Statistics Canada's latest readings on capacity utilization rates in the country are dismal, to say the least. The total industry rate dropped to 69.3% in first-quarter 2009 and manufacturing languished even lower at 65.9%. Among six industry aggregates, only oil and gas extraction registered an increase in capacity usage. In nine durables manufacturing sub-categories, there were no gains in plant usage. The category with the lowest capacity utilization rate of all was transportation equipment, at 42.5%. This was due to plant closings and temporary shutdowns in the auto making and parts sectors.

Only three sub-sectors recorded utilization rates above 80%. 1) The computer and electronic products sector has remained busy, as high-tech has weathered the difficult times much better than during the dot.com collapse earlier this decade. 2) Food manufacturing (81.3%) has retained a good level of plant usage as prices have remained elevated and shoppers are still making essential purchases. 3) Electric power production is at 80.8% of capacity, although this represents an easing versus 88.1% in first-quarter 2008, as the recession has taken a toll on electricity demand.

Ontario Delays its Nuclear Power Plant Expansion Plans

Developments in the electric power sector have had one dramatic impact on the construction outlook. The Ontario government has just announced that it is suspending plans to build two new nuclear reactors at Darlington. Most recently, there has been an excess of capacity which is permitting the province to take this somewhat surprising step, given its earlier commitment to the program and long-term concerns about power availability. This is also a risky move given nuclear's key role in keeping electric power generation "green" and carbon-free while coal-fired stations are phased out.

The delaying move is partly in response to the uncertainty about the future of Atomic Energy of Canada Limited (AECL). Ottawa plans to split AECL into two parts. The medical isotopes division is to be shut down. New power generation and servicing of existing Candu reactors is to be sold, in whole or in part, to the private sector. A contract with Ontario Hydro is crucial to AECL's survival. The firm needs a delivery showcase for its next generation of Candu reactors. The Ontario government has also been concerned about cost overruns. It wants Ottawa and AECL to assume a fixed-price risk.

Three Recent News Items Showing Conflicting Trends

The following are three recent news items that illustrate the conflicting trends that are currently besetting the industrial sector. Encouragingly, there is some good news mixed in with the bad news in vehicle production. Navistar of Chatham Ontario, a heavy-duty truck manufacturer, is moving almost all of its production to the southwest United States and Mexico. This has been a steady shift over several years and will leave the company's employment level in Ontario at only about 100 versus a peak of 2,500 in the late 1990s.

On a brighter note, 3,500 workers in Windsor are re-gaining employment at Chrysler's minivan plant. Work is resuming now that the company is coming out of a two-month sojourn in U.S. Chapter 11 bankruptcy protection. In the services sector, Tim Hortons has just announced that it will be repatriating its head office to Canada from the U.S. The primary reason is said to be the drop in the corporate tax rate from 22% in 2007 to only 15% by 2012. This move by the federal Tories is a long-term plus for the business sector.

Other than transportation equipment, the most disappointing sub-sectors have been mining (55.3%), where the largest output falls have been in potash production and base metals, and primary (-10.1 percentage points to 74.9%) and non-metallic minerals (-12.4 percentage points to 65.6%). The latter two tie in to the fall-off in auto demand and the weakness underway in construction markets. The construction industry, itself, is now operating at only 71.8% of capacity, down from 75.3% the quarter before and 79.0% the year before. The decline in residential starts is having a marked impact in this sector.

CanaData's Industrial Square Footage Forecasts

The foregoing numbers point to low expectations for industrial construction this year. CanaData's latest starts forecast calls for 4.0 million square feet to break ground in 2009. While the recession accounts for much of the latest drop in starts, it needs saying that this category has been in long-term decline over many years. Industrial construction starts were over 20.0 million square feet in 1998 and 2000. In the late 1980s, they were above 40.0 million. Manufacturing has been leaving the country and setting up in low-labour-cost emerging nations. 2010 industrial starts are projected at 6.0 million square feet.

Canadian Capacity Utilization Rates by Industry Groups

Total Canadian Industry
		The thick red horizontal line in each of the charts shows the 85% level. This is the benchmark level of capacity utilization above which firms in an industry will look seriously at investing in an expansion. The benchmark 85% level has generally been raised somewhat by "just-in-time" inventory. However, in many instances, border crossing delays with the U.S. are making instant inventory adjustments harder to make. There is also concern across most industrial sectors about the volatility in value of the Canadian dollar relative to the U.S. dollar. Many companies have adopted a "wait and see" attitude towards investment in physical plant. Once one firm in an industry makes the decision to expand, often its competitors will also jump on the bandwagon (i.e. a copycat effect) in order to keep up.
Forestry and Logging		Mining
The capacity utilization rate is a leading indicator for construction in each of these industrial sectors.
Oil and Gas Extraction		Electric Power
Construction		Manufacturing

Canadian Capacity Utilization Rates — Non-Durables*

Food Manufacturing		Beverage Manufacturing
*Non-durable goods are usually consumed quickly — within a year of being produced.
Plastic Product* Manufacturing		Rubber Product* Manufacturing
*Includes plastic pipe, bottles and bags;also plastic auto parts.		*Includes rubber tires, hoses and belting.
Leather Product Manufacturing		Primary Textile Mills
The capacity utilization rate is a leading indicator for construction in each of these industrial sectors.
Textile Product* Mills		Clothing Manufacturing
*Includes rugs, carpets and curtains.
Paper* Manufacturing		Printing and Related
*Includes pulp and paper mills, plus newsprint, corrugated paper and paperboard.
Petroleum and Coal* Products		Chemical* Manufacturing
*Includes gasoline, diesel fuel, aviation fuel, kerosene, asphalt paving material, shingles and coke.		*Includes petrochemicals (ethane), basic chemicals, synthetic rubber, pesticides, pharmaceuticals, paint, soap and chemical fertilizers (ammonia and urea).

Canadian Capacity Utilization Rates — Durables**

Wood* Products		Furniture* and Related Products
*Includes household, office and institutional furniture, also mattress manufacturing.
**Durables are goods that can be used for several years (e.g. longer lasting, often "big ticket" items).
Primary Metal* Manufacturing		Fabricated Metal* Products
*Includes iron and steel manufacturing (foundries, etc.) and products, plus aluminum (smelters) and aluminum products.		*Includes architectural and structural metal, also boilers, tanks, hardware, screws, nuts, hand tools and cutlery.
Computer and Electronic Products		Electrical Equipment and Appliance Manufacturing
The capacity utilization rate is a leading indicator for construction in each of these industrial sectors.
Transportation* Equipment		Non-Metallic Mineral* Products
*Includes motor vehicles and parts, aerospace products, railway rolling stock, ship and boat building.		*Includes clay and glass products, cement and concrete products, and lime and gypsum products.
Machinery Manufacturing
*Includes agricultural, construction, mining and industrial machinery, also heating, ventilating and air conditioning equipment.

An industry's capacity utilization rate is the ratio of its actual output to its estimated potential output.
Industry classifications are as according to NAICS (North American Industry Classification System).

Data source: Statistics Canada/Chart: Reed Construction Data — CanaData.