Highlights

Second Quarter 2003 (preliminary)

Corporate profits fell 7.3% to $40.4 billion in the second quarter of 2003 from a record high of $43.6 billion in the first quarter. This decline followed five consecutive quarters of growth, including a 12.4 % jump in the first quarter. Once again the energy sector dominated the results, as crude and refined petroleum prices plummeted following a first quarter surge due to supply concerns.

Excluding the oil and gas extraction and the petroleum refining industries, operating profits slipped a more modest 1.0 %. Overall, 13 of the 24 broad industry groups posted weaker profit results in the second quarter.

The non-financial group of industries dominated the second quarter profit slide, as their profits declined 10.3% to $30.7 billion. Profits had previously risen for five straight quarters from $21.4 billion in the fourth quarter of 2001 to a peak of $34.2 billion in the first quarter of 2003.

The financial industries, on the other hand, posted a 3.7% rise in second quarter operating profits, following gains of 8.5% and 9.3% in the preceding two quarters.

Oil profits hammered by price declines

Operating profits in the oil and gas extraction industry tumbled to $4.5 billion in the second quarter from $6.5 billion in the first. Crude oil prices had soared to record high levels in the first quarter, but fell almost 20.0% with an easing of supply concerns in the second quarter. The stronger Canadian dollar trimmed returns on export sales priced in US dollars. Natural gas producers fared somewhat better, as gas prices edged up in the second quarter.

Despite the second quarter weakness, operating profits of oil and gas producers were still 39.9% above those earned in the second quarter of 2002.

Manufacturing profits lowest in five quarters

Manufacturers saw their profits tumble 10.0% in the second quarter, curtailed by sizeable declines in the petroleum and coal, primary metals and motor vehicles industries. Manufacturers had enjoyed sustained profit growth over the previous six quarters that lifted profits from $6.5 billion in the third quarter of 2001 to the recent high of $10.5 billion in the first quarter of 2003. Although the second quarter profit downturn was centred in the petroleum industry, weakness was widespread with eleven of the seventeen manufacturing industries reporting lower second quarter profits. Excluding the petroleum and coal industry, manufacturing profits were down 3.5%.

The Monthly Survey of Manufacturing recently reported that shipments fell 4.4% in the second quarter of 2003, as Canadian producers struggled with the effects of the appreciating Canadian dollar, the ongoing weakness in the US economy and the single case of mad cow disease. There have been signs of recovery south of the border, however, as shipments by US manufacturers posted back-to-back increases in May and June.

Petroleum and coal manufacturers suffered a 33.2% slide in operating profits in the second quarter. Refined petroleum prices were down substantially in the quarter after peaking in March amid concerns over supply disruptions in Iraq and Venezuela . The value of petroleum and coal exports declined in the wake of falling prices.

Notwithstanding the recent declines, second quarter 2003 operating profits in the petroleum and coal industry remained 30.2% above second quarter levels of last year, as not all of the price increases of the past year were lost in the latest quarter.

Manufacturers of primary metals saw operating profits tumble 27.7% to $0.4 billion , following a 19.6% slide in the first quarter. Softening steel demand, partly due to declining North American motor vehicle production, and the stronger Canadian dollar contributed to the lower results. Lower priced imports from off-shore steel producers have also been cited as a cause of the difficult market conditions within the industry.

Motor vehicles and parts manufacturers earned $1.3 billion in second quarter operating profits, a 7.4% slide from the first quarter. Operating revenue dropped 3.3% to $33.0 billion, as cautious consumers curtailed new vehicle purchases for a second consecutive quarter. Declining US vehicle production has been bad news for motor vehicle parts producers, as parts exports eroded in the second quarter.

Operating profits in the wood and paper industry fell 13.9% to $0.6 billion. Profits have been in a downward spiral since peaking at $2.3 billion in the first quarter of 2000. Profits on lumber exports continued to be hindered by punitive duties on softwood lumber exports to the United States. The stronger Canadian dollar trimmed returns on exports priced in US dollars. Lumber demand from the domestic construction sector has been strong in 2003, despite monthly volatility in construction intentions. Paper producers dealt with sluggish market conditions in newsprint and packaging products by lowering production levels in the second quarter.

Difficult quarter for transportation carriers

Transportation carriers felt the effects of the lacklustre economy in the second quarter, as operating profits dropped 24.4% to $1.1 billion. Lower manufacturing shipments, coupled with slumping passenger travel due to the outbreak of severe acute respiratory syndrome (SARS) and the war in Iraq, reduced profits to their lowest level since the final quarter of 2001. While the stronger Canadian dollar was a boon for Canadians traveling abroad, it had a negative effect on the volume of international travelers coming into Canada.

Wholesale profits increased, but retailers lost ground

Led by wholesalers of machinery, overall wholesale trade operating profits rose to $3.2 billion in the second quarter from $3.0 billion in the first. Higher profits of machinery wholesalers more than offset a decline in wholesalers of petroleum products. Growth in operating revenue of wholesalers basically disappeared in the quarter (+0.1%), following three quarters of expansion.

Profit declines in retail motor vehicles and parts and general merchandise retail reduced total retail sector operating profits by 4.7% to $2.2 billion. Operating revenue edged up 1.0%, the smallest quarterly increase since the fourth quarter of 2001.

Financial profits up for third straight quarter

The financial group of industries earned $9.7 billion in second quarter operating profits, up 3.7% from the first quarter. Nonetheless, profit growth slowed considerably from the 8.5% and 9.3% increases in the fourth quarter of 2002 and the first quarter of 2003.

Insurance company profits rose to $1.7 billion from $1.5 billion in the first quarter. Life insurers benefited from lower insurance and annuity claims, as operating profits climbed 9.3% to $1.1 billion. Meanwhile, property and casualty insurers' profits increased to $0.5 billion from $0.4 billion in the first quarter.

Profitability ratios weakened (all industries)

The operating profit margin fell to 6.9% in the second quarter from 7.3% in the first, but was still above the 6.5% margins earned in each of the final two quarters of 2002.

The return on equity ratio lost a full percentage point, falling to 9.3% in the second quarter. After-tax profits were down 7.7% from the first quarter, while shareholders' equity increased by 1.8%.