REFINED PETROLEUM AND COAL PRODUCTS INDUSTRIES

Introduction

After growing rapidly through the early 1980’s, the total value of shipments for the Refined Petroleum and Coal Product Industries  plunged to record lows by the end of that decade. A dramatic drop in product demand along with a crash in world oil prices affected most industries in the major group. In addition, growth was further hampered by the 1990-1991 recession, fuel-switching programs and more energy efficient vehicles.

Since 1991, however, the economy has grown, fuelled by low interest rates and low inflation. There were modest increases in shipments for major group 36 industries in 1994 and 1995 but in 1996, shipments exhibited the largest increase since 1990.

This research paper reviews the Refined Petroleum and Coal Product Industries (Major Group 36). This annual industry review takes into consideration such key economic indicators as shipments, imports and exports, employment, capacity utilization and capital expenditures. Most of the data in the document is based on the 1996 Annual Survey of Manufactures.

Industry Structure

Major Group 36 is one of 22 major manufacturing groups in the manufacturing sector. The ASM classifies about 178 manufacturing establishments in this major group to three industries and two industry groups. These four-digit industries are Refined Petroleum Products (SIC 3611), Lubricating Oils and Grease (SIC 3612) and Other Petroleum and Coal Products (SIC 3699). The Refined Petroleum Products industry dominates with shipments accounting for about 95% of the major group’s total.

Shipments are concentrated in Alberta and Ontario

It should be noted that industries that make up Major Group 36 tend to be highly geographically concentrated. The percentage share of the value of shipments across the provinces has changed little over the last decade. Ontario, Alberta and Quebec are the largest producers as seen in Chart 1 – Provincial Distribution of the Value of Shipments – 1996. When combined, Ontario and Alberta alone a ccount for over half of the major group’s total shipment value.

Shipments jump in 1996 with the help of price increases

An improved economy was good news for Major Group 36. According to the 1996 Annual Survey of Manufactures, Major Group 36 shipments totalled $21 billion, ranking it ninth of the 22 major groups that make up the total manufacturing sector. After two years of modest increases, total shipments were up a remarkable 16% in 1996. When expressed in constant dollars (1992), the real value of shipments increased by 4.3%. Chart 2 – Value of shipments for Major Group 36 shows that for the first time in a decade, constant and current dollar shipments exceeded a 1990 pre-recession high.

Bolstered by an improved economy, the rate of growth in shipments for Major Group 36 exceeded that of the manufacturing sector as a whole. All manufacturing shipments increased by about 3% in 1996. Nevertheless, despite a steady increase over the last three years, this major group’s share of all manufacturing shipments remained in the 5% range.

Transportation fuels such as motor gasoline and diesel fuel are key outputs. These products are the largest source of revenues for the major group. After a decade of weakness, retail prices started to exhibit some strength in 1995. Regular unleaded gasoline (at the national level) increased from 55.4 cents per litre in 1995 to 58.1 cents per litre in 1996. Domestic heating oils increased from 36.2 cents per litre to 38.3 cents per litre in 1996. The most recent peak in the value of shipments occurred in 1990 when product prices spiked to record levels early in the Persian Gulf Crisis.

Substantial growth in 1996 followed by smaller gains in 1997

In 1997, the economy posted its best post recession performance with Gross Domestic Product (GDP)(1) up almost 4% from a year earlier. While the manufacturing sector jumped a healthy 6%, GDP for Major Group 36 increased by only 2% in 1997.

In 1997, the total value of shipments increased only 1%(2) from the year before. By comparison, shipments in the manufacturing sector jumped nearly 7%. Preliminary data from the Monthly Survey of Manufacturers for 1998 suggests shipments for this major group will fall back to $20 billion mark.

While the domestic economy continues to improve, the TD Economic Forecast suggests a moderation in Canadian economic growth. The pace of economic expansion is now expected to lose momentum because of global economic turmoil. After a strong first-quarter, GDP growth is expected to fall below 3% in 1998 and to about 2% in 1999(3).

Exports Support Growth

A surge in the demand for exports(4) was the primary reason for the rise in the value of shipments. While domestic demand remained relatively flat, the value of exports jumped by one-third in 1996 from a year earlier as shown in Chart 3 – Imports and Exports for Major groups 36 . This increase followed a 20% rise in 1995. As a percentage of total shipments, exports increased steadily from about 20% in 1991 to 30% in 1996. Over the same period, the value of product imports stayed in the vicinity of 10% of the domestic market.

Since 1991, the value of exports has more than doubled to $6.4 billion. The major group’s trade surplus jumped by about $2.4 billion to $4.4 billion in 1996. The sharp increase was driven by a booming U.S. economy, a favourable Canada /U.S. currency exchange rate and additional pipeline capacity. Improved trade regulations under the Canada Free-Trade Agreement (1989) and the North America Free-Trade Agreement (1994) also encouraged a shift towards the export market.

On the domestic side, demand for products remained relatively flat as seen in Chart 4 – Shipments and Apparent Domestic Market. However, improved economic conditions pushed the value of domestic shipments up 10% in 1996 from the previous year. This increase primarily reflected higher shipments of motor gasoline and some other products.

Output per worker still highest among all manufacturing industries

Total employment in Major Group 36 has been on a slow decline since 1989. The total number of employees working in the industry has fallen by 3,700 or 23% to nearly 12,400 in 1996 – about the same level as 1995. Likewise, the number of employees directly involved in production has fallen from a 1991 high of 7,000 to 6,300 in 1996. This decrease in total employment over this eight year period is directly related to the drop in product demand, major industry restructuring and technological improvements.

At $705 million, total salaries and wages in 1996 remained unchanged from a year earlier. Each employee represented about $180,000 of the major group’s GDP, nearly three times the average of the total manufacturing sector. Typically, close to 50% of the major group’s total work force is directly involved in production activities. In 1996, production workers accounted for a wage bill of about $330 million, which represents barely 2% of the major group’s 1996 total shipment value.

When compared with the 22 other manufacturing major groups which make up the manufacturing sector, Major Group 36 came in first in the value of shipments per production worker. The value of shipments per worker came in at a remarkable $3.3 million, more than double that of the second place Tobacco Products Industry. The average for all manufacturing industries is about $300,000 in shipments per production worker.

Input prices are on the increase

However, value added which is also a measure of labour productivity, decreased by nearly 30% in 1996 to $2.1 billion. This compares with $2.8 billion in 1995. Value added is defined as a measure of net output – the cost of shipments less purchased inputs. In this case, the decrease in value addedwas primarily a result of a large increase in the cost of inputs relative to the value of shipments.

Furthermore, the ratio between the value of inputs to outputs increased sharply in 1996 to 89% from about 82 % in 1995. While normally high, the ratio has averaged about 84% over the last six years. Much of this increase was the result of a jump in the cost of refinery feedstock. For example, in 1996, Canadian Par crude, posted at Edmonton, reached its highest level since 1985. The price averaged $184 per cubic metre in 1996, up from $152 per cubic metre in 1995.

Investment levels remain low

Major Group 36 registered an increase in its capacity utilization rate(5). However, this is somewhat deceiving in that most of the increase was due to industry restructuring combined with technological improvements and efficiencies. The capacity utilization rate registered 93% in 1996, up from a post-recession low of 83% in 1991. The capacity utilization rate is currently at a record high 94%.

Typically, a rise in capacity utilization translates into an increase in capital expenditures(6) which suggests an industry’s confidence in its long term potential. However, this is not the case for Major Group 36 industries. While manufacturing sector expenditures are now approaching a pre-recession high, this major group’s expenditures are stalled in a $350 and $450 million range as seen in Chart 5 – Capital Expenditures for Major Group 36. This is far from the $1 billion dollars spent in 1991.

Major Group 36 industries continue to suffer from the lingering effects of the mid-1980’s drop in refined petroleum product demand and crash of world prices. To make matters worse, high industry debt, rising environmental cost and global over-capacity reduced company cash-flows. These factors forced companies restructure and shelve investment plans.

Conclusion

With the help of growing demand for transportation fuels and exports, the Refined Petroleum and Coal Products industry experienced a large increase in shipments in 1996. Even with the rise in prices of these fuels in 1996, major group 36 shipments in constant 1992 dollars were still well above pre-recession highs. As well, these gains were made despite growing input costs.

1996 also saw the output per worker in major group 36 remain the highest in the manufacturing sector. This ranking will likely continue given the fact that the output per worker value is more than double that of the next highest industry.

Although the manufacturing sector had its best post-recession performance in 1997, industries in major group 36 did not experience as substantial a gain as in 1996. Shipments did grow slightly but at a much slower pace: 1% compared to the 16% in 1996. Shipments in 1998 are expected to decrease.

Refined petroleum product markets are cyclical in nature and the general state of the economy suggests that overall product demand will continue to grow. Demand for refined petroleum products has been on the rise since 1993, increasing by about 3% per year. Domestic demand motor gasoline has also been on the rise with an average growth rate of 2% since 1993.

Definitions

Major Group 36 – Refined Petroleum and Coal Products Industries:

The following four-digit industries are classified (by the Standard Industrial Classification System) to the Refined Petroleum and coal products Industries (Major Group 36). Also included are the respective CANSIM matrices. CANSIM can be used to extract more detailed principal statistics by industry.

For more detailed information on the industrial classification system please refer to Catalogue 12-501-XPB, Standard Industrial Classification, 1980.