MRO Magazine

2005 saw only marginal increase in industrial capacity utilization

Ottawa, ON -- Industrial capacity utilization increased only marginally during the last three months of 2005, despi...


Industry

March 13, 2006
By MRO Magazine
MRO Magazine

Ottawa, ON — Industrial capacity utilization increased only marginally during the last three months of 2005, despite strong exports and personal expenditures, Statistics Canada reports in its latest review. Higher international demand provided a significant boost to the durable goods-producing industries, while imports met most of the rise in domestic demand.

Industries finished the year operating at 86.3% of their capacity, compared with 86.1% in the third quarter. This slight gain left the rate 1.3 percentage points below the peak of 87.6% reached in the first quarter of 1988.

The industrial capacity utilization rate is the ratio of an industry’s actual output to its estimated potential output. Rates have been revised back to the first quarter of 2003 to reflect the revised source data.

Foreign demand for durable goods, especially automotive vehicles, contributed greatly to the rise in capacity utilization in the manufacturing sector. Nonetheless, manufacturers do not appear to be planning significant additions to their production capacity in 2006.

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A survey of private and public investment intentions for 2006 showed that manufacturers were planning only a moderate 3.4% increase in investment this year. Virtually all of it will be concentrated in plant construction, leaving investment in machinery and equipment at 2005 levels. The January 2006 Business Conditions Survey found that manufacturers were not expecting to increase production in the first three months of the year.

The oil and gas extraction and construction sectors also helped boost the rate in the fourth quarter, even though part of the increased production in these sectors was absorbed by the increase in production capacity.

Oil and gas companies took advantage of the high oil and natural gas prices, posting large increases in their profits in 2005. Employment remained high in the construction sector, and investments rose by 6.0% in 2005.

The forestry and logging, mining and electric power sectors slowed the rise in the rate from October to December as a result of lower use of their production capacity.

On an annual basis, the average capacity utilization rate for 2005 was 86.1%, slightly up from the 85.8% annual average for 2004. Inflation remained relatively stable despite consistently high rates over the past two years. The Consumer Price Index (excluding the eight volatile components identified by the Bank of Canada) rose 1.7% between January 2005 and January 2006.

DURABLE GOODS STIMULATE THE MANUFACTURING SECTOR
Manufacturers used 84.7% of their production capacity in the fourth quarter, up from 84.1% in the previous quarter. Most durable goods-producing industries reported rising rates, while non-durable goods-producing industries generally posted decreases.

The transportation equipment, machinery, plastic and rubber products and fabricated metal products, manufacturing industries were particularly instrumental in raising the rate in the manufacturing sector. However, the wood products, chemical and food manufacturing industries reduced their capacity utilization in the fourth quarter.

In the transportation equipment industry, capacity use rose from 88.3% to 90.7%. Automobile manufacturers, who increased production by 5.3% to meet growing demand in the United States, were instrumental in the industry’s strong performance.

BRIGHT SPOT WAS WITH MACHINERY MANUFACTURERS

Machinery manufacturers increased their capacity utilization by 4.9 points to 89.2%. This was the highest rate posted by this industry since the fourth quarter of 1997, when it reached 90.2%. Machinery exports increased significantly from October to December 2005 and production rose by 5.5%.

Production of plastic and rubber products rose 4.0% in the fourth quarter, as all of the main components of this group increased their production, except for tire manufacturers. As a result, this industry’s rate hit 91.1%, up from 87.3% in the previous quarter.

After two consecutive quarterly declines, capacity utilization rose in the fabricated metal products manufacturing industry, from 78.5% to 80.9%. A key contributor was the 3.1-percentage-point hike in architectural and structural metals manufacturing.

Wood products manufacturers reported a 2.8-percentage-point drop in capacity utilization to 84.8%. This fourth consecutive quarterly decline set the average annual rate at 89.3% for 2005, down from the 2004 annual average of 92.1%. The decline in output in most key components in this industry, especially sawmills, was central to the fourth-quarter decline in the rate.

Chemical products manufacturers operated at 79.9% of their capacity in the fourth quarter, down from 81.4% the previous quarter. A 3.8% cut in pharmaceutical and medicine production played a key role in the decline.

Food manufacturers used less of their production capacity in the fourth quarter, when their rate fell to 79.8% from 80.8%. A decline in production among the main components in this group was at the root of the 0.4% drop in production in this industry.

MIXED PERFORMANCE IN REMAINING SECTORS

In the forestry and logging sector, capacity utilization plummeted by 13.6 points to 80.9%. Production in this sector fell by 12.4% in the fourth quarter.

In the mining sector, the rate fell from 98.3% to 93.7%, completely cancelling any gains posted in the third quarter. The 11.0% drop in production in metal ore mines contributed significantly to the decline in mining production.

The demand for electricity fell due to the mild weather between October and December, and electric power generation dropped by 0.9% in the fourth quarter. As a result, capacity use in this sector fell from 89.2% to 88.0%.

In the oil and gas extraction sector, the rate rose by 1.7 percentage points to 84.5%. The drop in natural gas production failed to offset higher crude oil production, resulting in a 3.0% increase in production in the sector.

In the construction sector, where production grew by 2.2%, capacity use settled at 88.9%, up from 88.3% the previous quarter.