. In addition, some manufacturers had already curtailed production as a result of high input costs of recent months.

The primary metals and aerospace products and parts industries also reported sharp declines in August. Shipments of primary metals fell 4.8% to $2.6 billion, a 19-month low. Meanwhile, production in the beleaguered aerospace industry decreased 9.6% to $924 million, the lowest level since March.

RISING INDUSTRIAL PRICES

Higher shipments of wood products and petroleum and coal products partly offset the overall decrease in August. The increases were less related to production volumes, and more to rising industrial prices for these industries. Shipments of wood products rose 3.6% to $2.4 billion, the highest level in 2003. A sharp upturn in prices since June, the result of continuing strong demand in the North American housing market, and supply concerns due to the forest fire situation in British Columbia have contributed to a significant rise in the value of shipments in recent months.

Shipments of petroleum and coal products rose 2.5% to $2.9 billion in August, entirely the result of a 5.2% jump in petroleum prices. Shipments are at the highest level since April.

MANUFACTURERS CONTINUE TO REDUCE INVENTORIES

In August, manufacturers sliced another 1.4% from inventories, the fourth consecutive decline. Inventories were $61.5 billion, the lowest level in more than three years. August’s decrease, which was concentrated in finished-products, was largely attributable to manufacturers drawing down their finished-product inventories to meet product demand. As a result of the blackout, many manufacturers curtailed production activity during the month.

Manufacturers reduced finished-product inventories by 2.4% to $19.1 billion in August, the lowest level in one year, and the fourth decrease in a row. Meanwhile, raw material (-0.6%) and goods-in-process (-1.6%) inventories were also scaled down during the month.

The primary contributors to the lower inventories in August were the aerospace products and parts (-2.8%), wood products (-3.3%) and motor vehicles (-7.0%) industries.

August’s slide in shipments drives up the inventory-to-shipment ratio
The inventory-to-shipment ratio jumped to 1.50 in August from July’s recent low (1.45). The steep drop in manufacturing shipments was responsible for the sizable gain in the ratio. August’s level matches that of last May, and is the highest since December 2001 (1.55), a time of stubbornly high inventories relative to weak demand.

The inventory-to-shipment ratio has been inching upwards over the last year. In August 2002, the ratio stood at 1.42.

The finished-product inventory-to-shipment ratio edged up in August to 0.47 from July’s 0.46. August’s significant decline in finished-product inventories was outpaced by the 4.5% drop in shipments, contributing to the rise in the ratio. The ratio has been on an upward trend since mid-2002.

The finished-product inventory-to-shipment ratio is a measure of the time that would be required in order to exhaust finished-products if shipments were to remain at their current level.

REDUCED LEVELS OF UNFILLED ORDERS PERSIST

Cancelled orders contributed to an already weakened state for unfilled orders. In August, manufacturers’ backlog of unfilled orders fell 1.5% to $38.4 billion, the lowest level since October 1997. Unfilled orders are often considered a key determinant of future shipments.

August’s decline marked the twelfth straight decrease in unfilled orders. The longest string of consecutive declines was the 14 reported during the 199
0-1991 recession.

The global slump in the aviation sector and the subsequent lack of new contracts continued to erode the level of unfilled orders overall. The aerospace products and parts industry reported a 3.8% decrease in orders to $11.3 billion in August, marking the twenty-third decline in a row for the beleaguered industry. Excluding the aerospace industry, unfilled orders remained down 0.5%.

Also reporting fewer orders on the books were machinery manufacturers. Unfilled orders fell 1.1% to $6.0 billion, partly offsetting July’s 1.6% gain. Orders for heavy machinery have been slowing since the recent peak of $7.2 billion in March.

NEW ORDERS LOSE GROUND

New orders decreased a sizable 4.9% to $40.3 billion in August, wiping out gains of June (+1.9%) and July (+2.3%). New orders are at their lowest level since December 2001. Widespread decreases were reported in August, including in motor vehicle, machinery and primary metals manufacturing.