Decisions 2003: Shipments

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Carriers whose client mix is heavily reliant on manufacturing shipments should be thankful their hauls start on this side of the 49th. Canadian manufacturers appear headed into the new year on much firmer footing than their U.S. counterparts.

The economic downturn of 2001 plagued manufacturers on both sides of the border and they took great strides to whittle down their inventory holdings through significant reductions. But it appears the cutbacks Canadian manufacturers implemented are paying off much faster than is the case in the U.S.

Inventory levels have in fact dropped enough that Canadian manufacturers appear confident to begin the process of rebuilding their inventory levels, which of course means business for carriers. Statistics Canada reported a significant increase in finished-product inventories in September, the latest month for which data is available. The rise in finished product inventories contributed to the third consecutive rise in total inventories. Inventories were up 0.3% to $62.6 billion, the highest level to date for 2002. As well, the trend for inventories remained positive for the fourth month in a row. Specifically, finished-product inventories jumped 2.4% to $19.3 billion, a five-month high.

The main contributors to higher inventories in September were manufacturers of primary metals (+2.2%) and food (+1.7%).

According to October’s Quarterly Business Conditions Survey, conducted by Statistics Canada, the inventory levels are where they should be. The majority of manufacturers reported that they were relatively content with their levels of finished-product inventories, going into the final quarter of 2002.

It’s a much different scenario south of the border. When U.S. inventories fell again in August it marked the 19th consecutive decline in manufacturing stocks. Although manufacturing inventories did rise slightly in September, it was entirely because of industries in the non-durable sector. Manufacturers of durable products lowered inventories for the twentieth consecutive month; Inventories of durable products stood at their lowest level since December 1995 as U.S. manufacturers were heading into the final quarter.

Are Canadian manufacturers perhaps too optimistic? A look at other telling statistics would indicate that the rise in inventory levels is warranted.

The inventory-to-shipment ratio is a key measure of the time that would be required in order to exhaust finished-product inventories if shipments were to remain at their current level. Following the deceleration of the global economy last year, Canada’s inventory-to-shipment ratio has remained relatively stable over the last six months, and remained well below the nine-year high of 1.56 established in October 2001. The inventory-to-shipment ratio was trimmed back to 1.41 in September, equaling April’s 18-month low. And despite a strong increase in finished-product inventories, a rise in shipments as well contributed to a stable finished-product inventory-to-shipment ratio. The ratio remained unchanged at 0.43 for the third straight month.

Another indicator is manufacturing shipments, which advanced 1.2% in September to $44.5 billion, the third consecutive increase. The durable, big-ticket goods industries led the rise in shipments with a 1.8% increase, up for the third straight month. Year-to-date shipments are up 0.6% from the same period of 2001. The trend in shipments has also remained positive throughout 2002. In September, 12 of the 21 major manufacturing industries, representing almost 77% of total shipments, posted increases. On a provincial basis, shipments were up in seven provinces. Ontario led the provinces with a 1.6% rise in dollar value shipped compared with August.

In contrast shipments in the U.S. decreased 0.1% in September, drawn down by a gradually slowing automobile sector and lower production of machinery. Year-to-date shipments in September were down 2.2% from the same period of 2001, well below Canada’s 0.6% increase for the same period.

Despite the positive comparisons with the U.S., Canadian inventories are not completely free of concerns. The improving inventory-to-shipment ratio and shipment volumes are somewhat dampened by higher finished-product inventories and a decrease in unfilled orders.

Unfilled orders, which represent the stock of orders that will contribute to future shipments, fell back 0.9% in September to $46.7 billion following a 1.4% rise in August. This was the second drop for orders in the last three months. Decreases were reported in the aerospace products and parts, motor vehicle and computer industries. However, it should be noted that despite the decrease in September, the trend for unfilled orders, which had been slowly improving since last spring, did remain stable for the fourth consecutive month.

Of course, the economic health of our largest trading partner is also a major concern. The Canadian economy has outperformed the U.S. economy in 11 of the last 14 quarters. How long can Canada sustain such an unprecedented pace? With about three quarters of Canadian exports heading to the U.S., the answer to that is crucial to the continued rebounding of Canadian manufacturing and shipment volume growth for Canadian carriers.

Perhaps keeping that in mind, the mood among manufacturers, as indicated in October’s Quarterly Business Conditions Survey, remains somewhat guarded as they look ahead to the fourth quarter and into the new year.

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