Special Report: The dollar dilemma

Comptec faced more than its share of economic woes. The Surrey, B.C. company failed in an attempt to build dashboard components. The main client for its telephone keypads, Nortel, was hit by the high-tech meltdown. And there wasn’t enough business to justify an 80,000-square-foot facility, despite a successful contract to make swim goggles.

Then came this spring’s surge in the Canadian dollar.

“I would say it was the straw that broke the camel’s back,” says Wolrige Mahon president Michael Cheevers, the receiver responsible for picking through the pieces. “Practically all their sales were fixed prices in US dollars. By April of this year, they were making a gross loss.”

The company’s remaining assets were to be auctioned off in October.

This year’s higher-valued loonie has slashed profit margins across the country. Maax, a Canadian composites maker, is able to hedge 70% of its currency exposure, but every penny over a 70-cent exchange rate still means an $800,000 net shortfall. AT Plastics, which does 70% of its business in the U.S., took a $10.4 million hit in the first half of 2003 because of the currency swing.

“Our customers are in industries where they don’t have much pricing power themselves,” adds AT Plastics executive vice-president and CFO James Gingerich, referring to how there’s little hope of passing along related price increases in the automotive, lamination and packaging sectors.

Granted, exports don’t live and die with the value of the dollar. Between 1994 and 1997, exports grew 8.8% despite a 73-cent dollar, according to TD Economics, and 1988’s 80-cent dollar was matched by a 9.1% growth in exports. But this year’s increase was different. The U.S. demand for Canadian exports was stronger in the past, and a 17% increase in the Canadian dollar was gradual between 1986 and 1988. The loonie soared 18% in six months during the first half of 2003.

And don’t expect the Loonie to return below the 70-cent barrier for the foreseeable future.

“We’re still forecasting the Canadian dollar to stay more or less around the current level and keep moving sideways until the end of next year,” BMO Financial Group economist Robert Hogue says, matching the predictions of several other forecasters. (Estimates of a fair value for the Canadian dollar range between 70 and 80 US cents.) “And we don’t think a Canadian dollar at 73 to 75 cents would hurt the economy, generally speaking.”

The currency fluctuations translate into an “average” degree of vulnerability for the plastics industry because of its improved productivity and a “good” market, he says. The forecast isn’t as clear for the machinery suppliers who face “above-average” risks, even though a stronger Canadian dollar could convince some companies to make larger capital investments in the name of productivity.

“You’re basically gambling with the currency,” says Tom Meisels, vice-president of moldmaker FGL Precision Works Ltd., which does 80% of its business with U.S. clients. “It changed so quickly right off the bat, we lost quite a bit of money on existing projects.”

The timing of larger jobs can heighten the damage of currency swings. Million-dollar contracts can last as long as 22 weeks, depending on the complexity of a mould, and most fees aren’t paid until a contract is completed. American buyers, for that matter, show no interest in quotes in Canadian funds.

It’s not the only factor to increase the cost of business with the U.S.

Some truck fleets are introducing security surcharges, or charging for excessive delays at the border, says David Bradley, CEO of the Canadian Trucking Alliance. And it’s important not to be complacent with the smooth border crossings that are a current reality. “The situation at the border the last few months has really been a reflection in a slowdown of economic activity,” Bradley says. Automotive traffic dropped 11 to 12%, clearing the way to the bridges and land-based crossings. “But in the last five weeks or so, the indication we’re getting on the trucking side is that business is up. That will put us in the squeeze again.”

And there’s the added impact of political differences between the two countries. One mouldmaker who didn’t want to be identified, for example, said a U.S. customer had this response to the outbreak of Severe Acute Respiratory Syndrome in Ontario: “‘Serves you guys right for not supporting us (in the war in Iraq).”

“It’s sometimes said and sometimes not,” says Meisels. “I don’t know if we’ve actually lost any customers, but it’s definitely in the back of their minds. We don’t take anything lightly.”