MRO Magazine

17 of 22 manufacturing industries post production gains in March, but tough times may be ahead

Ottawa, ON -- Manufacturing activity picked up in March 2006, with wide-ranging gains led by a surge in aerospace p...


Industry

May 16, 2006
By MRO Magazine
MRO Magazine

Ottawa, ON — Manufacturing activity picked up in March 2006, with wide-ranging gains led by a surge in aerospace production and a rebound in shipments of petroleum products, according to the latest Monthly Survey of Manufacturing from Statistics Canada. However, StatCan’s separate business conditions survey indicates tough times may be ahead.

Following a rather lacklustre start to the year, shipments rose 1.6% to $51.4 billion in March, the first increase so far in 2006. Meanwhile, the trend for shipments remained stable, although it has weakened in recent months.

March’s advance by manufacturers was extensive as 17 of the 21 industries, accounting for 92% of total shipments, posted increases. Although widespread, much of the strength was concentrated in the aerospace and price-driven petroleum industries. Excluding these industries, shipments rose a more moderate 0.3%.

WEAK START TO THE YEAR PARTLY QUELLED IN MARCH

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The first quarter of 2006 began on a tenuous note as manufacturers cut shipment activity in both January (-0.4%) and February (-2.3%). A decline in petroleum prices, plus a marked slowdown in the production of motor vehicles largely contributed to the year’s slow start. First quarter shipments were up just 2.2% compared to the first three months of 2005.

A big boost in production of aerospace products and parts contributed to a 1.4% upturn in shipments by the durable goods industries to $29.2 billion, the first increase since December.

Aerospace manufacturers led all industries with a 35.7% jump in production to $1.4 billion. Global demand for domestic and military-related aerospace products and parts has contributed to the revival of the industry over the last year. Production so far in 2006 has risen 4.0% compared to the first three months of last year.

Continuing unrest in key oil-exporting countries, coupled with rising demand and constraints in production capacity, contributed to March’s 5.4% rebound in the industrial price of petroleum and coal products. As a result, shipments of petroleum products soared 7.2% to $4.7 billion.

Following last fall’s price surge, petroleum prices had declined substantially in late 2005 and early 2006, which contributed to a significant 9.8% drop in shipments in February alone. But the recent swell in geopolitical unease, notably the international concerns regarding Iran, has again contributed to significantly higher prices for petroleum products. By April, the price of crude oil surpassed the previous record levels attained in September 2005.

Led by the rebound in petroleum, shipments of nondurable goods bounced back 1.9% to $22.2 billion in March, following recent declines.

Robust demand, coupled with big orders shipped in March also contributed to sizeable gains in the machinery (+3.1%) and primary metals (+1.6%) industries. Higher prices (+1.5%) boosted shipments of primary metals, due to soaring demand for copper, zinc and aluminium.

MANUFACTURERS PUMP OUT MORE GOODS

Despite the impact of rising prices in March, manufacturers posted the first increase in the volume of goods shipped since December. At 1997 prices, shipments rose 0.9% to $47.9 billion.

All provinces, with the exception of Saskatchewan and the territories, posted higher shipments in March. Increased output at several petroleum refineries in Eastern and Central Canada contributed to gains in Quebec and Ontario.

Quebec’s aerospace and petroleum manufacturers reported big improvements in March, resulting in a $453 million (+3.8%) jump in shipments to $12.5 billion; this was only the second increase in Quebec’s shipments since October 2005.

Ontario’s manufacturers posted shipments of $25.4 billion, up $109 million (+0.4%), due in part to the petroleum and machinery industries. Following a weak January (-2.2%) and February (-1.0%), year-to-date shipments by Canada’s leading manufacturing province remained below levels of one year ago (-2.5%).

AEROSPACE MANUFACTURERS BOOST INVENTORIES

Total inventories rose 0.4% to $66.3 billion in March. Goods-in-process inventories carried the bulk of the increase, climbing 2.8% to $15.6 billion due to a recent buildup by aerospace manufacturers as they work through major orders. Inventories have been gradually accumulating over the last two years, soaring 12.5% in value since March 2004.

Inventories of raw materials remained steady at $28.7 billion, while strong demand for petroleum products contributed to the paring down of finished product inventories (-1.0%) to $22.0 billion.

Following last month’s sizeable advance in the inventory-to-shipment ratio to 1.31, the ratio settled back in March to 1.29. The rebound in shipment activity was enough to pull back the ratio from its recent year-high.

The inventory-to-shipment ratio is a key measure of the time, in months, that would be required to exhaust inventories if shipments were to remain at their current level.

HEAVY DUTY TRUCKS AND MACHINERY DRIVE UNFILLED ORDERS

Contracts received for big ticket items including heavy duty trucks (+15.7%) and machinery (+1.7%) contributed to the sixth successive increase in unfilled orders. Manufacturers’ backlog of unfilled orders rose another 0.5% to $43.5 billion in March, the highest level since November 2002.

Meanwhile, manufacturers of fabricated metal products (-2.9%) and railroad rolling stock (-1.5%) worked through orders in March, which partly offset the buildup of orders overall.

NEW ORDERS PICK UP IN MARCH

Following a big decline in February (-2.3%), manufacturers’ new orders rebounded to some extent, up 1.4% to $51.6 billion in March. Substantial gains in the aerospace and machinery industries propped up new orders during the month.

MANUFACTURERS CONTINUE TO FACE CHALLENGES

Despite the relatively wide scope of March’s improvements, manufacturers continued to face challenges which will test their productive abilities in the months to come. The strengthened value of the Canadian dollar, rising input costs and skilled labour shortages particularly in Western Canada, remained critical though unavoidable obstacles for many in the sector.

According to the recent release of the Business Conditions Survey for April 2006, these obstacles were among the primary challenges facing manufacturers in the months ahead, and contributed to their expectations of tough times ahead.

<I>(Note: Non-durable goods industries include food, beverage and tobacco products, textile mills, textile product mills, clothing, leather and allied products, paper, printing and related support activities, petroleum and coal products, chemicals, and plastics and rubber products. Durable goods industries include wood products, non-metallic mineral products, primary metals, fabricated metal products, machinery, computer and electronic products, electrical equipment, appliances and components, transportation equipment, furniture and related products and miscellaneous manufacturing.

Unfilled orders are a stock of orders that will contribute to future shipments assuming that the orders are not cancelled. New orders are those received whether shipped in the current month or not. They are measured as the sum of shipments for the current month plus the change in unfilled orders. Some people interpret new orders as orders that will lead to future demand. This is inappropriate since the “new orders” variable includes orders that have already been shipped. Readers should note that the month-to-month change in new orders may be volatile. This will happen particularly if the previous month’s change in unfilled orders is closely related to the current month’s change.

Not all orders will be translated into Canadian factory shipments because portions of large contracts can be subcontracted out to manufacturers in other countries. Also, some orders may be cancelled.)</I>