Canada’s auto industry driving towards increased profits

Strong economic fundamentals, ultra-loose credit conditions, and low gas prices are fuelling North Americans’ appetite for motor vehicles.

Thanks to record North American sales and the lower Canadian dollar, Canada’s auto manufacturers will likely see their highest profits in years in 2015, according to The Conference Board of Canada Spring 2015 Industrial Outlook reports.

Industry profits are forecast to reach $2.3 billion in 2015, up from $1.3 billion in 2014.

“With more than 80 per cent of the vehicles produced in Canada exported to the U.S. market, the lower Canadian dollar is a boon to the industry’s bottom line,” said Fares Bounajm, economist with The Conference Board of Canada. “The lower exchange rate means that cars made in Canada fetch a higher price in Canadian dollars when they are sold in the U.S.”

Vehicle sales in Canada have posted a new record in each of the last two years but may be reaching a saturation point. A weak labour market and the adverse effects of the collapse in oil prices on the Alberta economy have slowed sales in Canada. However, south of the border where the labour market remains robust and pent-up demand is high, strong sales growth is expected to continue until at least 2017.

On the production side, the Canadian industry has been parked in the neutral position since the start of 2015 as two plants were retooling in preparation for the production of new models. However, production is expected to rebound strongly in the second and third quarters and overall production is expected to grow by 2.5 per cent this year, supported by the depreciated dollar and the resurgent popularity of light trucks, which make up about 60 per cent of the vehicles produced in Canada.

Beyond 2015, the outlook gets dimmer. The end of the Camaro production in November and the likelihood of further layoffs at the Oshawa plant in 2016 mean that Canadian production will decline in both 2016 and 2017.

Industry costs are expected to rise by 3.9 per cent this year due to a combination of increased production and higher material prices. From 2015 to 2019, costs will grow by just 1.5 per cent per year. Labour costs, however, are projected to grow very slowly due to more senior employees retiring, continued labour productivity improvements and low interest rates.

Motor Vehicle Parts Manufacturing

Likewise, Motor vehicle parts producers will benefit from the lower loonie and stellar North American vehicle sales this year. “Parts producers were able to expand their markets both internationally and domestically to see 8.9 per cent growth in production last year. For 2015, we expect production to continue advancing at a robust, albeit, slower pace,” added Bounajm.

Profits are expected to grow by 3.1 per cent to about $2 billion, thanks to a strong sales growth. Over the next few years, as domestic vehicle production declines and pent-up demand in the U.S. wanes, profits are expected to gradually decline to around $1.5 billion per year.

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