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INDUSTRY PULSE: Canadian businesses post record profits in 2005 but manufacturers struggling

OTTAWA, Ont. - For Canadian carriers concerned about the vitality of their customer base, the latest barometer on...

OTTAWA, Ont. – For Canadian carriers concerned about the vitality of their customer base, the latest barometer on the health of Canadian business provides good news in general but continuing need for caution for those with a heavy base of manufacturing clients.

Canadian corporations earned record high operating profits of $217.0 billion in 2005, fuelled by a large increase in the oil and gas industry, according to Statistics Canada figures just released.

Profits climbed 12.1% from the previous high in 2004 and have now risen for four consecutive years. However, it should be noted that the most recent rate of growth was down from the 20.3% annual increase in 2004.

Of the 22 industry groups, 16 increased their profits this year, most notably the oil and gas industry where fuel prices rocketed to all-time highs.

On the other hand, manufacturers suffered from the strong Canadian dollar’s impact on export sales and rising input costs, their profits declining 6.9% in 2005. Employment in the manufacturing sector also declined as companies endeavoured to trim costs.

Manufacturing companies earned $42.0 billion in operating profits in 2005, down 6.9% from 2004. Of the 13 manufacturing industries, 10 lost ground, with petroleum and coal producers reporting the only substantial gain. The strong Canadian dollar trimmed revenues for exporters of goods priced in US dollars. High fuel costs and an unstable demand further undermined manufacturing profits. The December release of the Monthly Survey of Manufacturing revealed that the upward trend for shipments persevered in 2005, but that the rate of growth was much slower than in the previous year.

Wood and paper manufacturers earned $4.1 billion in operating profits in 2005, down from $6.5 billion in 2004. Softening newsprint demand, high energy costs and the strong Canadian dollar all contributed to weakness in the paper sector. Newsprint consumption has been declining steadily in recent years due to the increased popularity of electronic media. Wood producers benefited from strong domestic construction demand, however, as the value of issued building permits reached record high levels in 2005. Lumber exports picked up in the latter months of the year, partly due to US rebuilding efforts in the aftermath of the hurricanes on the Gulf Coast. However, the average wood product price reaped by manufacturers was significantly down in 2005, compared to the previous year.

Motor vehicle and parts manufacturers earned $1.8 billion in 2005, down 37.6% from 2004. Operating revenues dropped 6.5%, curtailed by lower exports of passenger automobiles, despite some strength in the fourth quarter. The industry was extremely volatile throughout the year, affected by rising fuel prices, intense foreign competition and inconsistent consumer demand.

Petroleum and coal manufacturers’ operating profits surged to $11.7 billion in 2005, from $9.2 billion in 2004. Record high crude and refined oil prices drove earnings to unprecedented levels for many companies. Refining margins surged, particularly in the autumn after the hurricanes battered the US Gulf Coast and commodity prices escalated.

Primary metal producers saw profits drop 17.4% to $2.0 billion in 2005, the result of higher energy costs and softening steel prices.

The year 2005 saw a spectacular rise in the price of crude oil and natural gas. Crude oil prices soared to over US $70 per barrel in the late summer amid concerns over supply. Natural gas prices were jolted by the hurricanes that devastated the US Gulf Coast’s production capabilities. Oil and gas extraction companies benefited from these lofty prices, their annual operating profits rising to $31.3 billion in 2005, up 46.5% from 2004. The oil and gas industry alone accounted for half of the overall profit gain in the non-financial industries in 2005.

Metal mining companies also benefited from rising commodity prices in 2005; these were boosted by thriving North American and Asian demand for metals. In 2005, operating profits increased to $7.0 billion, from $4.2 billion in 2004. Before metal prices began to soar two years ago, annual operating profits had hovered around $1.6 billion for three consecutive years.

Consumers increased their spending in 2005, causing a 4.8% rise in operating revenues and a 16.4% jump in operating profits for all retailers. Employment gains and consumer confidence in the economy encouraged consumers to loosen their purse-strings.

Clothing and department stores earned 9.7% more in profits, as operating revenue advanced 4.4%. Profits of motor vehicles and parts dealers rose 12.1%. The December issue of New Motor Vehicle Sales indicated that the number of new vehicles sold in 2005 increased for the first time in three years, thanks to high profile incentive and rebate programs.

Wholesalers reported a 6.9% rise in annual operating profits, with wholesalers of food, beverages and tobacco showing the biggest gain (+27.0%).

Looking specifically at the fourth quarter, corporations earned $57.5 billion in the fourth quarter of 2005, up 4.4% from the third quarter. Profits have risen in all but 2 of the past 16 quarters, nearly doubling over that period. Financial industries’ operating profits swelled 8.5% to $14.1 billion in the fourth quarter, while the non-financial industries reported profits of $43.4 billion (+3.2%).

Crude oil prices retreated from their third quarter record highs, pulling down fourth quarter operating profits in the oil and gas industry to $8.3 billion (-5.5%). The price decline was attributed to increased supplies, as normal oil and gas production resumed in the US Gulf Coast following the late summer hurricanes.

The manufacturing sector gained ground in the fourth quarter, their operating profits rising 5.1% to $10.6 billion. Despite the improvement, profits remained well below the recent high of $12.5 billion earned in the second quarter of 2004. Manufacturers of wood and paper (+23.9%), computers and electronics (+34.2%) and petroleum and coal (+25.2%) all contributed to the fourth quarter increase. However, Manufacturers of motor vehicles and parts lost ground, as their profits lessened by more than two-thirds.

Retailers reported a 5.7% rise in fourth quarter operating profits, with retailers of clothing and department stores showing the biggest gain (+17.6%). Wholesalers’ operating profits edged up 3.2% in the same quarter.

The operating profit margin increased for a fourth consecutive year in 2005, expanding to 8.2%, from 7.7% in 2004. The return on average shareholders’ equity also improved, reaching 11.0% in 2005, compared to 10.6% in 2004. The return on equity has almost doubled since falling to 5.7% in 2002.

The operating profit margin edged up to 8.5% in the fourth quarter, from 8.3% in the third quarter. Similarly, the return on shareholders’ equity showed a slight increase to 11.6%, compared to 11.4% in the previous quarter.

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