Industrial Capacity Utilization Rate at Record Low 74.7%
Statistics Canada recently released industrial capacity utilization rates for the fourth quarter of 2008. Generally speaking, the numbers were not pretty. In fact, Canada's overall industrial utilization rate (74.7%) was the lowest in the history of the series, which was started in 1987. Significant cutbacks in production across many sectors were the primary cause.

Weak utilization rates are to be expected, given the depth of the economic downturn. What is worrisome, however, is that the further down usage rates drop, the longer it will take for construction activity to gear up again, once there is a bounce off the bottom.

Benchmark Levels
A figure between 80% and 85% of capacity is when firms in an industry start to think seriously about expanding facilities. For an awful lot of industries, particularly in the manufacturing sector, 80% to 85% of capacity is an increasingly far-away lofty goal.

Resource Sector — Falling Prices and Weak Markets
Some of the highlights from the most recent data set are as follows. The decline in commodity prices since last summer and the concurrent drop in world demand have caused mining's utilization rate to falter to only 69.8% in the latest quarter. This level suggests that there will be little in the way of new investments in the immediate future.

The lack of investment in new capacity will mean rising prices once recovery does get underway. Another obvious conclusion is that it is cheaper to buy capacity rather than to build it. Mergers and acquisitions will increasingly be in fashion in the resource sector, as the cash-strong absorb the cash-weak. An example can be found in the oil and gas sector (76.9% of capacity), where Suncor is proposing a takeover of Petro-Canada.

Manufacturing at only 73.8% of Capacity
Resources may be struggling, but the really bad news resides in the manufacturing sector (73.8% of capacity). Export sales are down and employment is being chopped. The lower-valued Canadian dollar is helping a little, but markets at home and outside the country are depressed. Production levels and inventories are being adjusted accordingly.

The weakest manufacturing sector is transportation equipment, operating at only 58.1% of capacity in fourth-quarter 2008. "Auto assembly and parts" makes up two-thirds of this category. Vehicle sales in North America are down by one-quarter year over year and major industry players are barely hanging on to fight another day. The problems in assembly operations are also showing up in rubber (75.9%) and plastics (67.9%).

Construction-related Sectors
While the forestry and logging industry (73.5%) remains weak, it has actually improved versus the previous quarter. There are some signs that the shattered U.S. housing market may be stabilizing. Existing home sales increased in the latest month, thanks to very low prices and record-low interest rates, and starts also perked up a little.

Canada's housing markets are in the early days of decline. The wood products utilization rate is extremely low, at 69.3%, and construction overall, which is heavily residential-dependent, has fallen to 74.4% of capacity. This will not pick up again until there is success in releasing the government-promised flow of infrastructure projects.

Other residential-related sectors include furniture and related products (74.9%), as well as electrical equipment and appliance manufacturing. The latter is recording a surprisingly strong 85.5% usage rate. Other mainly non-residential construction-related sectors are non-metallic mineral products (78.9%) and fabricated metal products (77.8%).

High-tech and Primary Metals
The high-tech sector has not been as devastated as during the dot.com collapse. Proof can be found in computer and electronic product manufacturers operating at 85.9% of capacity. Also still at a high rate of capacity utilization in the fourth quarter of last year was primary metal production (85.4%). However, this incorporated the largest percentage rate decline (-10.4 quarter to quarter) among all sectors. Also, this measurement was taken before the rapid deterioration in steel markets that occurred early this year, culminating in temporary mill closures in Hamilton and on the shores of Lake Erie.

Regional Distribution and a Final Word on Electric Power Usage
The utilization-rate reductions are spread across the country, although the gaps in the manufacturing sector are most heavily weighted in Ontario and Québec. A final observation concerns the power generating sector. This is a sector where supply constraints are almost always evident. However, in the current climate of reduced activity levels, even electric power capacity usage has dropped, down to 82.5% in the latest reading.