August 8, 2012
The capacity utilization rate in Canada is on the mend (Part 1)
The nation-wide industrial capacity utilization rate in the first quarter of this year clawed its way slightly higher versus the fourth quarter of last year, according to Statistics Canada.
The latest result was up 0.2 percentage points from 80.5% to 80.7%.
The year-over-year change was a 1.0 percentage-point improvement over the first quarter of 2011 (79.7%).
(The utilization rate is the proportion of full potential output that is actually achieved.)
Between 80.0% and 84.9% is a significant range for the utilization rate. The degree of importance, however, depends on the direction of change.
Climbing quarter to quarter and year over year is obviously good. Falling is bad.
In the latest data results, the usage rates of most of the sub-sectors were moving in an upward manner. There will be more on that subject in Part 2 of this article.
But for the moment, let’s extend the benchmark discussion. It is more important for the utilization rate to cross above 85%. That’s when our industry, construction, particularly benefits.
Above 85%, individual firms within an industry must start thinking about expanding.
In fact, the more critical number these days – given just-in-time inventory and computerized delivery and tracking of product – may be 90%. Let’s go with 85% as an early-warning sign nonetheless.
It will become apparent that the figure is somewhat variable based on a changing set of circumstances.
When the usage rate exceeds 85%, firms begin to wonder how they will cope with extraordinary surges in demand – or with future demand, for that matter.
This becomes especially critical if one firm in an industry assumes a leadership role. Competitors are then in danger of losing business to the standard bearer.
The leader’s expansion plans are likely to include new technology that will both save money and incorporate greater energy efficiency.
That’s why there’s often a copycat effect among investment intentions within a specific industry.
An announced project plan by one company in an industry will often be quickly followed by a “bold” similar move from a watchful rival.
The physical size of the project and dollar scope will also play roles in the critical-mass utilization rate.
The larger and more complex the new project, the more lead-time is needed to bring on greater production.
Before leaving Part 1 of this story, I’d like to compare the current overall utilization rate (80.7%) in the country with the most recent trough level.
When the recession was at its worst, in the second quarter of 2009, the total industry usage rate in Canada was only 67.4%. Employing the popular vernacular, “We’ve come a long way, baby.”
Part 2 will delve into individual sub-sector performances in the latest quarter.
|Total Canadian Industry||Mining|
|Oil and Gas Extraction||Electric Power|
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.
Industry classifications are as according to NAICS (North American Industry Classification System).