Parity creates new reality for Canadian companies

Parity preparations that began at Craig McIntosh’s small Manitoba plastics business a decade ago have positioned the company to gain from a soaring loonie because it now buys more from the U.S. than it sells there.

Parity preparations that began at Craig McIntosh’s small Manitoba plastics business a decade ago have positioned the company to gain from a soaring loonie because it now buys more from the U.S. than it sells there.

After returning from a cross-border fact-finding mission 10 years ago, McIntosh determined that currency fluctuations could cost him customers.

That’s when he embarked on a mission to avoid becoming one of the small- to medium-sized exporters economists say could be crushed under a loonie trading at or above par.

The loonie closed at 98.39 cents US Friday afternoon after a week of anticipation about when it would hit parity.

At Winnipeg-based Acrylon Plastics Inc., where McIntosh is president and CEO, preparing for parity included upgrading equipment to increase productivity, cutting costs, revamping its market focus and changing the way it managed finances.

Since 2003, McIntosh has reversed an export-oriented business that shipped 70 per cent of its plastics to the U.S. and sold 30 per cent at home.

Last year, the company sold 65 per cent of its products in Canada and shipped only 35 per cent south of the border.

“Now we’re a net buyer from the U.S. as opposed to a net seller… today it’s proven to be a great position to be in,” McIntosh said in a phone interview from Boston, where he is attending courses on international business strategies at Harvard.

“We’re coming out ahead as (the dollar) is moving to parity.”

In the past two years, Acrylon made two acquisitions that added domestic sales to its portfolio and reduced its dependence on the U.S. market.

Meanwhile, it continues to purchase raw materials from the U.S.

The company, which has five plants in the Prairies and 225 employees, produces plastic parts for four diverse markets — windows, farm machinery, buses and playground equipment.

The company has also reduced its exposure to currency fluctuations by simplifying its finances. Customers once paid Acrylon in U.S. funds, which it then converted into Canadian funds that it paid to suppliers, who were converting it back into American dollars.

Since 2004, the company has reduced the amount of business it conducts in U.S. funds from 70 per cent to 40 per cent as part of its strategy to adjust to parity.

In doing so, the company has created what economists call a natural hedge against currency fluctuations because it receives as much as it pays out in American funds, removing conversion from the equation.

Many of Canada’s largest manufacturing, mining, and oil and gas companies use currency hedging strategies to protect themselves against rapid changes in the dollar.

For Canadian mining giant Teck Resources Ltd. (TSX:TCK.B), a one cent movement in the dollar impacts earnings by $40 million, according to spokesman Greg Waller.

He added that the company incorporates projections on exchange rates into every decision it makes, but recent currency fluctuations have made it hard to predict what the dollar will be at even a month down the road.

“A difficult aspect of long-term investment decision-making in the mining business is where that currency’s going to be long-term,” he said.

Huge fluctuations in the value of the loonie over the past decade, and especially since it hit parity in 2007, have challenged companies when planning for the long term, said Jeff Brownlee, a spokesman for the association of Canadian Manufacturers and Exporters.

“It’s not so much the value of the dollar necessarily as it is this instability…. When it goes up and down like this and it’s not stable it makes it really hard to plan ahead,” Brownlee said.

The rapid rise of the dollar to parity and beyond in 2007 caught many Canadian manufacturers off guard and forced some to close their doors.

Parity creates lucrative business opportunities for competitive American companies to tap into the Canadian market, driving inefficient Canadian companies out.

“(2007) was a wake-up call and it was almost an obituary notice for some businesses that has proven to be true now. We’ve seen customers literally just close up shop,” McIntosh said.

But the economic climate will be much different from 2007 if the dollar hits parity this year because manufacturers are currently undergoing a fragile recovery after seeing a 25 per cent decrease in sales during the recession, Brownlee said.

But he added the companies that have survived have done so because they were innovative in how they managed risks and cut costs, putting them in a good position to face parity.

He said many manufacturers have diversified their markets outside the U.S. In 2002, 80 per cent of products made by Canadian exporters were sold to the U.S. compared to 74 per cent today.

“The new normal for Canadian manufacturers right now as we enter this fragile phase of recovery is that business as usual is no longer an option,” Brownlee said.

“You’re going to have to do what you need to do to prepare for par…. Parity is the new benchmark by which everybody today, if they’re doing business in the U.S., should figure out ways of competing.”