Industrial capacity utilization rates closing in on record high
Ottawa, ON -- Industries edged ever closer to a record high use of their production capacity thanks to a rebound in...
Ottawa, ON — Industries edged ever closer to a record high use of their production capacity thanks to a rebound in exports in the third quarter of 2005, Statistics Canada reports.
Industries operated at 86.9% of capacity during the third quarter, up from 86.5% in the second. The gain placed the third-quarter rate only 0.7 percentage points below the record peak of 87.6% 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 1999 to incorporate original data that have been revised.
The rebound in exports, and especially the strong gain in exports of automobile products, fuelled a gain in capacity use in the manufacturing sector. Incentive-induced automotive sales south of the border had a substantial impact on Canadian exports. A 7% jump in automotive exports helped push up total exports by 2.5%.
Manufacturers also benefited from a decline in raw materials prices in the third quarter, according to the Raw Materials Price Index excluding mineral fuels.
In addition, the October 2005 Business Conditions Survey showed that the number of manufacturers planning to increase production in the fourth quarter was slightly higher than those planning cutbacks. However, lack of capacity remains a problem for some manufacturers. Data on fixed assets released in The Daily on November 23, 2005 touched on the issue of capital depletion in the manufacturing sector. It suggested that to enter an investment expansion phase, and thus increase their production capacity, manufacturers would require capital spending of about $50 billion over the next two years.
Forestry and logging and mining sectors, with substantial increases in their rates, have also contributed to the advance in capacity utilization in the third quarter.
Capacity utilization rates have remained high for some time. It has been two years since they have dropped below 85.0%. Despite these high rates, inflation has remained relatively stable. The Consumer Price Index, excluding the eight volatile components as identified by the Bank of Canada, remained unchanged in October from the previous month. Compared with October 2004, the year-over year gain was 1.7%.
EXPORTS DRIVE MANUFACTURING
Use of production capacity among manufacturers edged up from 85.8% in the second quarter to 86.1% in the third. Only nine of 21 major manufacturing groups increased capacity utilization, although these nine accounted for more than half the sector’s total production.
The sector’s strong results are attributable to manufacturers of transportation equipment, chemical products, primary metal products, and plastic and rubber products. The rise in the rate was moderated somewhat by reductions in the capacity use of manufacturers of wood products, fabricated metal products and food.
Among transportation equipment manufacturers, the rate rose to 89.7% from 87.4% in the second quarter. International demand for automobiles strengthened, encouraged by financial incentives. As a result, production of transportation equipment climbed 2.4% between July and September.
After three straight quarters of declining capacity utilization, chemical product manufacturers increased their industrial capacity use from 81.0% to 83.0%. Higher production among most of the main components of this group accounted for the 2.5% gain in output in this industry.
In the primary metals manufacturing industry, the rate increased from 90.3% to 92.5%. This was the highest rate posted by this industry since the fourth quarter of 2003 when it reached 93.3%. Much of the 2.1% increase in production in this industry can be attributed to manufacturers of aluminium and steel.
The capacity utilization rate among manufacturers of plastic and rubber products was up 2.2 percentage points to 91.1%. Mixed results among the main components of this group resulted in a 2.5% increase in production in the third quarter.
Conversely, manufacturers of wood products reduced their use of capacity, as the rate fell from 92.7% to 89.7%. The wood export market has slowed in 2005 and prices for lumber are down sharply. It is expected that US demand will strengthen when rebuilding begins along the hurricane-ravaged Gulf Coast.
In the fabricated metal products manufacturing industry, the rate was 82.1%, down 1.7 percentage points from the previous quarter. Production fell in this industry by 1.2%. Much of the decline was attributable to architectural and structural metals manufacturing, where production fell 3.1%.
Among food manufacturers, the rate was 81.8%, down from 83.1%. This was the largest reduction since the second quarter of 2003, when concerns over mad cow disease resulted in a 1.6-percentage-point decline in the rate to 79.1%.
MIXED RESULTS IN OTHER SECTORS
In the forestry and logging industry, the capacity utilization rate rebounded 7.2 percentage points to 96.0%, driven by a 10.5% increase in production.
Capacity utilization rose from 94.3% to a record high of 98.5% in the mining sector in the third quarter. Mining production increased 7.4% as a result of a 22% rise in support activities for extraction and the volume of iron ore production.
Industrial capacity utilization in the electrical power sector remained virtually unchanged, edging up from 88.3% to 88.4%. Production in the sector rose 0.8%.
In contrast, the oil and gas extraction and construction sectors experienced declines in their rates, as the increase in production capacity exceeded growth in production.
In the oil and gas extraction, the rate fell from 80.9% to 80.2%, while in the construction sector it was 87.0%, down from 87.6%.