Canadian corporate operating profits declined 2.6% to $56.1 billion in the first quarter of 2006, following five straight quarters of growth. Nevertheless, first quarter profits were the second strongest ever, surpassed only by the all-time high of $57.6 billion earned in the fourth quarter of 2005. Oil and natural gas export prices weakened in the first quarter, reducing profits in the oil and gas sector. A string of price increases had fueled a run-up in oil and gas profits over the past several quarters, a major factor in the recent overall profit growth.

Excluding the oil and gas extraction and refining industries, operating profits for the remaining industries increased 1.1% in the first quarter.

The non-financial industries' profits fell 2.8% to $41.3 billion in the first quarter, just the second decline in the past eleven quarters. Financial sector profits were also down, falling 2.1% to $14.8 billion. Overall, about half of the industries posted profit gains, while the remainder were down in the quarter.

Mining companies lose ground

Oil and gas extraction companies saw profits slide 9.1% to $8.0 billion in the first quarter. Profits had previously risen for five straight quarters from the $4.9 billion earned in the third quarter of 2004. Profits were pared by lower crude oil export prices, as exports generally account for about two-thirds of domestic crude oil production. Natural gas export prices were also down notably in the quarter. As reported in the March Canadian International Merchandise Trade, the export value of crude oil and natural gas declined in the quarter. Mild weather conditions cooled demand, keeping North American inventory levels high.

The metal mining industry also lost some ground in the first quarter, as profits fell to $0.8 billion from $1.2 billion in the previous quarter. Potash producers reported lower first quarter profits as export demand for potash wavered. In addition, while non-ferrous metal prices swelled in the quarter, growth in ferrous metal prices eased . The export value of primary iron and iron ore declined substantially in the first three months of 2006.

Manufacturing shows some strength

Nine of thirteen manufacturing industries improved operating profits in the first quarter of 2006. However, lower profits by the petroleum and coal refineries pulled overall profits down 4.6% to $10.6 billion. Manufacturing profits peaked in the second quarter of 2004 at $12.5 billion, but have faltered over the past few years due to the stronger Canadian dollar, rising input costs and volatile demand for products. The Business Conditions Survey recently reported that manufacturers are expecting tougher times ahead, anticipating lower levels of production and employment in the second quarter.

Petroleum and coal manufacturers saw their first quarter operating profits drop to $2.5 billion from an all-time high of $3.7 billion in the fourth quarter of 2005. North America's warmer-than- normal weather in the first quarter moderated demand for petroleum products. Petroleum and coal exports were well down, a combination of the weaker demand and lower export prices. Domestic sales of refined petroleum also declined in the quarter.

Wood and paper producers churned out $1.0 billion in first quarter profits, up from $0.9 billion in the fourth quarter. However, profits remained just half of the $2.0 billion peak earnings of the second quarter of 2004. Shipments of wood products moved ahead for the three month period, but the gains were largely achieved early in the quarter.

Demand for lumber products was buoyed by robust construction activity both domestically and south of the border. However, lumber prices stalled in the quarter and remained much below year earlier levels. The strong Canadian dollar and high input costs continued to undermine profits in the wood and paper sector.

Motor vehicles and parts manufacturers' operating profits edged up to $0.4 billion in the first quarter from $0.3 billion in the previous quarter. Profits have been volatile over the past several years, but have trended downward since peaking at $2.5 billion in the second quarter of 2000. In the most recent quarter, exports of automotive products slowed, but domestic new motor vehicle sales accelerated.

Retail up but wholesale profits edge back

Retailers earned record high profits of $3.3 billion in the first quarter, up 5.4% from the previous high in the fourth quarter of 2005. Confident consumers continued to spend, boosting profits for retailers of furniture and electronics (+ 26.1%), food and beverages (+10.9%) and for clothing and department stores (+7.4%).

Wholesalers saw their profits slip to $3.9 billion from the record high $4.0 billion in the fourth quarter.

Financial sector profits weakened

Profits in the financial sector slipped 2.1% to $14.8 billion, following a 5.4% gain in the fourth quarter.

Companies dealing in securities, commodity contracts and other financial investment activities earned $3.5 billion, down 4.8% from the fourth quarter. The chartered banks earned $6.0 billion in first quarter profits, little changed from the previous quarter.

Profitability ratios

The operating profit margin weakened to 8.1% in the first quarter from 8.3% in the fourth quarter, halting consecutive increases dating back to the fourth quarter of 2004.

The return on shareholders' equity also deteriorated, falling to 10.9% from 12.0% in the previous quarter. After-tax profits, the numerator in this profit measure, fell 7.7% in the first quarter, reflecting lower operating profits and a decline in interest and dividend revenue.