Dec '07/Jan '08

Supply Side

How can mining suppliers cope with the strong Canadian dollar?

By J. Baird

The average exchange rate in 2002 was CDN$1.57 for US$1 dollar. It rose to $1.40 in 2003, $1.30 in 2004, and $1.21 in 2006. Now we are above parity. So, exporters continuously have to ask for more U.S. dollars just to get the same number of Canadian dollars. Fortunately our dollar has not strengthened to the same extent in the home currencies of many clients of Canadian mining supply exporters.

Many Canadian suppliers (and their customers) have become accustomed to using the U.S. dollar as a common currency. Thus, over, say, a one-year period from quote to delivery, the Canadian supplier is taking a hit while the buyer has been profiting. Remember that using a third currency as an intermediary means that conversion costs are incurred twice, once by the buyer and once by the seller.

One way around the problem is to hedge, assuming that U.S. dollars received in the future will be worth less in Canadian funds. This has a cost and it is risky, in case the U.S. dollar strengthens. It is not usually a good approach unless a very large contract is in question.

A better idea is simply to start quoting in Canadian currency. This protects you against all currency exchange risk, assuming that your expenses to fulfill the contract are in Canadian dollars. Our dollar is quoted on most markets, and foreign buyers should not have any more difficulty paying in Canadian as opposed to U.S. dollars. Some buyers may resist this, but it may well be a good thing to try to negotiate in your favour.

Of course our strong dollar reduces the cost of sales trips, exhibition attendance and other marketing and selling expenses, as well as parts, components and production machinery sourced in the United States, so our mining supply community has at least some benefit. Investment in new, more efficient production machinery from the United States is now less expensive and, once in place, can yield benefits into the future.

Another positive factor in the current environment is that commodity prices remain strong. This means that the revenues of the mining companies that are the clients of suppliers are strong, even if their margins may shrink as the currencies of the countries in which they produce strengthen against the U.S. dollar.

What does the future hold? The Canadian dollar is heavily influenced by commodity prices, and I will leave it to you to predict where they are going. We are an important producer of many commodities. In particular, the price of oil continues to increase and some are now saying that our dollar is a ‘petrodollar.’

It is certainly hard to predict a strengthening U.S. dollar in the face of the huge U.S. debt, deficit and negative trade balance. I have read that the present value of the US federal government obligations is $64 trillion. Apparently, if the U.S. government confiscated all the property in the country, including bank accounts and investment portfolios, and sold them to foreigners without depressing the value of those assets, it would still be $20 trillion short.

Jon Baird
Jon Baird is the managing director for CAMESE.

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