(Recasts lead, adds comments by finance minister, analysts)
By Gilbert Le Gras
OTTAWA, Jan 21 (Reuters) - Canadian factory shipments fell 0.5 percent in November as fewer vehicles were produced, Statistics Canada said on Wednesday in a report that underscored the impact of the currency's unprecedented rise.
Auto output was down for the second month in a row with some assembly plants closed for upgrades and others trimming back production to reduce the number of vehicles in inventory, Statscan said. The auto sector is one of Canada's key industries and much of its output is bound for U.S. consumers.
"While the U.S. economy appears to be on the road to recovery, there are concerns that the strengthening value of the Canadian dollar may curb demand for Canada's manufactured goods," Statscan said, highlighting that the currency neared 77 U.S. cents in November from 64 U.S. cents in January.
Excluding autos from November's data would show shipments up 0.1 percent. Unfilled orders fell 0.8 percent in November from 2.5 percent in October, but some industries faced contract cancellations as the currency neared a 10-year high, it said.
"There's no doubt that over the course of the last year the very rapid appreciation of the value in the dollar has had an impact on our ability to penetrate the U.S. market. Clearly the impact is there and people are concerned about it," Finance Minister Ralph Goodale told reporters in Halifax, Nova Scotia.
Analysts said the drop in shipments, the second month in a row, was in line with expectations and added more evidence in favor of Tuesday's interest rate cut by the Bank of Canada.
"The Canadian manufacturing sector is clearly struggling to generate any growth at a time when the U.S. factory sector is posting some of the strongest survey readings in 20 years," BMO Nesbitt Burns' chief economist Sherry Cooper said.
"This report will only add to the Bank of Canada's dovish convictions," Cooper added.
There were signs of potential for recovery in the report as well, analysts said.
New orders were up 1.0 percent, the fourth increase in six months, while inventories were unchanged from October after six months of declines to the lowest level since February 2000, which Statscan said suggested the trend may be bottoming out.
"The fact that the pace of decumulation is slowing may well bode well for the ability of inventory investment to contribute towards economic growth and drive higher working capital financing requirements in 2004," Royal Bank of Canada assistant chief economist Derek Holt said.
The inventory-to-shipment ratio edged up to 1.42 from 1.41 in October. The trend in the second half of 2003 has been down as factories continued efforts to trim inventories -- a phenomenon the Bank of Canada has singled out recently. ($1=$1.29 Canadian) (Additional reporting by Mary Wilcox in Halifax.)