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4 Production

From 1990 to 1991 total production in mining and manufacturing fell more than 5 per cent according to the preliminary National Accounts. The change in capacity utilization, as measured by Statistics Sweden, is very similar, though the level does seem to have fallen somewhat less than production in the course of 1991. This suggests that industrial capacity has been reduced, a conclusion that is supported by the Business Tendency Surveys, where the proportion of firms reporting decreased capacity in 1991 is the highest ever recorded in this series, which began in 1964. Major difficulties arise, however, when quantifying the change in capacity. But it does seem that in 1991 production capacity perhaps fell one or two per cent from 1990. This estimate starts from the still preliminary National Accounts for 1991 and presupposes that firms report capacity utilization in a consistent manner throughout the business cycle.

In the first half of 1992 industrial production was lower than in the second half of 1991 and our annual forecast is a fall of almost 3 per cent from 1991 to 1992. Production is being held back mainly by diminishing domestic demand for private consumption and investment. Positive factors are an expected increase in exports and a slower reduction of stocks.

In 1993 production will still be falling. A recovery is not expected until 1994, generated primarily by a renewed increase in the consumption of goods, accompanied by accelerating export growth and a further fall in stock reductions. An upswing for imports, however, will tend to subdue the growth of production.

After some very profitable years in the late 1980s, the market forforest industries (sawmills, pulp and paper manufacturing) deteriorated in 1990, though profitability remained strong. The downward tendency was accentuated in 1991, which was a poorer year for these industries.

Export deliveries from sawmills began very weakly in 1991, when sales were only half the level a year earlier, but picked up in the course of the year and the annual volume of exports was relatively favourable. In most of the main market countries, imports of Swedish wood products tended to pick up, though an end to stock reductions may have been largely responsible for this. Canadian suppliers, moreover, concentrated more on the American market, where construction activity was rising. With the recovery in the second half-year, the annual volume of exports grew about 5 per cent in 1991. Deliveries to the domestic market did much worse, dropping more than 10 per cent. Prices fell throughout the year. In December 1991 the export price index was around 15 per cent lower than a year earlier, which meant that the annual level was more than 10 per cent down on 1990.

Pulp manufacturers also had a poor year in 1991, when the balance between supply and demand was clearly to their disadvantage. Paper manufacturers continued to adjust their input stocks and the consumption of paper was also weak. Prices fell throughout the year and the drop from 1990 according to the export price index was as much as 22 per cent. Demand in the second half-year was more favourable, however, and the annual volume of exports rose 4 per cent. Still, at the year end the price of market pulp was the lowest since 1986.

Deliveries from paper manufacturers fell in 1991 by as much as 6 per cent to the domestic market but only negligibly to export markets, though newsprint exports decreased substantially. There was strong competition from North America, where the weak domestic market could not absorb a growing supply. Europe imported large volumes of newsprint from Canada and craft liner from the United States. Major investments in additional capacity, above all for newsprint and printing paper, led to heavy pressure on prices in 1991; but despite the downward tendency, the average annual level stayed almost one per cent up on 1990. With capacity utilization at just over 90 per cent, production calculated in tonnes fell one per cent. Value added, however, was one per cent up on 1990.

In the first half of 1992 wood product prices went on falling to levels that impose heavy strains on producers. The low dollar rate in the late summer has led to renewed pressure from Canadian suppliers in the European market. Another very troublesome development is the ongoing depreciation of the Finnish currency. If, as seems likely at present, the depreciation were to amount to 10 per cent or more, Finnish sawmills would certainly have room for some price reductions in exchange for market share. While prices are a major problem and a highly uncertain factor in the immediate future, deliveries are more encouraging. Sawmills have been able to export the largest volumes since 1984; exports in the first half of 1992 were more than 30 per cent higher than a year earlier. As mentioned already, however, this did not come from increased consumption; some forecasts for construction activity in Europe point to a fall this year. The explanation lies instead in the behaviour of other suppliers, with Canadian producers preferring the US market and a substantially reduced Russian supply to Western Europe. The negative effect of stock reductions may also have ceased. The outcome for 1992 is thus still very uncertain. Domestic deliveries are expected to fall sharply while export deliveries rise by as much as 15 to 20 per cent and prices are greatly reduced, so that the annual level of export prices drops as much as in 1991. Expected production cuts in the second half-year will presumably lead to some fall in the annual level.

Total deliveries of market pulp, calculated in tonnes, in the first half of 1992 were about 4 per cent higher than a year earlier. Export growth was somewhat weaker, about 3 per cent, due to a sharp drop for mechanical pulp. For paper pulp, exports rose more than 8 per cent, an important factor being stock replenishment by paper manufacturers. The beginnings of a price rise, from a low at the beginning of the year, and the expected strike in Canada helped to explain this. In the second half-year, however, deliveries are estimated to fall back. Prices are weakening again but we assume an unchanged level in Swedish kronor in the second half-year. A price increase could occur in the latter part of the year. We also foresee a slight increase in the volume of exports this year and an average level of export prices that is about 7 per cent down on 1991. Production is assumed to fall about 1 per cent.

Deliveries of paper and paperboard, calculated in tonnes, rose more than 3 per cent in the first half of this year. The domestic market continued to weaken but the growth of export deliveries reached almost 5 per cent, coming mainly from newsprint and other printing and writing paper. The major problem for producers at present is surplus capacity. The export price index shows a sharp fall in the overall price of paper and paperboard since the beginning of 1991. Downward pressure is greatest on newsprint and other printing paper, for which global capacity has been greatly expanded in recent years. We assume that prices have now reached a low but this still implies that the annual level of export prices will fall by an almost unprecedented 6 per cent. The volume of exports is estimated to rise about 3.5 per cent and production by between 1 and 2 per cent.

Prices for sawn wood products are assumed to remain low in 1993. We envisage that appreciable price increases will hardly be feasible until the second half-year, implying little change in the annual price level from 1992. The high volume of exports is expected to continue, with a modest increase as consumption slowly improves. The domestic market will continue to decline and some cuts in production may be necessary in order to limit stocks and support prices.

Demand for market pulp should improve next year and the volume of exports is estimated to rise more than 5 per cent. Production should be stepped up more than 7 per cent, implying an appreciable improvement in capacity utilization. We also count on more scope for price increases, so that the annual level of export prices in 1993 is more than 10 per cent up on this year.

For paper and paperboard, exports in 1993 should continue to be maintained mainly by newsprint; with a smaller increase for the other components, growth is estimated to be about 2.5 per cent. The average level of export prices is expected to rise about 4 per cent but would still be below the first half of 1991. The growth of production is expected to be somewhat stronger than in the preceding years and reach about 2.5 per cent.

In 1994 economic activity should be considerably more favourable for forest industries and the total volume of exports is expected to rise about 5 per cent. Prospects are brightest for sawmills and paper manufacturers but an increase is also foreseen for pulp exports. Export prices are expected to rise about 8 per cent. But although price increases in the vicinity of 10 per cent are estimated for wood products as well as pulp, the price level at the end of the year would still be some way below earlier highs. Production in the three sub-branches combined is assumed to rise about 4 per cent.

Steel production in Sweden went on falling in 1991, when value added dropped more than 5 per cent or as much as in 1990. The decline comes entirely from the domestic market; with decreased investment in construction, stock reductions by steel wholesalers and users, and, above all, lower production in engineering, domestic demand for steel fell more than 20 per cent last year. The comparatively limited drop in production is explained by increased exports and lower imports of steel.

In 1992 domestic demand for steel is falling another 5 per cent but the drop is confined to the first half-year. Investment in construction is assumed to decline to much the same extent as last year, while production in engineering is cut by 4 to 5 per cent. But in contrast to last year, stockbuilding seems to be adding to apparent consumption of steel. The production of steel has been maintained to date this year thanks to continued export growth for commercial steel; the annual level is likely to rise 2 per cent.

In 1993 and 1994 increased production in Swedish engineering should lead to stronger demand for steel even though construction investment is very low. The extent to which steel production rises will depend on the development of steel exports and imports. Import shares have been rising in recent years as a consequence of changes in the structure of the Swedish steel industry, with fewer units and companies. At the same time, an increased volume of exports has been achieved despite weak international activity, leading to larger export shares for steel producers in Sweden. We envisage that in the next two years, when international steel consumption should be higher, Swedish steel production should be able to rise at least one or two per cent.

Exports of iron ore appear to be rising this year even though demand for steel is weak and continental steelworks are using more scrap at the expense of iron ore. The extraction of iron ore could then rise 3.6 per cent and reach 20 million tonnes. Capacity exists for a higher level of production when activity in steel strengthens, as is expected next year. The extraction of iron ore is then assumed to reach 21 million tonnes and then stay at that level in 1994.

Engineering production fell more than 6 per cent in 1991. The annual level rose only for electrical machinery and even here production fell sharply in the course of the year. In the other sub-branches production dropped almost 10 per cent.

Production remained weak in the first half of this year but the index suggests that the fall has ceased and the overall level seems to have stabilized around a level that was established at the end of 1991. The annual level for 1992 is calculated to be just over 4 per cent down on the year before. Important factors behind the drop are decreased investment in machinery, declining consumption of engineering products and the combination of weak international demand and further losses of market share for Swedish producers.

The prospect of substantial export growth in 1993 is combined with a further fall in domestic demand, leading to just a slight increase in total production. Weak investment activity is the main explanation but producers of consumer goods will also continue to face a troublesome situation as domestic consumption goes on weakening. This is partly offset by a smaller reduction of stocks.

In 1994, however, activity in engineering is expected to pick up, mainly because investment in machinery should show an appreciable upswing and the consumption of engineering products should also begin to rise. We also count on a further positive development of exports. Production would then be able to rise by between 4 and 5 per cent.

In the heterogeneous collection of branches referred to here as other manufacturing, production fell more than 6 per cent in 1991. The situation was weakest for textiles, wood manufacturers excluding sawmills, and non-metallic mineral products, which is closely connected with construction activity; but production in the printing industry, for instance, was also greatly reduced.

In the first half of 1992 the National Accounts indicate that production in these branches fell more than 2 per cent. With the prospect of a negative change in private consumption in the second half-year, the annual level of production is estimated to fall more than 2 per cent despite substantial export growth.

Production will continue to be curbed in 1993 as the consumption of goods goes on falling. Despite a further increase in exports, we count on production falling 4 per cent. In 1994 a change in the trend should lead to increased production.

Production in other sectors of the economy is summarized in Chapter 5, section 5. Construction activity is reported in more detail in Chapter 7, section 4.
Table 4.1 Production in mining and manufacturing
Percentage volume change
 1991 1992 1993 1994
Mining -2.4 1.5 1.0 0.3
Iron ore mines -1.3 3.6 5.0 0.0
Non-ferrous ore mines -5.3 1.0 -8.0 0.0
Other mines -1.4 -4.0 1.0 2.0
Manufacturing -5.4 -2.7 -0.5 3.6
Food manufacturing(1) -3.3 -2.0 0.0 1.0
Saw mills(2) -4.7 -0.5 -2.0 3.5
Pulp manufacturing 0.2 -1.0 7.5 4.0
Paper and paperboard mfg. 1.0 1.5 2.5 4.5
Petroleum refineries, etc.(3) -6.1 5.0 2.0 0.0
Iron and steel basic ind.(4) 5.1 2.0 2.0 2.5
Non-ferrous metal basic ind. 2.9 -7.0 2.0 3.5
Engineering excl. shipyards -6.4 -4.3 0.4 4.8
Shipyards(5) -6.2 -3.0 1.0 0.0
Other manufacturing(6) -6.3 -2.4 -4.0 2.7
Total -5.3 -2.6 O.5 3.5
(1) Incl. beverages and tobacco.
(2) Incl. planing mills and wood preservation works.
(3) Incl. miscellaneous petroleum and coal products.
(4) Incl. ferro-alloy works.
(5) Incl. boat yards.
(6) Rest of manufacturing.
Source: Statistics Sweden and the Institute.
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Publication:The Swedish Economy
Date:Sep 22, 1992
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