Corporate profits increased 6.0% in the first quarter of 2004, fueled by gains in the oil and gas and banking sectors. Eight increases in the past nine quarters have boosted operating profits to a record high of $47.4 billion.

The non-financial industries enjoyed a 6.4% jump in profits, led by oil and gas (+18.2%) and manufacturing companies (+13.5%). Transportation and warehousing companies lost ground in the first quarter, as their profits dropped 11.8% to $2.1 billion. Overall, 10 of the 17 non-financial industries showed higher profits in the first quarter.

Chart 1
Record high profits in the first quarter

The financial industries reported a 5.0% improvement in operating profits, led by a 15.8% gain by the depository credit intermediaries (mainly chartered banks). Insurance carriers saw profits slide 7.8% to $2.4 billion.

Soaring prices a boon for oil and gas producers

Oil and gas extraction companies reaped the benefits of rising crude oil prices in the first quarter, as operating profits jumped 18.2% to $4.8 billion. Strong demand coupled with worldwide supply concerns lifted average crude oil prices almost 15% above fourth quarter levels. However, profits remained well below those earned a year earlier when crude prices spiked to all-time highs, jolted by the war in Iraq and Venezuelan supply disruptions.

Sizeable gain for manufacturers

Manufacturers enjoyed a profitable first quarter, despite the effects of the strong Canadian dollar on export prices and higher production costs associated with rising energy prices. The Canadian dollar eased back over the past few months following decade-high levels in January. Overall, manufacturing profits increased 13.5% to a four quarter high of $10.2 billion, despite an operating revenue slide of 0.7%. Excluding a decline by the manufacturers of motor vehicles and parts, however, manufacturing revenue increased 1.0% in the quarter.

Petroleum and coal producers posted the strongest profit gain in the manufacturing sector, as their profits swelled 34.3% to $1.6 billion. Refined oil prices increased with the rising crude prices, but both remained significantly below the first quarter peak levels of last year. Domestic and foreign demand for refined petroleum products were solid in the quarter.

Chemical manufacturers saw their profits rise 21.7% to $1.4 billion. Most of the gains were associated with improved efficiencies in controlling costs, as profit margins were much improved despite little growth in revenue and prices. Wood and paper manufacturers reported a third straight rise in operating profits. Profits of $1.0 billion were 13.0% above fourth quarter levels, and were almost triple those earned in the second quarter of 2003.

Wood prices strengthened on the heels of sustained demand from the North American housing sector. Meanwhile, pulp and paper markets picked up and prices improved throughout the quarter.

Thriving domestic and international demand triggered revenue and profit growth in the primary metals industry. Profits jumped 28.2% to $0.4 billion, propelled by a 3.7% increase in revenue. Demand for steel from the oil and gas industry accelerated, as exploration companies expanded drilling activity. The Monthly Survey of Manufacturing recently reported that demand for raw steel by China is skyrocketing, raising concerns about possible shortages. Prices for most metals showed healthy increases in the quarter.

Chart 2
Profit growth continued

Transportation profits retreated from fourth quarter peak

Operating profits in the transportation and warehousing industry were down, following two straight quarters of double-digit growth. The decline was led by the transportation carriers, whose operating profits fell 19.2% to $1.4 billion from an all-time high of $1.8 billion in the fourth quarter. A labour disruption, airfare discounting and higher fuel costs were all cited as factors in the profit slide. However, first quarter results remained historically strong, bolstered by rising manufacturing shipments and increased passenger travel.

Banks led financial sector gains

The depository credit intermediaries were the big winners in the financial group of industries, mainly because of gains by the chartered banks. Operating profits of the chartered banks rose 17.3% to reach a record high of $5.2 billion, benefiting from lower loan loss provisions in an improved credit environment and higher net interest income. Stronger equity markets contributed to growth in underwriting fees, trading gains, and securities trading commissions .

Insurance carriers' operating profits slipped in the first quarter, primarily as a result of a $174 million (-13.7%) decline in the profits of life insurers. Higher life insurance and annuity claims were only partly offset by increased premiums and annuity considerations. Meanwhile, property and casualty insurers reported little change in operating profits.

Profit margin improved (all industries)

The operating profit margin jumped to 7.7% in the first quarter from 7.2% in the previous quarter. This was the largest quarter-to-quarter improvement since the first quarter of 2003. Corporations succeeded in controlling their operating costs, resulting in a 6.0% rise in operating profits despite a marginal decline in operating revenue.

The return on shareholders' equity fell to 9.5% from 10.3% in the fourth quarter of 2003. Robust growth in operating profits was obscured by lower capital gains, resulting in a 7.4% drop in after-tax profits. The return on shareholders' equity averaged 7.4% in 2001, 6.2% in 2002 and 9.9% in 2003.

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Financial statistics for enterprises