MRO Magazine

Manufacturing continues to face challenges

Ottawa, ON -- Widespread declines in July 2005 pulled down manufacturing shipments by 1.4% to $50.1 billion, while ...


Industry

September 27, 2005
By MRO Magazine

Ottawa, ON — Widespread declines in July 2005 pulled down manufacturing shipments by 1.4% to $50.1 billion, while new orders weakened by 0.4%, according to Statistics Canada. On the upside, manufacturers added to the backlog of unfilled orders by 2.4%, the result of a recent surge in orders for aircraft and railroad rolling stock.

July’s decrease in shipments, the fourth so far in 2005, was wide ranging as 16 of 21 industries, accounting for 92.5% of total shipments, posted declines. The trend for shipments, negative since November 2004, has been declining at a slow but relatively steady pace.

MANUFACTURERS FACE CHALLENGES

Manufacturers continued to face challenges in 2005 that remained largely beyond their control. The soaring cost of inputs, the heightened value of the Canadian dollar and increased foreign competition have taken a toll on the sector. At 1997 prices, factory shipments dropped 1.3% to $46.2 billion, as manufacturers cut production volumes.

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According to the latest Labour Force Survey, manufacturers continued to shed jobs during the summer. Following a decline of 26,000 in July, manufacturing employment was trimmed by another 8,500 in August. The number of factory jobs has fallen by 4.7% or 108,000 since August 2004.

In other manufacturing-related news, weak export growth in the second quarter of 2005 contributed to the first decline in four quarters of the manufacturing sector’s capacity utilization rate. According to the release of industrial capacity utilization rates, the rate for the manufacturing sector fell 0.4 percentage points to 86.7% in the second quarter. The transportation equipment, chemicals and non-metallic mineral products industries contributed most to the drop.

While the Canadian manufacturing sector faltered in July, Canada’s largest trading partner, the United States, began the summer with a 0.7% boost in shipments to $389.3 billion.

Steep industrial prices for nondurable goods industries, including petroleum and chemical products, were more than enough to offset some weakness in the durable goods sector. Excluding the petroleum and chemical products industries, U.S. shipments edged back 0.2%.

Traditionally, July is the month when some factories seasonally slow production for annual employee vacations, introduce product changes on assembly lines and carry out maintenance shutdowns. July 2005 was no exception, with key industries including motor vehicles and wood products reporting shipment declines that were somewhat larger than in previous years.

Shipments of motor vehicles dropped 4.7% to $5.5 billion in July. Summer shutdowns at various assembly lines, in addition to extended shutdowns at some plants, have contributed to a larger-than-seasonal decline in shipments this year. Compared to one year ago, motor vehicle shipments were down almost 15% in July.

The trend for shipments of motor vehicles has been steadily weakening since the summer of 2004, as some companies attempted to clear their retail inventories with incentive programs and low cost financing.

Paper manufacturers posted shipments of $2.6 billion in July, a decrease of 5.6%. Lower prices for pulp and paper, coupled with maintenance shutdowns contributed to the fifth decrease thus far in 2005. In addition, the price of lumber and other wood products decreased 1.4% in July, also contributing to a 3.6% decline in wood product shipments.

Partly offsetting the overall decline in shipments, production of aerospace products and parts surged 23.7% to $1.3 billion, as manufacturers worked through orders. Recent contracts in the railroad rolling stock industry also contributed to a 29.1% jump in production to $377 million.

MANUFACTURERS’ INVENTORIES ON A STEADY RISE

Big gains in raw materials (+1.3%) and goods-in-process (+1.7%) contributed to a 1.0% jump in total inventories to $65.8 billion in July. This marked the 18th increase in the last 19 months, and the highest level of inventories in four years.

Popular demand for certain Canadian-manufactured models of motor vehicles, coupled with soaring petroleum prices contributed to the sharp rise in raw materials, which stood at $28.6 billion in July. Goods-in-process inventories also added fuel to the overall build-up in total inventories with robust successive increases since May.

Finished product inventories rose 0.4% to $22.2 billion. Finished products have been on an upward trend since the start of 2004.

The strength in the inventory build-up was split between nondurable and durable goods industries. Inventory gains were reported by the petroleum and coal products (+5.9%) and chemical products (+2.4%) industries, in addition to motor vehicles (+9.2%) and aerospace (+2.3%) manufacturing.

Inventory-to-shipment ratio at the highest level since the summer of 2003
July’s sizable drop in shipments was more than enough to send the inventory-to-shipment ratio to the recent high of 1.31 from 1.28 in June. The ratio is now at the highest level since the August 14, 2003, when the electrical blackout in Ontario temporarily impeded factory production during the month, boosting the August 2003 ratio to 1.38.

The inventory-to-shipment ratio, which has been on a gradual rise over the last year, now stands well above the recent low of 1.20 set last summer.

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.

BACKLOG OF UNFILLED ORDERS, ONWARDS AND UPWARDS

In July, unfilled orders rose for the fifth month in a row, led by gains in the transportation equipment industry. The backlog of orders jumped 2.4% to $41.6 billion, the highest level since November 2002 ($44.6 billion).

The railroad rolling stock (+12.5%), aerospace products and parts (+1.5%) and motor vehicle (+13.0%) industries contributed to the rise in orders overall.

In recent months, Canadian manufacturers’ unfilled orders have been more in-sync with those of their US counterparts. US manufacturers of transportation equipment contributed to another healthy 1.0% gain in unfilled orders to $580.5 billion, following strong increases in May (+2.3%) and June (+2.8%).

NEW ORDERS EDGE DOWN

Manufacturers’ new orders fell 0.4% to $51.1 billion in July. Despite a stream of new contracts for the aerospace and railroad rolling stock industries, they were not enough to reverse an overall decline in the level of new orders for various industries, including computers and plastics and rubber products.

REVISIONS

With the July release, all data have been re-benchmarked to the revised 2001 Annual Survey of Manufactures (ASM). Estimates of shipments, inventories and orders have been revised back to January 2000. Although the historical month-to-month movements were preserved, there were minor adjustments made to the levels of the Monthly Survey of Manufacturing (MSM).

These adjustments were due to several factors: the use of new and revised data; the updating of the seasonal adjustment factors; and the re-benchmarking of the MSM to the revised 2000 and 2001 ASM levels.

The average level of adjustment for shipments from reference year 2000 to 2005 was 0.24%.