Canadian Manufacturing Sales Drop 3.4% in December

Canadian manufacturing sales dropped 3.4% to $48.6 billion in December, the lowest level in three years. Longer-than-normal shutdowns at several motor vehicle plants were the primary source of the deep cut in sales.
 
Excluding the motor vehicle and parts industries, total manufacturing sales decreased a more moderate 0.8% in December.


December's decline was the largest since August 2003, when a widespread electrical blackout and its fallout thereafter impacted much of Ontario's production during that month.

Deep cuts in volumes manufactured
Despite ongoing strength in key price-driven industries, overall manufacturing activity decreased in four of the last five months, due in part to some significant cuts in the volume of goods manufactured.


At 2002 prices, manufacturing sales plunged 5.8% to $46.7 billion, the lowest level since August 2003. Over the past five months, the volume of goods manufactured has declined 8.7%. Excluding the dominant transportation equipment sector, sales at 2002 prices fell 2.1% in December.

Big spike in the inventory-to-sales ratio
December's big decline in sales contributed to a spike in the inventory-to-sales ratio for the month as the ratio vaulted to 1.33 from November's 1.29. The ratio had been relatively stable in the range of 1.30 for the last six months. December's level was the highest since October 2006's 1.36.


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

Manufacturers face an uphill battle
The majority of manufacturing industries were battered in December as 16 of the 21 industries posted lower sales, accounting for almost two-thirds of total sales.


In 2007, manufacturers coped with a variety of circumstances that contributed to the marked slowdown in the sector.

Among the most prominent was the soaring value of the Canadian dollar, which at the end of 2007 flirted again with parity to the US greenback. The higher-valued dollar makes Canadian-made goods more expensive to many foreign customers.

By late December, world petroleum prices spiked again as crude oil closed in on US$100 per barrel.

Meanwhile, recent indications from south of the border have suggested that the US economy may be headed to a recession. Since the United States is Canada's principal trading partner, this could have a detrimental impact on the Canadian manufacturing sector.

Manufacturers are apprehensive
Accordingly, manufacturers' mood for the coming three months remained apprehensive, as suggested by the Business Conditions Survey for January. Manufacturers are expecting tougher times ahead, with lower production and employment over the first quarter of 2008.


Factory payrolls fared poorly in December as there were 33,000 fewer manufacturing jobs compared with November. Employment was down almost 130,000 (-6.2%) compared with December 2006, according to the Labour Force Survey.

Motor vehicles drag down sales
Manufacturing sales of motor vehicles plummeted 24.9% to $3.8 billion in December. Over and above the usual Christmas shutdowns, some manufacturers extended closures for inventory control measures and re-tooling, largely contributing to the biggest monthly decline since 1996.

A general weakening of the US economy has contributed to substantial unease in the Canadian automotive sector, as the bulk of motor vehicles made in Canada are shipped to the United States.

The ongoing slump in the wood products industry, coupled with a sharp drop in non-metallic mineral products

manufacturing, rounded out the top three industries contributing to the decline in December.

A sharp reduction in U.S. housing construction contributed to widespread decreases in the manufacturing sales of wood products. Sales dropped 8.3% to just $1.9 billion, the lowest level in almost 12 years.

Following a string of monthly increases, manufacturers of non-metallic mineral products posted a 12.4% decline in sales to $1.1 billion in December. This industry is closely tied to the construction sector and includes the manufacturing of cement, ready-mix concrete and glass products.

Petroleum products ramp up sales
Rising prices continued to boost the value of manufacturing sales of the petroleum and coal products industry. In December, factory sales jumped 6.2% to $6.3 billion, as some refineries returned to full production following temporary shutdowns. In addition, prices edged 2.0% higher in December, and have risen almost 30% since the start of 2007.

Manufacturing activity weakened across most provinces
Ontario's flagging motor vehicle industry dominated the province's big 6.4% decline in manufacturing sales to $22.5 billion in December. Ontario, which has had weakening sales in six of the last nine months, led the six provinces reporting decreased sales in December.

Manufacturing sales fell 2.1% to $12.1 billion in Quebec, due to widespread declines, including the transportation equipment and wood products industries. Alberta was also down in December, posting a 1.2% drop in manufacturing sales to $5.5 billion. This was the fourth decrease in five months.

Newfoundland and Labrador (+62.2%), New Brunswick (+1.6%), Manitoba (+0.7%) and Saskatchewan (+1.4%) each reported higher manufacturing sales to end the year.

Manufacturers reduce raw material inventories
A sharp decrease in raw materials entirely contributed to December's 0.4% reduction in total inventories. Inventories, which have been on a downward trend for most of 2007, fell to $64.9 billion, the lowest level in almost three and a half years.


Robust demand for petroleum products saw several refineries draw down their inventories of raw materials in December. Overall, raw materials contracted 1.3% to $27.7 billion in December and have been gradually declining since the most recent peak of $29.2 billion in April 2007.

Meanwhile, a 0.7% boost in goods-in-process inventories partly counterbalanced some of the decline, while manufacturers' finished product inventories remained steady at $22.2 billion in December.

The main contributors to December's decline in total inventories included the primary metal (-3.5%) and motor vehicle (-6.2%) industries.

Aerospace provides boost to unfilled orders
The aerospace industry helped to push the backlog of orders to a record level in December. Rising for the second straight month, unfilled orders increased 2.4%, topping the $57.4-billion mark. With the exception of a brief two-month dip last fall, unfilled orders have risen unabated for the past 16 months.


Healthy demand for civilian and defence aircraft propelled unfilled orders of aerospace products and parts to $26.1 billion, up 4.4% in December.

The railroad rolling stock industry also played a significant role in December as unfilled orders increased 19.4% to $2.3 billion on the strength of new contracts for commuter rail cars.

In contrast, unfilled orders for computer and electronic products slipped 3.7% to $3.5 billion in December. In just five months, this industry has seen a 13.7% decrease in the backlog of orders as many producers coped with future market

uncertainty.

New orders resume downward movement
New orders cooled considerably in December, falling 5.6% to $50.0 billion, which reversed a significant 8.3% rebound in November. New orders have been down in 9 of the past 11 months.

Following a big November, manufacturers of aerospace products received fewer new contracts in December (-37.4%). In addition, shift closures and demand uncertainty fuelled a large decrease in new orders of motor vehicles.

Year in review: Price increases help manufacturers hold their own in 2007
Despite a perfect storm of challenges including rapid currency appreciation, rising energy costs and a softening US export market, Canada's manufacturing sector managed to stay afloat in 2007.


Sharp price-driven increases for both petroleum and primary metals provided the necessary buoyancy, as sales edged up 0.3% over 2006 levels to $612.9 billion.

The year 2007 witnessed winners and losers. Petroleum and coal product manufacturing increased 8.6% on the back of record crude oil prices, which approached US$100 per barrel by year-end. Manufacturing of primary metals rose 5.0% on sharp demand from Asian markets. Alternatively, motor vehicle (-3.2%) and wood product (-15.8%) manufacturers saw sales drop in the face of challenging market conditions.
 
Source: Statistics Canada