Dollar daze

Rob Antle
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The resurgence of the loonie may be good for some, but it's not welcome news for manufacturers and exporters

On Tuesday, the loonie retreated two cents against the U.S. dollar. No big deal? Not to Howard Nash.

"That represents $15,000 to us on just one order," notes Nash.

Nash is president of Northstar Network Ltd. The St. John's-based company provides a wide array of engineering, fabrication and manufacturing services.

Northstar works mainly in the defence, aerospace, marine and homeland security fields. It recently won, for example, contracts to build consoles for land-based trainers for the Halifax class of Canadian Navy ships.

Electronics technician Tim Murphy is pictured working at Northstar Network Ltd. in St. Johns. Northstar is one of many local manufacturing firms dealing with the impact of the high loonie. Submitted photo

On Tuesday, the loonie retreated two cents against the U.S. dollar. No big deal? Not to Howard Nash.

"That represents $15,000 to us on just one order," notes Nash.

Nash is president of Northstar Network Ltd. The St. John's-based company provides a wide array of engineering, fabrication and manufacturing services.

Northstar works mainly in the defence, aerospace, marine and homeland security fields. It recently won, for example, contracts to build consoles for land-based trainers for the Halifax class of Canadian Navy ships.

The firm directly employs 16 people in Newfoundland, but outsources the majority of its fabrication and manufacturing work to other companies in the region.

Nash says the recent rise of the loonie is not so much a story of the Canadian dollar as it is a story about the weakness of the U.S. dollar and economy.

Regardless, the impacts are significant north of the border.

According to the Canadian Manufacturers and Exporters (CME), every percentage point increase in value of loonie impacts the manufacturing sector by $2 billion nationally.

That translates into a loss of roughly 25,000 jobs, notes Nash, who is chairman of the CME's board of directors in this province.

"With a volatile currency and approaching par, it has a double-whammy impact on Canadian companies exporting there, because now our products are more expensive and less attractive to US customers - the customers that are actually left, that is," Nash says.

Nash notes that profit margins are "razor thin." And while many companies have worked to get themselves in relatively good shape - by cutting costs and otherwise making adjustments -the currency fluctuations make it difficult to plan ahead. "Like weather forecasting, it's a crap shoot trying to 'guess' where the loonie will be down the road."

Manufacturing involves long lead times, Nash says. That means an order a company booked six months ago at a lower currency level is now cheaper for no other reason than a currency fluctuation.

"This is a direct price cut on export sales, bottom line," he says. "In the case of the company paying my salary, Northstar Network, many of our contracts are five years with a 'firm fixed price' regardless of the cost of raw materials or the dollar. So we are really more concerned about the unpredictability of the dollar than where it is. Small changes can have a big impact on our margins."

CME is telling its members to be prepared to compete at par going forward. "If we're wrong, at least those companies will be making money," Nash says.

He notes that many manufacturers and exporters are re-evaluating business models and internal operations right now and figuring out the best path forward.

"The future of manufacturing in Canada is not one of mass production, but one of mass customization," Nash says.

"It's about high-value manufacturing. It's one thing to make lumber, but another to build a Muskoka chair out of that lumber - that's what we need to focus on is value-added manufacturing."

But he cautions that the news is not all "doom and gloom" - Nash says the manufacturing sector remains a strong and vibrant industry in the country.

The steep appreciation of the loonie is not just garnering attention on the factory floor - it's also a keen topic of interest in the boardroom.

This week, Bank of Canada governor Mark Carney cited the loonie's strength as a key obstacle to the rebound of the Canadian economy.

According to a Canadian Press report, Carney called the loonie's persistent rise since July "the major downside risk" to the economy. Although the loonie was higher two years ago, he noted, the difference now is that it comes during a period of severe economic weakness.

Carney indicated the central bank could move to deflate the dollar. "Intervention is always an option," he said.

Government officials in this province are also keeping a keen eye on the loonie.

Finance Minister Tom Marshall is from Corner Brook, where he says people closely watch the currency as a measure of the health of the local paper mill.

Today, Marshall is looking at the loonie for a much broader range of economic reasons.

The currency's recent strength has mixed impacts, he says.

"Obviously, in the sense that we buy equipment from the U.S., that we buy orange juice from the U.S., the dollar goes up, it's an advantage for us," Marshall said in an interview last week.

"But the rise in the value of the dollar is very challenging for our businesses and our exporters which sell into the U.S."

The province's economy is largely dependent on such exports.

According to statistics posted on the government's website, Newfoundland and Labrador exported $14.6 billion worth of goods in 2008.

The vast majority of that total - $10.5 billion, or 72 per cent - went to the United States.

That's a big chunk of change that translates into a big number of jobs.

So when Derek Butler sees the loonie rise, he also sees the fiscal fortunes of his industry fall.

"It is clear that the current rate threatens the viability of the industry, that is very clear," said Butler, executive director of the Association of Seafood Producers (ASP).

"We cannot sustain the current dollar."

Earlier this week, the loonie peaked in trading at more than US97 cents, before retreating near US95 cents on Friday.

Six months ago, the loonie had dipped as low as US77 cents.

The currency climb has been bad news for the province's fishing industry.

According to Butler, the recent run-up of the loonie means reduced returns to Newfoundland and Labrador producers.

When the crab and shrimp fisheries started in April, he noted, the dollar was 79 cents US, compared to this week's high of 97 cents US.

Simple math means local producers get 18 cents less per pound. On a $3 item, that's 54 cents less per pound.

"That is a huge hit on our bottom line, on our margins, and obviously on our viability," Butler notes.

He says all exporters are hurt by the stronger dollar, but those most hurt or impacted are industries that are not structured to withstand these economic challenges - industries like the fishery.

"We don't have the margin to take a 54 cent hit on a $3 sales price," he said.

"It's the exact inverse of someone who wants to go to Florida for a holiday now, or do some cross-border shopping. They will benefit from a stronger dollar, they will get more U.S. currency for the Canadian dollar they exchange. But producers selling in U.S. dollars get fewer Canadian dollars, so our returns are diminished."

The continued strength of the loonie will mean less cash going back into the business for capital improvements and other necessary investments.

"It's hand to mouth, and I think it is clear that not everyone currently in the business will remain in the business," Butler noted. "There will be change, as there has been in recent years. Some operators will go by the wayside, there is no doubt."

While the fishing industry has been a billion-dollar-a-year enterprise for the province, Butler expects the number will "fall substantially" under that level in 2009.

rantle@thetelegram.com

Organizations: Northstar, CME, Halifax Canadian Navy Canadian Manufacturers Association of Seafood Producers Bank of Canada Canadian Press

Geographic location: United States, Newfoundland and Labrador, St. John's Canada Muskoka Corner Brook Florida

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  • Gold
    July 02, 2010 - 13:17

    It must be too hard for manufacturers and exporters. Everything will be back to normal we just need for the right time.

    Regards,
    http://www.goldcoinsgain.com

  • Gold
    July 01, 2010 - 19:57

    It must be too hard for manufacturers and exporters. Everything will be back to normal we just need for the right time.

    Regards,
    http://www.goldcoinsgain.com