MRO Magazine

Value of manufacturing shipments dropped in December

Ottawa, ON -- Canadian manufacturers began 2004 with a bang as order books filled and assembly lines hummed. But th...


Industry

February 14, 2005
By MRO Magazine
MRO Magazine

Ottawa, ON — Canadian manufacturers began 2004 with a bang as order books filled and assembly lines hummed. But the tide seemed to turn as the year drew to a close, reports Statistics Canada in its year-end Monthly Survey of Manufacturing.

In December 2004, finished-product inventories climbed to a record high as unfilled orders weakened steadily. Conversely, new orders advanced 0.4% to $49.9 billion, the first increase since July.

Manufacturing shipments slipped 0.2% to $50.1 billion in December; however, the decline was driven by falling petroleum prices. The trend for shipments has been gradually weakening since late summer. In constant dollars, shipments fell back for the third time in four months, decreasing 0.8% to $46.8 billion.

PETROLEUM PRICES FELL SHARPLY

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Beginning in late 2003, industrial prices for petroleum and coal products have risen steadily, reaching record levels by the fall of 2004. These gains came to an abrupt end in November. Prices have dropped just over 10% in the last two months, pulling down total manufacturing shipments in December. Excluding the petroleum and coal products industry, manufacturers posted a modest 0.4% increase in total shipments. Despite the many obstacles currently facing Canadian manufacturing, the sector continues to hold its own as shipments have plateaued over the last few months.

MANUFACTURING BOOMED IN THE FIRST HALF OF 2004

Strong global demand, particularly from the United States and China, fuelled Canadian manufacturing over the first eight months of 2004, with shipments reaching record levels by mid-year. Manufacturers capped off the year reporting shipments of $591.7 billion, up 8.4% compared with 2003. This marked the largest annual increase in shipment activity since the most recent booms of 1999 (+16%) and 2000 (+10%).

Prospects began to turn in the second half of 2004, as the strong value of the Canadian dollar, coupled with high production costs took a toll on the manufacturing sector. The fourth quarter of 2004 ended with a 0.8% drop in shipments. This was the first quarterly decline since the second quarter of 2003, when a sharp drop in petroleum prices, a slowdown in motor vehicle manufacturing, and the start of the mad-cow crisis contributed to a 4.0% decline in manufacturing activity.

A more detailed look at manufacturing shipments by province in 2004 will be released in April.

MANUFACTURERS CONCERNED ABOUT SHORT-TERM PROSPECTS

As reported in the January 2005 Business Conditions Survey, manufacturers anticipate lower production and employment levels in the coming months, resulting from dissatisfaction with the current levels of orders and inventories. Just 13% of manufacturers stated that they would increase production in the next three months, down from 21% in the October survey.

NONDURABLE GOODS MANUFACTURING RECEDES

Just over half (11 of 21) of the manufacturing industries, accounting for 48% of total shipments, reported decreases in December. The decline was concentrated in the petroleum and coal products industry which pulled down shipments of nondurable goods by 1.0% to $21.7 billion. Meanwhile, big-ticket durable goods manufacturers reported the first increase in four months, rising 0.4% to $28.3 billion.

Milder winter temperatures in December, coupled with reports of higher than expected petroleum supplies on hand in the United States, contributed to the substantial weakening of the price of crude oil. As a result, the value of petroleum shipments retreated a significant 6.3% to just over $4.0 billion in December. Although this marked the first decrease in 14 months, shipments remained 33% above levels of one year ago.

A decline in orders for machinery in recent months contributed to a 2.7% drop in shipments to $2.3 billion. Strong demand had fuelled widespread increases in machinery manufacturing during the first half of 2004, but production has slowed since shipments peaked in August ($2.4 billion). The non-metallic mineral products industry also reported a 5.3% drop in shipments to $1.1 billion in December. The booming construction sector contributed to strong gains in the industry earlier in 2004.

Largely offsetting the lower shipments in December, manufacturers of motor vehicles boosted year-end production 2.3% to $6.1 billion. This was only the second increase for motor vehicle manufacturing in the last six months. Higher shipments were also reported by the beverage, paper and railroad rolling stock industries.

SIX PROVINCES REPORTED LOWER SHIPMENTS

New Brunswick (-$105 million), Nova Scotia (-$38 million) and British Columbia (-$36 million) led the six provinces reporting lower shipments in December. Offsetting the declines, Ontario (+$67 million) and Quebec (+$37 million) both had small gains, making up some of the ground lost in November.

FINISHED PRODUCTS INVENTORIES HIT RECORD HIGH

Finished product inventories increased 1.4% in December to $21.6 billion, surpassing the previous record high of June 2001 ($21.4 billion). Although finished products had been on an upward trend through much of 2004, sizeable gains in recent months coupled with a slowdown in production may indicate manufacturers’ difficulty in moving goods. Inventories of finished products rose just over 7.0% during 2004.

Goods-in-process inventories also rose 0.7% to $14 billion in December. Meanwhile, manufacturers reduced their stock of raw materials on hand by 0.6%, the second decrease in three months. Raw materials had been on a steady rise in 2004, but have retracted somewhat in the fourth quarter.

Gains in inventories of chemical products (+2.2%) and motor vehicles (+6.2%) were counterbalanced by decreases in the computer (-2.7%) and petroleum (-3.4%) industries. Total inventories climbed 0.4% to $62.6 billion in December, the first significant rise in two months.

INVENTORY-TO-SHIPMENT RATIO EDGED UP

Weak shipments and a build-up in inventories contributed to December’s rise in the inventory-to-shipment ratio. The ratio shifted up to 1.25 from 1.24 in November. The inventory-to-shipment ratio is a key measure of the time, in months, that would be required in order to exhaust inventories if shipments were to remain at their current level.

NEW ORDERS ROSE IN DECEMBER

New orders rose 0.4% to $49.9 billion, following four consecutive decreases. December’s increase was wide ranging, and included the motor vehicle (+3.7%), fabricated metal products (+5.5%), and aerospace (+15.5%) industries.

BACKLOG OF UNFILLED ORDERS CONTINUED TO SHRINK

Despite December’s boost in new orders, the backlog of unfilled orders ended the year on a weak note. Unfilled orders declined a further 0.4% to $36.5 billion in December, the fifth decrease in a row.

Orders had started 2004 on a healthy upward trend, but manufacturers have since lost most of the ground gained earlier in the year. According to the January 2005 Business Conditions Survey, 24% of manufacturers expressed a lower-than-normal backlog of unfilled orders, compared with 18% in October 2004.

Computer and electronic products (-4.7%) and machinery (-2.5%) manufacturing were among several industries reporting lower unfilled orders in December. The decrease was slightly offset by a build-up in orders for the aerospace products industry (+1.0%).