Canadian corporations earned record high operating profits of $217.0 billion in 2005, fuelled by a large increase in the oil and gas industry. Profits climbed 12.1% from the previous high in 2004 and have now risen for four consecutive years. However, the most recent rate of growth was down from the 20.3% annual increase in 2004.

Of the 22 industry groups, 16 increased their profits this year, most notably the oil and gas industry where fuel prices rocketed to all-time highs. Steady employment growth and healthy consumer spending bolstered the retail sector, while profits of depository credit intermediaries (mainly chartered banks) continued to shine.

On the other hand, manufacturers suffered from the strong Canadian dollar's impact on export sales and rising input costs, their profits declining 6.9% in 2005. Employment in the manufacturing sector also declined as companies endeavoured to trim costs.

Operating profits increased to $57.5 billion in the fourth quarter, up 4.4% from the third quarter. Quarterly profits have risen for five consecutive quarters, establishing record highs each quarter. Operating profits in the financial sector were up 8.5%, as chartered bank profits reached all-time high levels. The non-financial sector turned in a more modest 3.2% profit growth, led by gains in retail, transportation and some manufacturing industries. However, these gains were tempered by lower profits for oil and gas companies, as crude oil prices eased in the fourth quarter.

Soaring commodity prices boost oil and gas and mining profits in 2005

The year 2005 saw a spectacular rise in the price of crude oil and natural gas. Crude oil prices soared to over US $70 per barrel in the late summer amid concerns over supply. Natural gas prices were jolted by the hurricanes that devastated the US Gulf Coast's production capabilities. Oil and gas extraction companies benefited from these lofty prices, their annual operating profits rising to $31.3 billion in 2005, up 46.5% from 2004. The oil and gas industry alone accounted for half of the overall profit gain in the non-financial industries in 2005.

Metal mining companies also benefited from rising commodity prices in 2005; these were boosted by thriving North American and Asian demand for metals. In 2005, operating profits increased to $7.0 billion, from $4.2 billion in 2004. Before metal prices began to soar two years ago, annual operating profits had hovered around $1.6 billion for three consecutive years.

Challenging year for manufacturers

Manufacturing companies earned $42.0 billion in operating profits in 2005, down 6.9% from 2004. Of the 13 manufacturing industries, 10 lost ground, with petroleum and coal producers reporting the only substantial gain. The strong Canadian dollar trimmed revenues for exporters of goods priced in US dollars. High fuel costs and an unstable demand further undermined manufacturing profits. The December release of the Monthly Survey of Manufacturing revealed that the upward trend for shipments persevered in 2005, but that the rate of growth was much slower than in the previous year.

Wood and paper manufacturers earned $4.1 billion in operating profits in 2005, down from $6.5 billion in 2004. Softening newsprint demand, high energy costs and the strong Canadian dollar all contributed to weakness in the paper sector. Newsprint consumption has been declining steadily in recent years due to the increased popularity of electronic media. Wood producers benefited from strong domestic construction demand, however, as the value of issued building permits reached record high levels in 2005. Lumber exports picked up in the latter months of the year, partly due to US rebuilding efforts in the aftermath of the hurricanes on the Gulf Coast. However, the average wood product price reaped by manufacturers was significantly down in 2005, compared to the previous year.

Motor vehicle and parts manufacturers earned $1.8 billion in 2005, down 37.6% from 2004. Operating revenues dropped 6.5%, curtailed by lower exports of passenger automobiles, despite some strength in the fourth quarter. The industry was extremely volatile throughout the year, affected by rising fuel prices, intense foreign competition and inconsistent consumer demand.

Petroleum and coal manufacturers' operating profits surged to $11.7 billion in 2005, from $9.2 billion in 2004. Record high crude and refined oil prices drove earnings to unprecedented levels for many companies. Refining margins surged, particularly in the autumn after the hurricanes battered the US Gulf Coast and commodity prices escalated.

Primary metal producers saw profits drop 17.4% to $2.0 billion in 2005, the result of higher energy costs and softening steel prices.

Retail and wholesale both up in 2005

Consumers increased their spending in 2005, causing a 4.8% rise in operating revenues and a 16.4% jump in operating profits for all retailers. Employment gains and consumer confidence in the economy encouraged consumers to loosen their purse-strings.

Clothing and department stores earned 9.7% more in profits, as operating revenue advanced 4.4%. Profits of motor vehicles and parts dealers rose 12.1%. The December issue of New Motor Vehicle Sales indicated that the number of new vehicles sold in 2005 increased for the first time in three years, thanks to high profile incentive and rebate programs.

Wholesalers reported a 6.9% rise in annual operating profits, with wholesalers of food, beverages and tobacco showing the biggest gain (+27.0%).

Other non-financial industries

Transportation and warehousing company profits climbed to $11.2 billion in 2005, from $7.7 billion in 2004. Profits in the information and cultural industry increased 21.5% to $10.3 billion. This substantial increase, however, can be explained by unusually low 2004 profits in the telecommunications sector arising from restructuring charges.

Banks propel financial sector profits to record levels

The depository credit intermediaries posted operating profits of $23.2 billion in 2005, up 10.4% from 2004. Chartered banks reported higher net interest income and increased gains related to securities held for trading.

Insurance carriers' operating profits rose 8.4% to $12.9 billion in 2005, while non-depository credit intermediaries reported a 10.1% annual profit rise to $7.7 billion.

Quarterly profits continue to rise

Corporations earned $57.5 billion in the fourth quarter of 2005, up 4.4% from the third quarter. Profits have risen in all but 2 of the past 16 quarters, nearly doubling over that period. Financial industries' operating profits swelled 8.5% to $14.1 billion in the fourth quarter, while the non-financial industries reported profits of $43.4 billion (+3.2%).

Crude oil prices retreated from their third quarter record highs, pulling down fourth quarter operating profits in the oil and gas industry to $8.3 billion (-5.5%). The price decline was attributed to increased supplies, as normal oil and gas production resumed in the US Gulf Coast following the late summer hurricanes.

The manufacturing sector gained ground in the fourth quarter, their operating profits rising 5.1% to $10.6 billion. Despite the improvement, profits remained well below the recent high of $12.5 billion earned in the second quarter of 2004. Manufacturers of wood and paper (+23.9%), computers and electronics (+34.2%) and petroleum and coal (+25.2%) all contributed to the fourth quarter increase. However, Manufacturers of motor vehicles and parts lost ground, as their profits lessened by more than two-thirds.

Retailers reported a 5.7% rise in fourth quarter operating profits, with retailers of clothing and department stores showing the biggest gain (+17.6%). Wholesalers' operating profits edged up 3.2% in the same quarter.

In the financial sector, the depository credit intermediaries' operating profits were up sharply, rising 20.8% to $6.4 billion. Higher dividend income, foreign exchange and trading gains, and lower provisions for litigation costs contributed to the fourth quarter improvement.

Profitability ratios

The operating profit margin increased for a fourth consecutive year in 2005, expanding to 8.2%, from 7.7% in 2004. The return on average shareholders' equity also improved, reaching 11.0% in 2005, compared to 10.6% in 2004. The return on equity has almost doubled since falling to 5.7% in 2002.

The operating profit margin edged up to 8.5% in the fourth quarter, from 8.3% in the third quarter. Similarly, the return on shareholders' equity showed a slight increase to 11.6%, compared to 11.4% in the previous quarter.