Five successful exporters from the Bay of Plenty share their war stories on how they have been dealing with the finicky NZ dollar
BY: BOB EDLIN
It’s a difficult time for traders, says HiFX currency specialist Mike Hollows, who urges exporters to be conservative, to keep things tight and be disciplined.
“From a positive perspective, if the currency is heading higher, it’s generally because global optimism is picking up a little bit, and if that’s the case, then hopefully markets will be improving for their businesses,” he says. “That’s something to balance the position up a little bit.”
OVERCOOKED
The BNZ is saying the currency is over-cooked and could pull back, but advises exporters to get it locked up and focus on their business.
Look at your exposure over the next two or three years, says BNZ chief economist Tony Alexander, and hedge now. “We are cyclically low, you lock it in, you get your hedging done. “That sort of message is going down quite well in the business sector, not only in regard to forex hedging, but interest rate risk hedging – they just want to set their rates and get on with running the business.”
If he had to ring currencies in order for export hedging (the opposite would apply to importers) he would rank the Aussie first, followed by the yen, the US dollar, the euro and the pound.
Earl White, at Bancorp Treasury Services, says people should have a proper risk management framework and manage the risk within their tolerances. He sees nothing much different in trading conditions. “The Kiwi is always volatile – there are no special conditions today.”
Five Bay of Plenty exporters – each in line for local export awards – agree with him.
Stainless downunder (producing marine products for the super yacht market) mostly is paid in NZ dollars. “So my best advice would be to try to get paid in NZ dollars,” says general manager Andrew Lilly. His firm has no formal forex policy, but aims to get a 50% deposit. Thus half the price of a job is paid up front; the other half is paid before the job leaves the Katikati workshop (partly because the firm deals through a US distributor which handles much of the risk). But the company has been doing more of its own marketing, particularly through Europe, and is learning to handle more of the risk itself with forward cover and so on.
Eclipse Valves Limited manufactures and supplies valves and regulators for CNG, fluid delivery and gas handling systems. It exports mostly to East, West and North Asia and South America, selling in US dollars but without forex advice. Manufacturing costs are worked out and locked in, but material prices rise and fall with the exchange rate, says chief executive David Short. It’s a matter of averaging things out – “then we just take the wins and losses from there.” Some work stretches out over 60 days, and day-to-day currency fluctuations don’t much influence the end result. The volatility of recent months has presented no particular difficulties.
Allied Industrial Engineering, a heavy mechanical engineering service company exporting mostly to Australia, prefers to sell in NZ dollars. Some customers have delayed payments, waiting for the exchange rate to go back in their favour; hence it is talking about dealing more in Australian dollars. It takes out foreign exchange contracts to minimise the exchange risk in just about 95% of cases for its imports and exports, but “we are not in the game of playing the exchange rate,” says general manager Mark Lovegrove. “We have learned the hard way a couple of times and now remove the total exchange risk by taking out foreign exchange contracts.”
Bluelab Corporation Limited manufactures hand-held meters and control equipment for measuring and controlling parameters such as the pH, conductivity and temperature of a liquid. Exporting mainly to the US, Canada, Britain and Australia, it has several approaches to forex management – “we do a bit of hedging when and if we can, and we have tended to shift our purchasing into US dollars for our inputs, so we have got some sort of hedge there,” says managing director Greg Jarvis. “And we budget for US dollar business towards the high end, then keep it there regardless of what the current exchange rate is doing. We will budget – say – for a US70c-plus level, because we have been undone in the past by budgeting US60-plus, only to see it at US75c.” Thus it aims to be profitable at a higher level and gear its productivity around the higher rate.
Nature Shop Ltd, in Tauranga, sells natural fibre products such as ugg boots and merino wool clothing. About 95% of turnover comes from exports. It takes full payment in six currencies: sterling, euro, the US dollar, Australian dollar, yen and NZ dollar. Managing director Conrad Cranfield isn’t greatly troubled by the volatile exchange rate. He keeps a close eye on daily rates and reads a lot of the business news – “but to a degree, because we take so many different currencies, we can offset a lot of our costs into the foreign currencies rather than having to pay everything in NZ dollars, and having a spread of currencies means things balance out to a degree. As a retailer, we’ve got a healthy margin built in, so we can probably have a 10c shift in the US dollar and not change prices.” Nature Shop is not hedging, but as it grows will consider it.
KEY TAKEAWAYS
- Lock up any gains in the NZ dollar. Stay focused on your business.
- If you don’t already have a risk management strategy, get one.
- Remember currency volatility is a way of life for now.
- Build in healthy margins so you don’t get choked off by sudden Kiwi dollar gains.
