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Production.

4.1 Mining and manufacturing

Industrial production fell 2.8 per cent in 1990 according to the latest estimates for the National Accounts. The fall was most marked in the latter part of the year and manufacturing decreased most for steel, pulp and engineering products. Exports remained weaker than imports, so the net effect continued to hold production back.

Industrial activity has gone on weakening this year, mainly due to decreased exports, greatly reduced investment and stock reductions. According to the Business Tendency Surveys, moreover, the shortage of skilled workers is the lowest ever recorded and the proportion of firms reporting full capacity utilization has not been so low since the 1982 recession.

Our annual forecast for industrial production this year is a fall of 6 per cent. This assumes that the drop in the first half-year was not quite as marked as the volume index from Statistics Sweden suggests. Persistently weak demand and large stocks of finished goods are reasons for supposing that production will continue to decline in the rest of the year.

Industrial production is expected to reach a low in the course of the winter and then pick up again, aided by better international activity. This could result in some growth of production in 1992.

Very strong activity in 1989 for forest industries (sawmills, pulp and paper manufacturing) was followed by a clear slowdown in 1990, though the picture did vary.

Sawmills benefited from very strong price increases; the average level of export prices in 1990 was more than 15 per cent higher than the year before. However, a sharp increase in the first quarter was followed by little change in the rest of the year. Underlying demand remained good but the high price level prompted importers to begin destocking and the inflow of orders for delivery in 1991 dropped markedly towards the end of the year. Moreover, when the North American market weakened and the competitive situation deteriorated, Canadian suppliers turned to Europe, leading to a further reduction of Swedish exports to the United Kingdom. Imports in other important Swedish markets were also cut back substantially last year. The volume of Swedish exports therefore fell more than 8 per cent, while the level of domestic deliveries was virtually unchanged. The high level of production was maintained until the fourth quarter, when it began to slacken. The annual level of production was more than 3 per cent up on 1989. Stocks of finished goods accumulated rapidly during the second half-year.

Pulp manufacturing experienced a marked slackening of activity last year, representing the beginning of a very weak period. A fall-off in demand worldwide and particularly in North America, accompanied by increments to supply, put an end to a very good period. Final users began to draw on stocks. Japanese import demand decreased sharply, with the result that producers in North America, for whom the Japanese market is important, became very aggressive in Europe and took substantial shares of that market from other exporting countries. The volume of Swedish exports fell 7 per cent. Export prices declined during the year and the average level was about 7 per cent down on 1989. The weak market led to cuts in production, which for Swedish producers amounted to more than 7 per cent in volume. Even this did not prevent a further increase in stocks.

Paper manufacturers noted a weak increase of around 2.5 per cent in global demand last year. It was still slack demand in North America that was primarily responsible for the imbalance with supply. Swedish producers faced growing competition with Canadian newsprint and US craft liner. This was accompanied by additional production capacity, mainly for newsprint and other printing paper, which could not be fully absorbed. Prices were accordingly subdued and the increase in the average export price stopped at about 2.5 per cent. The volume of exports rose less than 1 per cent. An increase in production of just over 1 per cent then implies that the level of capacity utilization fell about 1 percentage point.

Although the trend during the year was negative, 1990 was a relatively good year for forest industries in terms of the profit level, though even this was below the very high figure the year before.

The outlook for 1991 is weak. Export prices, weighted together for the three sub-branches, are estimated to fall almost 6 per cent. The volume of exports is rising just over 2 per cent, while production is falling about 1.5 per cent.

The pulp market is very depressed. Prices went on falling in the first half of 1991. Prices in German marks, for instance, have dropped for bleached pulp from a high of 1.630 per tonne at the end of 1989 to 1,050 in the late summer this year; discounts may be resulting in even lower prices. There is a risk of some further price fall but the low is probably not far off. We assume that the price level is then unchanged for the rest of this year because even if demand does improve, it will still be exceeded by supply. The North American market is still weak and the supply of pulp is growing, above all in South America. It was chiefly in Asia, Italy and to some extent France that an increase in import demand was registered in the first half-year. Producers in North America benefited most from this but Swedish exports have also risen. Part of the increase in demand no doubt represents a replenishment of stocks while prices are low; the production of paper does not fully correspond to the first-half increase in pulp demand. We foresee an increase of about 6 per cent for Swedish exports, which means that the level will still be lower than in 1989. The average price level is calculated to fall more than 20 per cent this year. The growth of production is put at between 1 and 2 per cent, accompanied by some further accumulation of stocks.

Paper manufacturers also face a depressed market, with supply outstripping demand. Newsprint capacity has been expanded and more capacity is on the way. Prices for other high-grade printing paper are also depressed by the capacity surplus relative to demand. Low pulp prices give consumers of paper an additional argument for pressing prices. Other grades, such as craft liner, are still doing relatively well in volume but their prices are weak. In the second half-year we foresee some overall price fall, implying that the annual level of export prices goes up less than 1 per cent for 1991. The volume of exports is expected to rise almost 2 per cent. In view of cuts in the output of newsprint, the overall level of production is likely to be only marginally higher than last year, implying that the level of capacity utilization falls about 2 percentage points.

Sawmills have also experienced a worsening of the market this year, in keeping with tendencies that were apparent towards the end of 1990. Prices fell throughout the first half and the mid-year level was almost 10 per cent below the average for 1990. Production has outstripped demand, leading to greatly increased stocks. One sign that a turn may be on the way is that stocks at importers are no longer sizable. Sales figures are also catching up on last year. The important but weak construction markets in the United Kingdom and the United States are still an uncertain factor, causing Canadian producers to turn to Europe and crowd out Swedish and Finnish companies. The new, lower price level is expected to continue, possibly with some further fall before a low is reached. This implies that the annual level of export prices will be around 7.5 per cent down on last year. The volume of exports is estimated to remain low, falling roughly 1 per cent, while domestic deliveries drop almost 10 per cent. We envisage that the need to reduce stocks leads to substantial cuts in production in the second half-year, so that the annual level falls as much as 10 per cent.

1992 is likely to be another weak year for forest industries as a whole. Prices are assumed to remain weak and it is only for sawmills that we foresee a clear improvement in the volume of exports.

Pulp manufacturers are calculated to experience yet another very weak year. Supply is expected to go on exceeding demand, making it very difficult, at least initially, to raise prices. The average level of export prices in 1992 is calculated to be somewhat lower than this year. Swedish capacity for mechanical pulp is to be reduced, which will hold exports back; the overall level is calculated to rise about 1 per cent. We also expect producers to go on reducing stocks at the expense of production. With the decreased output of mechanical pulp, total production of commercial pulp is calculated to fall by up to 1.5 per cent.

Paper manufacturers are likewise expected to have a meagre year with a persistent imbalance between supply and demand. Prices will therefore remain weak in 1992, an increase of about 1.5 per cent being estimated for export prices. The volume of exports should rise about two per cent and production around 2.5 per cent.

Sawmills can no doubt count on substantial increases in the volume of exports, though this does assume improvements in, for instance, construction in the United kingdom and the United States. Domestic deliveries are expected to go on falling. With further stock reductions, the level of production is assumed to be unchanged from 1991. Export growth may reach as high as 6.5 per cent. Prices are expected to move more slowly, so that at the end of 1992 they are still a good bit below the 1990 level.

Steel production in Sweden fell in 1990 by 5.5 per cent in terms of value added. The decline is continuing this year at an undiminished rate and the annual level is likely to be 6 per cent down on last year. The causes of the decline are mainly in the domestic market. Engineering production (with electrical machinery excluded on account of its low steel content), for instance, fell more than six per cent in 1990. This year the weak demand for steel has to do not only with a further contraction of engineering production but also with a drop of 2.2 per cent for construction investment. Under these circumstances, the net supply of steel to the domestic market is likely to fall as much as 16 per cent this year.

Steel production will not fall to the same extent as domestic demand this year because exports of steel are rising by an estimated four per cent in volume. It is mainly various types of commercial steel which, as a result of the weak domestic market, have been sold abroad instead.

The weak demand and low world market prices for steel have intensified rationalization and structural adjustments by virtually all steels companies. This is leading to a continuous concentration of production to fewer places with fewer employees. This year, for instance, two metallurgy facilities have been closed down: Fundia's in Halmstad and Ovako's in Hallefors.

In 1992 construction investment is expected to go on falling, entirely due to lower residential construction, though the decline is expected to stop at 0.6 per cent. In engineering, however, the low should be reached in the winter and this is an important condition for our forecast that steel production rises next year by 1.5 per cent. Another factor that should generate increased production next year is that both wholesalers and consumers are expected to build up their stocks, which are very low at present.

Export prices for Swedish steel are expected to fall this year by more than import prices, that is by 5.4 compared with 2.8 per cent. The value of exports would then decline from 17.6bn kronor to 17.1bn. The prospect of improved demand for steel next year points to some price rise.

The extraction of iron ore is expected to rise this year to 20 million tonnes. LKAB, already much the largest supplier, will have no domestic competitor next year because the Dannemora mine is closing down at the turn of 1991. Even so, no change is foreseen in the total production of iron ore in 1992.

Deliveries to Swedish steelworks have been maintained at last year's level even though steel production has fallen. The explanation lies in a decreased input of steel scrap. Exports of iron ore, which make up more than 80 per cent of total deliveries, are rising by 0.25 million tonnes this year. LKAB still has no difficulty in finding markets; the volume of sales is limited by production. Demand is good for pellets in particular, on account of their high quality. Pellets are steadily increasing their share of total deliveries and in 1990 they reached roughly half the total tonnage.

The 1991 contracts for iron ore were not nearly as good as for 1990; for LKAB they gave an average dollar price rise of only 3 per cent. Pellet prices went on rising more slowly than prices for fines; prices for blastfurnace pellets actually fell 2.5 per cent. With the prospect of weak activity in steel in the near future and a good supply of fines as well as pellets, price contracts next year are also likely to be unfavourable for the mining companies. Assuming another increase by 3 per cent and a dollar rate of SEK 6.48, the price rise in Swedish kronor would be 7.8 per cent.

Engineering production fell continuously in 1990 and above all in the second half, when engineering exports decreased for the first time in many years. The annual level of production was 4.5 per cent down on 1989.

This year the drop in production has gone on accelerating despite a marked increase for electrical machinery. The other three major sub-branches (non-electrical machinery, metal engineering and transport equipment) are accordingly expected to cut their production by more than the 7 per cent by which total engineering is forecast to fall in 1991.

Major factors behind the weak output are decreased exports, of cars in particular, and diminishing demand for investment goods. At the same time, the accumulation of finished goods in 1990 and the first half of 1991 is likely to hold production back in the future. Even so, the level is not expected to fall next year.

Other manufacturing, a heterogeneous collection of branches, did better last year than industrial production as a whole. This year, however, the data from Statistics Sweden indicate that production in other manufacturing, which includes printing, was weaker than anywhere else. We count on a fall of 7.7 per cent. Next year the expected growth of private consumption should benefit other manufacturing in particular and production is forecast to rise 1 1/2 per cent. Here, too, estimated stock reductions will tend to hold production back.

4.2 GDP broken down by sectors

GDP at factor values, measured from the expenditure side, is calculated to have risen about 1/2 per cent in 1990, a marked slowdown from 1989 as well as compared with most of the 1980s, when growth averaged more than 2 per cent. A recession began in 1990 and GDP fell during the year. This tendency is continuing and GDP at factor values is expected to fall almost one per cent this year. An upturn is not expected until well into 1992, when annual growth is estimated at less than one per cent, though the rate is expected to accelerate during the year. The sectorwise development of production is summarized below and in Table 4.2.
 1989 1990 1991 1992
Agriculture and fishing 19.8 2.5 -10.0 2.5
Forestry 3.9 -0.7 -2.0 2.5
Mining and manufacturing 1.2 -2.8 -6.0 0.6
Electricity, gas, heating and -6.2 -1.5 0.0 -1.0
Construction 5.6 1.0 -0.6 1.1
Private services 3.1 1.0 1.0 1.7
 excl. unassigned bank services 3.0 1.2 0.2 1.4
Total business sector(1) 2.6 -0.1 -2.1 1.1
Public authorities(1) 2.3 1.4 0.7 0.3
GDP at factor values(1) 2.2 0.6 -0.8 0.9
(1)Output measure.


Production in agriculture and fishing is estimated to fall as much as 10 per cent this year, with a steeper rate for vegetable production and a below-average rate for animal production. Next year there is the prospect of some overall increase that comes from animal production, while the National Agricultural Market Board expects vegetable production to go on falling.

Production in forestry is calculated to go on falling this year, by about 2 per cent, having already declined slightly last year. Activity in forest industries is considered in the first section of this chapter. Some recovery in forest industries is foreseen next year.

In mining and manufacturing, production fell sharply in the first half of 1991 and we count on an annual fall of 6 per cent, implying that an upturn does not occur until the middle of next year. Our annual forecast for 1992 is a very weak increase of about 1/2 per cent, which assumes that production does pick up in the winter.

Construction has also been falling this year, by just over half of one per cent at total level, which includes a very sharp drop for some sub-branches, not least industrial construction. A weak recovery is foreseen in 1992, with a production increase of one per cent. Further details are presented in the section on construction in Chapter 7.

These forecasts give a fall of no less than 4 1/2 per cent for the total production of goods. As mentioned earlier, the registered contraction of demand is not as great as the decreased supply of goods in the form of production and imports. The resultant residual in the estimates for the National Accounts must be attributed to uncertainties in the production estimates and probably also to other parts of the economic statistics. In 1992 there is the prospect of weak annual growth at 3/4 per cent, albeit with an accelerating rate during the year. The production of private services is expected to rise one per cent this year, in which case total production in the business sector would fall just over 2 per cent. Calculations from the output side give a fall in production of less than 1 1/2 per cent. In 1992 the production of services is expected to rise 1 1/2 per cent, in which case the production of goods and services in the business sector would be stepped up more than 1 per cent next year.

Public sector production, consisting primarily of employment, is still rising but at a weaker average rate than last year, with increases of about 3/4 per cent for the central government as well as for local authorities. The overall increase next year is estimated to be negligible and much weaker than business sector production, with a fall of 3/4 per cent for the central government and an increase at much the same rate for local governments.

GDP at factor values is then calculated to fall almost one per cent this year and rise one per cent next year. The level of production in 1992 would then be much the same as in 1990. [Tabular Data 4.1 Omitted]
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Title Annotation:Swedish industrial productivity
Publication:The Swedish Economy
Date:Sep 22, 1991
Words:3279
Previous Article:Foreign trade.
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