GO
Loading...

ANALYSIS-Canadian exporters see fewer reasons to cheer currency drop

Louise Egan and Leah Schnurr
Monday, 10 Feb 2014 | 1:00 AM ET

OTTAWA/TORONTO, Feb 10 (Reuters) - Craig McIntosh's company exports half of what its Canadian plastics factories produce, so he should be rejoicing in the Canadian dollar's slide to a four-year-low. But he's not.

The chief executive officer of Acrylon Plastics, which made the plastic parts in the children's play set on the White House south lawn, says his business is suffering from President Barack Obama's policy of encouraging American firms to open factories at home.

McIntosh's operation also relies more on imported raw materials than it did 10 years ago, meaning costs rise more than in the past when the Canadian dollar slips.

While McIntosh believes the weaker currency will ultimately be a help, the inability of exporters like him to benefit more from the soft currency and improving U.S. demand has surprised many forecasters.

Tiff Macklem, senior deputy governor at the Canadian central bank, said on Friday it was "a bit of a puzzle" why exports were not picking up along with the economic recovery.

Canadian exporters struggling to grow sales blame low-cost Asian competition, a more global supply chain and stiffer competition from U.S. rivals to serve the giant U.S. market.

"The aggressive in-shoring has created a very unleveled playing field," said McIntosh, citing wage subsidies, location payments, free buildings and property tax breaks for some U.S. manufacturers.

"There is also pressure on our customers to purchase from an American-based plant ... We have to work much harder to win business versus a U.S.-based competitor."

McIntosh said his company recently bought a plant in the United States to help deal with this trend.

Obama has set a goal of creating 1 million manufacturing jobs during his second term. Economists question how successful the sector will be in "onshoring" jobs from abroad but note that on average, productivity has improved at a faster pace in the United States than in Canada.

This means the value of a U.S. worker's output per hour has increased more quickly than it has in Canada, helping to make U.S. companies more competitive.

CHALLENGING DECADE FOR EXPORTERS

Canadian exporters have had a challenging decade. The currency climbed from a value of 62 U.S. cents in 2002 to trade at parity for much of 2012. More recently it slipped to almost 89 U.S. cents as a worrying drop in inflation prompted more dovish language by the central bank.

While exporters welcome the respite, they say increasingly global supply chains have dampened some of the benefit.

Exporters of manufactured goods imported about 42 percent of their supplies in 2010, the latest available data show. For the high-tech and automotive sectors, the ratio is above 50 percent.

McIntosh said the higher costs can show up quickly. "What used to cost me one dollar six months ago now costs me a dollar and 11 cents," he said. "We hurt."

Many exporters are also seeing more robust competition from Asia and other low-costs markets to serve the coveted U.S. market.

Mark Zimney, whose company Promation makes tooling and robotics systems for automakers like Honda and Toyota, now has to compete with a South Korean rival that moved into the U.S. market while Zimney was focusing on domestic business.

"I lost ground in the U.S. to the Koreans," he said. "That's what the dollar did to us."

Some Canadian companies also increased international operations over the past decade to reduce the impact of the currency's rise. While curbing risk, this has also reduced the upside from a softer Canadian dollar.

Linamar Corp., Canada's second-largest auto parts maker, with 42 plants worldwide, has built in natural hedging so that profit margins avoid the same roller coaster ride as the exchange rate. It made sure to have both costs and revenues in U.S. dollars as well as in local currency.

"When the (Canadian) dollar became very strong we read all these stories about companies crying about it, and now we're reading all these stories about companies crying about a weak dollar," Chief Executive Linda Hasenfratz told Reuters. "There's no crying going on over here."

ICING ON THE CAKE

There is no doubt that weakness in the loonie, as the Canadian currency is commonly called, is overall a good thing for exporters, a pillar of the economy. According to World Bank data, exports accounted for 30 percent of gross domestic product in 2012. About three-quarters of Canada's exports go to the United States.

The currency weakness could alleviate some pressure on the Canadian auto industry, which has been losing jobs over the past few years and is at risk of being displaced by Mexico as the leading exporter of vehicles to the United States.

Peter Hall, chief economist at the government's export credit agency, Export Development Canada, estimates the favorable exchange rate alone will boost GDP by 1 to 1.5 percent this year.

Yet exporters, economists and even the central bank agree that the latest depreciation will not provide the same boost to growth it did 10 years ago.

The Bank of Canada sees net exports adding to growth this year for the first time since 2009. But Governor Stephen Poloz says the U.S. recovery is the main reason for export growth, with the currency just "the icing" on the cake.

Because exports have not performed as expected, Poloz says he has less faith in the bank's main forecasting model, which assumes that a 10 percent currency depreciation will boost exports by about 2.6 percent and real GDP by 0.4 percent.

This suggests the central bank is more likely to keep interest rates lower for longer than it would have a decade ago if the currency had fallen to the same degree.

But the direction of Canadian interest rates, and by extension the currency itself, will ultimately be dictated by inflation, which the central bank has a mandate to keep near 2 percent.

Analysts note inflation also seems to be less responsive to a weaker currency than in the past, which some attribute to pressures from the entry of big U.S. retailers and more companies using currency contracts to hedge against volatility in the loonie.

Mountain Equipment Co-op (MEC), which sells outdoor gear and clothing, is one such firm. It buys products in several currencies, with many of them priced in U.S. dollars.

"We don't want prices bouncing up and bouncing down," said Jeff Crook, chief product officer at MEC.

(With additional reporting by Susan Taylor in Toronto; Editing by Jeffrey Hodgson, Ross Colvin and Dan Grebler)