August 2010

Supply Side

Coping with the stronger Canadian dollar

By J. Baird

The strength of our currency is making newspaper headlines as several economic indicators, including commodity prices, work in its favour. The domestic mining industry sells its products in U.S. dollars but has costs in Canadian currency. Thus, receiving fewer Canadian dollars in revenue means shrinking margins for miners.

Most of Canada’s minerals and metals companies have assets outside of our borders. Their costs at foreign operations outside of the United States rise if the U.S. dollar weakens relative to the currency of the host country. Also, repatriated profits may be reduced when exchanged for Canadian funds.

The high Canadian dollar may discourage downstream processing in this country, as it becomes cheaper to do it overseas. This was one of the reasons given by Xstrata when it closed its Timmins metallurgical complex.

On the other hand, commodity prices are rising in U.S. dollars, so the future of our producers is not that bleak. Furthermore, producers can hedge their currency risk if they choose. Also, their balance sheets will be improved if they have debt denominated in U.S. dollars while their purchases of exploration properties and mining operations in other countries will become cheaper. So, all in all, a strong Loonie may not hurt the producers much.

For suppliers that export, the situation is different. The high Loonie means that Canadian products and services are more expensive for foreigners, at least in U.S. dollars. However, some commodity-rich countries to which we export are seeing their currencies rise too. Thus, they can still afford to buy Canadian.

Canadian manufacturers can now buy U.S. and European production machinery at a discount and without the tariffs that were discarded in the March 2010 Federal Budget. Given the global nature of manufacturing supply chains, U.S. dollar-denominated inputs for our manufacturers will be cheaper.

Of course, exporters’ costs of foreign sales trips, attendance at trade shows and other international marketing and selling activities should decrease with a stronger Canadian dollar. Exporters can hedge currencies, but this is a risky business unless you know exactly what your foreign currency requirement is.

One of the best tactics is to simply quote in Canadian dollars. Buyers can then compare their currency directly. The Canadian exporter is protected against sharp rises in the Loonie. The deal could also benefit by saving the dual cost of the buyer converting to U.S. dollars and subsequent conversion by the Canadian seller to our currency.

Many Canadian suppliers remember how they got caught when the Loonie shot to a modern-day high of US$1.1024 on November 7, 2007. They had valid offers outstanding and contracts to fulfil in U.S. dollars. It really hurt. Had they quoted in Canadian dollars they would have been protected.

I believe that Canadian manufacturers, in general, having had a couple of years to worry about the threat of a high dollar, are ready to cope with it. There are defences, input costs may be lower and businesses are doing all they can to optimize productivity.

Jon Baird
Jon Baird, managing director of CAMESE and the immediate past president of PDAC, is interested in collective approaches to enhancing the Canadian brand in the world of mining.

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