Canada manufacturers see expiring forex hedges lifting exports

Wed Mar 9, 2016 4:23pm EST
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By Andrea Hopkins and Fergal Smith

TORONTO, March 9 (Reuters) - A long-awaited rebound in Canadian manufacturing is finally taking hold as currency hedges and contracts priced when the country's dollar was stronger expire, giving exporters a competitive edge, executives in the sector say.

The nation's C$2-trillion-dollar economy has been sluggish because of plunging commodity prices that have ravaged energy and mineral companies, forcing them to layoff workers and delay or abandon investment plans.

Some economists had expressed doubt that Canadian factories could overcome the lower labor costs of foreign competitors to make inroads in new markets.

But on the ground, manufacturing executives say the currency's two-year decline took time to feed through because many companies hedge their currency rates and sign fixed-price contracts months or years in advance.

With the currency dropping 38 percent at its January nadir from its 2007 peak - driven by falling oil prices and the resulting Canadian interest rate cuts - manufacturers say they are now reaping the benefit of lower costs, and pricing new contracts below global competitors.

"Every penny movement in the dollar adds about C$200,000 ($151,000) of profit to my bottom line," said Brad Bourne, chief executive of Toronto-based Firan Technology Group Corp, which makes circuit boards and cockpit panels for aerospace and defense equipment.

The Bank of Canada, which has been watching export trends closely, held interest rates steady on Wednesday, noting that while the economy is still struggling, "non-energy exports are gathering momentum, particularly in sectors that are sensitive to exchange rate movements."

Bourne said his 2015 sales were up 18 percent from the prior year, with almost half of that attributable to currency depreciation.   Continued...