Analysis

The good news about Canadian capacity utilization rates in the third quarter of this year resided at the manufacturing sub-sector level.

Plant floor usage increased in 11 of the 21 sub-categories.

Furthermore, in the sectors where there were declines in utilization rates, the rate of cutback was generally much lower than between quarters in the depths of the recession (from the fourth quarter of last year through the second quarter of this year).

The three most notable declining industries were: primary metals (from 61.3% in Q2 to 58.1% in Q3), fabricated metal products (from 63.6% to 61.3%) and machinery manufacturing.

Weakness in both residential and non-residential capital spending played a key role in reducing usage rates in the first two categories.

In primary metals, steel production got a boost from auto demand. But the aluminum industry is suffering along with flagging aerospace sales.

The increase in value of the Canadian dollar versus the greenback has hurt machinery and equipment export sales.

As the U.S. and Canadian recoveries proceed, the capacity utilization rates of many of these industries will firm up.

Usage rates rise when demand increases and/or capacity is reduced.

Some of the latter will continue as firms rationalize to improve and re-position operations. Many companies have achieved success in maintaining profit levels through manpower reductions.

Current extremely low interest rates, improving profits and reviving stock markets should be positive for industrial sector investments.

Before this translates into dollars spent, however, significant progress will need to be made in raising capacity utilization rates.

For raw materials industries, the initiating factor will be further upticks in world, and especially Chinese, demand.