Operating margins eroded amid falling factory gate charges and increase in manufacturers’ input costs
November 1, 2016
October data pointed to another challenging month for the Canadian manufacturing sector, with production volumes stagnating amid subdued demand patterns and ongoing efforts to reduce finished goods inventories. That said, the latest survey highlighted a slight improvement in overall business conditions, driven by a renewed rise in new work and greater employment numbers. Meanwhile, operating margins were eroded further amid falling factory gate charges and a sharper increase in manufacturers’ input costs.
Adjusted for seasonal influences, the Markit Canada Manufacturing Purchasing Managers’ Index (PMI) registered 51.1 in October, up from September’s seven-month low of 50.3. The index has posted above the 50.0 no-change threshold in each month since March, but the latest reading was weaker than the survey average (52.4) and signalled only a marginal improvement in overall business conditions.
Production volumes stagnated in October, which was a key factor weighing on the headline PMI and contrasted with the sustained output growth seen during the previous seven months. Reports from survey respondents suggested that inventory drawdown and relatively weak client demand had placed a brake of production levels. Reflecting this, stocks of finished goods decreased at the sharpest pace since July.
October data highlighted a slight rebound in new business volumes, following the decline recorded during the previous month. Some firms linked rising sales to new product launches, alongside successful promotional discounting, but there were also reports that subdued energy sector demand had weighed on new business volumes. At the same time, export sales were broadly unchanged in October, which compared favourably with the marginal declines seen through the third quarter of 2016.
Mirroring the trend seen for new order volumes, the latest survey indicated a return to employment growth across the manufacturing sector. However, with some firms commenting on hiring freezes at their plants, the overall pace of job creation was only marginal. October data also pointed to a general lack of pressure on operating capacity, with backlogs of work broadly unchanged since the previous month.
Manufacturers suggested that supply chain pressures worsened in October. Vendor performance deteriorated at one of the fastest rates since the end of 2014, which was linked to capacity cutbacks among suppliers, alongside low stocks and shipping delays. As a result, some firms sought to boost their stocks of purchases, and this contributed to a rise in input buying for the first time since June.
Input cost inflation picked up to a three-month high in October. This was partly attributed to greater imported raw material prices. However, factory gate charges fell for the second month running, which manufacturers mainly linked to intense competition for new work.
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