Month was rough for Canadian manufacturers

RP news wires, Noria Corporation

Despite a boost from price increases for petroleum products and primary metals, shipments declined in April, losing most of March's gains, Statistics Canada reported June 14 in its monthly survey of manufacturers.

A substantial drop in the production of aerospace products and parts was largely behind April's 1.5 percent decrease in shipments which stood at $50.4 billion. This was the third decline so far in 2006, and followed March's 1.6 percent advance in shipments. Excluding the aerospace industry, shipments were down a more modest 0.4 percent.

The sharp drop in shipments boosted the inventory-to-shipment ratio to 1.31 in April, equal to the ratio's recent high set in February.

Uncertainty in the manufacturing sector, due in part to the strengthened value of the Canadian dollar and soaring input costs, have contributed to some weakness in shipment activity. As a result, the trend of the inventory-to-shipment ratio has been on a gradual, upward movement over the last few months.

Note to readers

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.

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.

A cool start to spring

In April, two-thirds of the manufacturing industries, accounting for 66 percent of total shipments, posted declines. Both the durable (-1.8 percent) and nondurable goods (-1.1 percent) sectors recorded lower shipments for the month.

A quarter-end boost in production in March by some aerospace manufacturers led to a larger than normal drop in production in April. Production of aerospace products and parts fell 37.8 percent to $892 million in April, following last month's 38.2 percent surge. Despite the decline, a gradual recovery in global demand for aircraft and parts has fuelled growth in Canada's aerospace industry compared to last year.

Food manufacturers also reported wide ranging declines, as shipments tumbled 4.2 percent to $5.6 billion. Decreases were extensive and included the dairy products, grain and oilseed milling and meat products industries.

The fabricated metal products industry also registered a 3.4 percent drop in shipments to $3.1 billion, following some big orders shipped in recent months.

Shipments fall despite price hikes for gas and metals

In spite of strong demand and sky-high prices for primary metals and petroleum, the strength of these industries only partly offset the overall decline in shipments for April.

Soaring prices contributed to a 5.5 percent jump in shipments of primary metals to $4.4 billion. Robust demand and low inventories for certain metals, including copper, zinc and nickel, have driven up prices in recent months. The industrial price index of primary metals has risen 13 percent since December, soaring 6.4 percent in April alone.

Motor vehicle shipments increased 2.7 percent to $5.3 billion in April, following a 6.8 percent decline in March due to temporary plant closures. Notwithstanding April's gain, the auto sector continues to struggle with a range of challenges from weakening retail sales in North America, to rising interest rates and high consumer debt in the United States. Year-to-date shipments of motor vehicles were down 9.5 percent in the first four months of 2006 compared to the same period in 2005.

April saw the return of record high prices for petroleum products. By mid-month, the price of crude oil exceeded $73 US per barrel, surpassing its previous apex in September 2005. Unease regarding supply as the summer driving season fast approaches, coupled with global tensions concerning Iran and other oil-producing regions have contributed to the recent price speculation. Petroleum shipments rose 2.6 percent to $4.9 billion in April and might have been higher but temporary refinery shutdowns largely counterbalanced the 9.6 percent spike in petroleum prices.

Manufacturers produce less in April

The volume of goods shipped also fell for the third time in the last four months. At 1997 prices, shipments dropped 1.4 percent to $46.8 billion.

Notwithstanding the many challenges of the last year, manufacturers have held their own as the volumes of goods shipped remained relatively stable over the last 12 months. That said, these challenges may have eroded opportunities for market expansion and employment growth. Constant dollar shipments for the period January-to-April 2006 were essentially unchanged with that of the same period last year.

Quebec and Alberta were among the seven provinces and the Yukon to post lower shipments in April. Big declines in aerospace production coupled with the food and wood products industries pulled down shipments in Quebec by $393 million (-3.1 percent) to $12.1 billion.

The machinery and chemical products industries contributed to the relatively widespread decreases among Alberta's manufacturers. Shipments fell by $164 million (-3.1 percent) to $5.1 billion in Alberta, marking the third decrease in the last four months by the province's manufacturers.

Manufacturing shipments, provinces and territories

March 2006^r

April 2006^p

March to April 2006

Seasonally adjusted

$ millions

% change

Canada

51,198

50,432

-1.5

Newfoundland and Labrador

268

223

-16.5

Prince Edward Island

121

116

-3.5

Nova Scotia

799

804

0.6

New Brunswick

1,259

1,216

-3.4

Quebec

12,491

12,098

-3.1

Ontario

25,178

25,097

-0.3

Manitoba

1,083

1,094

1.0

Saskatchewan

917

965

5.2

Alberta

5,253

5,089

-3.1

British Columbia

3,820

3,721

-2.6

Yukon

-3.7

Northwest Territories including Nunavut

2.8

^r	revised
^p	preliminary

Dissatisfaction prevails among manufacturers

With the recent erosion in both the value and the volume of goods shipped, dissatisfaction has emerged among manufacturers as reported in the April Business Conditions Survey. Manufacturers are anticipating tough times in the months ahead as the effects of the high-valued Canadian dollar and soaring input costs continue to cut into their bottom lines.

Inventories trimmed in April

Manufacturers' inventories were reduced by 0.5 percent to $66.0 billion in April, the first decline since December. The aerospace industry (-11.6 percent) was the main contributor, but that was partly offset by inventory gains in the primary metals (+4.4 percent) and chemical products (+2.0 percent) industries.

April's decrease in inventories was concentrated in the goods-in-process stage of fabrication, which fell by 2.3 percent to $15.3 billion. This followed a healthy 2.6 percent rise in March, and the recent volatility was due to aerospace manufacturers working through orders for their quarter end last month.

Inventories of raw materials edged up 0.2 percent to $28.7 billion, the fourth increase in a row, while finished product inventories remained constant at $22 billion.

Fewer orders on the books

New orders fell 2.3 percent to $50.1 billion in April. The aerospace industry (-49.3 percent) has been partly responsible for the flux in new orders received in recent months. Excluding aerospace products and parts, new orders were down 1.0 percent.

Other industries with sizeable declines included machinery (-9.4 percent) and motor vehicle parts (-3.5 percent). The decrease in new orders overall was slightly offset by a 5.4 percent gain in contracts received by the hot primary metals industry.

Unfilled orders decline, but the level remains healthy compared to 2005

The backlog of unfilled orders weakened somewhat in April as some cancelled orders contributed to a 0.9 percent decrease to $42.9 billion.

April's setback was only the second decline in unfilled orders in the last eight months. So far in 2006, the average level of unfilled orders has remained 10.6% above last year's average.

Manufacturers of big ticket industries including aerospace products and parts (-1.1 percent) and machinery (-2.3 percent) contributed to the decline in unfilled orders.