MRO Magazine

Industrial capacity utilization rates at highest level in nearly five years

Ottawa. ON -- Capacity use by industries edged up to its highest level in nearly five years during the second quart...


Industry

October 3, 2005
By MRO Magazine
MRO Magazine

Ottawa. ON — Capacity use by industries edged up to its highest level in nearly five years during the second quarter of 2005, despite a decline in the big manufacturing sector, reports Statistics Canada.

Industries operated at 86.7% of capacity between April and June, up marginally from 86.5% in the first three months of the year. This slight gain took the rate to its highest point since the fourth quarter of 2000. It was also less than one percentage point below the peak of 87.6% reached in the first quarter of 1988.

An industry’s capacity utilization rate is the ratio of its actual output to its estimated potential output. Rates have been revised back to the first quarter of 2003 to incorporate original data that have been revised.

The second quarter saw contrasting trends. Manufacturers reduced their capacity utilization for the first time in over a year. At the same time, capacity use increased in all other sectors after declining during the first quarter.

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This decline in the manufacturing sector, which accounts for 55% of the entire industrial spectrum, is attributable to weak export growth. This slowdown hit vehicle and automotive parts manufacturers especially hard with exports down 3.1%.

According to the Business Conditions Survey for July 2005, manufacturers were less satisfied with the volume of new orders received and remained worried about the volume of finished product stock. For these reasons, they predicted a slight reduction in production in the third quarter of 2005. In addition, higher oil prices may be a further impediment to performance in the manufacturing sector.

Capacity use rose sharply in the mining and oil and gas extraction sector as a result of a rebound in tar sands oil extraction and vigorous demand in Asia and North America for non-ferrous metals. Strong world demand and concerns about supply helped drive up oil prices on international markets and the profits of oil and gas extraction and refinery companies reached record levels in the second quarter.

Although the industrial sector is operating at high capacity, inflation remained relatively stable. The Consumer Price Index, excluding the eight volatile components identified by the Bank of Canada, rose 1.4% between July 2004 and July 2005.

MANUFACTURING SECTOR FALTERS AFTER FOUR STRAIGHT QUARTERS OF INCREASES

Following four straight quarters of increases, the manufacturing sector’s capacity utilization rate fell 0.4 percentage points to 86.7% in the second quarter. The 21 industrial groups comprising this sector were almost evenly split between those where rates rose and those where they fell.

The biggest contribution to the decline came from the transportation equipment, chemical, non-metallic mineral products and fabricated metal products industries.

Among transportation equipment manufacturers, the rate fell from 89.8% to 87.8%. Weak international demand for automotive products was largely responsible for a 2.1% decline in production in this industry.

Among chemical manufacturers, the rate slipped to 81.0% from 83.7% in the first quarter. A slowdown in production activities for the majority of main components in the group resulted in a 2.6% reduction in chemical production.

After peaking at 91.5% in the first quarter, industrial capacity utilization among manufacturers of non-metallic mineral products tumbled to 87.2%. Production declined for all of the main components of this group.

In the fabricated metal products manufacturing industry, the rate was 85.5%, down 1.7 points from the previous quarter. After posting strong results during four straight quarters, production in this industry declined 1.8% in the second quarter, largely due to a 9.6% drop in production by manufacturers of boilers, tanks and shipping containers.
However, higher capacity utilization in the primary metal, machinery and computer and electronic products manufacturing industries helped moderate the drop in utilization rate in the manufacturing sector.

Among primary metal manufacturers, producers of steel and aluminium products posted significant production increases, and production of primary metal products rose 2.6%. As a result, the rate for this industry climbed from 86.2% to 88.5%.

Machinery manufacturers used more of their production capacity for an eighth consecutive quarter, with the rate climbing from 91.4% to a record 93.2%. Mixed results among the main components of this group translated into a 1.6% increase in production.

For manufacturers of computer and electronic products, the rate rose to 95.5%, up from 93.2% in the previous quarter. This was the highest rate since the third quarter of 2000 when it peaked at 99.7%.

CAPACITY USE UP IN ALL OTHER SECTORS

All other industrial sectors used more of their production capacity in the second quarter of 2005.

The mining and oil and gas extraction sector posted strong results in the second quarter. Solutions to production problems with the treatment of the tar sands produced an increase of 1.3% in production in the oil and gas extraction industry, which reached a use rate of 82.6%, up 1.8 percentage points from the previous quarter. It was the largest increase in the capacity utilization rate in this sector since the second quarter of 1999 when the rate rose 2.0 points.

Capacity utilization also posted robust growth in the mining sector where it rose from 91.5% to 94.8%. Production in non-metallic mineral mines jumped 13.8%, making a major contribution to this sector’s increased production.

In the forestry and logging industry, the use rate climbed 1.1 points to 94.7%, the result of a 1.7% increase in production.

Capacity use rose in the construction sector, climbing from 84.7% to 85.0%. Residential construction, which peaked in June, was a strong contributor to a 0.8% gain in production in this sector.

Production of electricity rose 1.0% in the second quarter. As a result, the capacity utilization rate in the electrical power sector increased from 87.6% to 88.4%.