Canadian car production to jump

Plunging North American vehicle inventories, particularly for Canadian-assembled cars, will boost production through the end of 2009 and into 2010, according to the latest industry forecast released Wednesday by Scotia Economics.

Strong U.S. vehicles sales in August, boosted by the government’s Cash for Clunkers program, left inventories at a record-low 30 days’ supply, down from a normal of 65 days. Asian automakers’ inventories are even lower, at an average 22 days’ supply, said Carlos Gomes, senior economist and auto industry analyst at Scotia Economics.

Inventories of Canadian-made models are very low, especially for popular models such as the Toyota Corolla, Honda Civic and Chevy Camaro, the report said.

Plans call for vehicle assemblies in Canada to climb to an average 1.7 million units monthly in the final months of 2009, nearly 40 per cent above the 1.2 million average of the first half of 2009. Output in Canada will jump further in early 2010, once Toyota expands production of the Corolla at its factory in Cambridge, Ont., in the wake of the closure of its joint-venture plant in California planned for early next year, said Gomes.

The cyclical recovery in the auto market continues to gain momentum around the world, he said.

“Record purchases in emerging markets are leading the way, with sales in China, India and Brazil advancing 55 per cent year-over-year in August. However, activity is also strengthening in the mature markets of North America and Western Europe.”

In the U.S., the Cash for Clunkers program pulled many buyers into dealer showrooms in August, lifting passenger-vehicle sales above a year earlier for the first time since October 2007, he said. “Even excluding Cash for Clunkers, U.S. sales climbed to a nine-month high of 10.5 million units, up from a cycle low of 9.1 million in February.”

In Canada, car and light-truck sales remained strong in August, totalling 1.51 million units. This represents the second consecutive month above 1.50 million units and is the best back-to-back performance since last October.

According to the report, the strong U.S. sales performance in August slashed dealer inventories to record lows, prompting automakers to extend the gearing up of production into 2010. U.S. inventories fell to only 1.41 million vehicles in late August, down sharply from an already-low 1.79 million at the end of July and nearly half the 2.76 million units prevailing a year ago.

Automakers began to ramp up production even before the inventory depletion in August, with assemblies across North America climbing to 9.3 million units in July and August, up from 7.0 million in the first half of 2009.

“This increase is now filtering through the economy, helping overall activity transition from recession to recovery,” Gomes said.

Vehicle assemblies will continue to rise in coming months, with automakers planning to assemble an annualized 10.3 million units in the fourth quarter, he said.

However, these schedules are likely to be increased further, even as sales moderate from the recent Cash for Clunkers’ rush.

Scotia Economics’ estimates suggest that even if fourth-quarter U.S. sales slip back to an annualized 10 million units, current production plans imply year-end 2009 inventories of about 50 days’ supply — well below the 67 days’ average of the past decade and nearly 10 per cent below the level prevailing at the end of the 2001 recession.

Current production plans will add roughly two percentage points to U.S. overall economic activity in the second half of 2009, said Gomes.

“In Canada, auto assemblies are expected to add at least a percentage point to economic growth in the third and fourth quarter,” said Gomes.

“However, output would have to increase at least 20 per cent above current schedules to bring inventories back to ‘normal’ by the end of 2009.”

Photograph by: Ken Shimizu