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Manufacturers continue to cut back production capacity

Ottawa. ON -- In the second quarter of 2006, Canada's industrial capacity utilization fell slightly for the third s...


Ottawa. ON — In the second quarter of 2006, Canada’s industrial capacity utilization fell slightly for the third straight quarter between April and June, due to lower foreign demand and a slowdown in the housing market, Statistics Canada reports.

Industries operated at 85.5% of their capacity in the second quarter, compared to 85.7% in the previous quarter. This slight dip puts the current rate 2.1 percentage points below the high 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. For this release, rates have been revised back to the first quarter of 2004 to reflect the revised source data.

A drop in exports and a slowdown in residential construction were largely responsible for the decline in capacity utilization in the manufacturing sector. Most export-based industries and industries associated with the housing market reduced their capacity utilization in the second quarter.

However, due to the level of new orders and the decline in stocks of finished products, manufacturers remain optimistic in their forecasts for the third quarter, according to the July 2006 Business Conditions Survey.

Capacity utilization remained high in the second quarter without creating inflationary pressures. The Consumer Price Index, excluding the eight volatile components identified by the Bank of Canada, rose 1.5% between July 2005 and July 2006.

The decline in the industrial capacity utilization rate can be attributed to lower capacity use in 12 of the 21 industry groups in the manufacturing sector and in the oil and gas extraction sector. The rate remained steady in the construction sector, and rose in the forestry and logging, electrical power and mining sectors.

DECLINE IN THE MANUFACTURING SECTOR FOR THIRD STRAIGHT QUARTER

Manufacturers cut back their production capacity for a third straight quarter, allowing the rate to fall from 83.7% to 83.1%. This is the lowest rate since the second quarter of 2004 when it reached 83.0%.

Three industries in particular contributed to the rate’s decline in the manufacturing sector: wood products, plastic and rubber products, and non-metallic mineral products manufacturing. The rate remained steady in the transportation equipment manufacturing industry and rose in the chemical products manufacturing group.

In the wood products manufacturing industry, the rate fell from 85.5% to 81.1%. This was the sharpest drop since the second quarter of 2003 when it fell 6.0 points. The decline in foreign demand for wood products resulted in reductions in production in all main components of this industry in the second quarter.

Capacity utilization among manufacturers of plastic and rubber products fell 3.0 percentage points to 84.0%. A slight increase in production of rubber products was not enough to offset a 3.7% drop in output of plastic products.

The rate among manufacturers of non-metallic mineral products fell 4.7 points to 88.8%, almost cancelling out the gain posted in the first quarter. Manufacturers of cement and concrete products contributed significantly to this industry group’s slowdown in production with their 4.9% decline in output.

Despite lower foreign demand for automobile products, the rate remained at 87.9% in the transportation equipment manufacturing industry. A 0.1% rise in production was offset by a slight increase in capacity. Strong results posted by aerospace products manufacturers accounted for the small increase in production in this industry.

On the other hand, manufacturers of chemical products increased their capacity use, bringing the rate to 80.8%, compared to 78.4% in the first three months of the year. This situation was due mainly to manufacturers of resins and synthetic rubber, who increased their production by 10.6%.

STRONG INCREASE IN THE FORESTRY AND LOGGING SECTOR

In the forestry and logging sector, capacity use climbed 6.6 percentage points to 95.4%. Production in this sector rose 8.2% in the second quarter.

After declining for two straight quarters, production by the electrical power sector rose 0.8% in the second quarter. As a result, capacity use climbed from 85.8% to 86.3%.

Higher extraction of metallic metals and non-metallic minerals succeeded in offsetting a 9.4% drop in extraction of coal, thus the mining sector output rose slightly. As a result, the rate rose from 89.0% in the first quarter to 89.2% in the second quarter.

In the construction sector, the rate remained steady at 90.9% in the second quarter, as increased production was offset by increased production capacity. Residential construction, which benefited from mild weather in the first quarter, edged down between April and June.

Only the oil and gas extraction sector posted a lower rate in the second quarter. Capacity use settled at 83.8%, down from 84.3% in the previous quarter. Production fell 1.3% in this sector.