Company cleans up as exchange rate takes a bath

By DANIEL RIORDAN

Ray Markham's company makes luxury baths, for which customers in the United States pay $US630 (plus shipping).

Six months ago, when the kiwi was worth US50c, he was pocketing $1260 for every American looking to get clean with class.

Today, with the kiwi limping at US42c, he is taking in $1500, making $240 more per bath for doing nothing extra.

He should be smiling, and he is - but not as widely as you might expect.

Trouble is, Mr Markham's company, New Plymouth-based Burmark Industries, exports to countries other than the United States where our dollar has not fallen as dramatically. And it must import, at rising prices, many of the components and raw materials to make the final product.

It also makes other products, including medical equipment, which it sells mainly on the local market. Imports make up 90 per cent of the inputs for some of them, leaving that side of the company exposed largely to the downside of the low kiwi.

Those mixed signals make Burmark Industries a microcosm for much of our manufacturing sector, which trades with markets whose currencies move at different speeds against the kiwi.

Unlike our big primary exporters who almost unequivocally reap the benefits every cent the kiwi drops, manufacturers are a far more diverse bunch whose reaction to exchange rate movements cannot be generalised.

"You just can't answer what impact a 2c movement in the exchange rate [would] have on manufacturing," says Alasdair Thompson, chief executive of the Northern arm of the Employers and Manufacturers Association.

"That might be fine for exporters like the Dairy Board but it's a commodity way of thinking that doesn't work for manufacturers because they're doing so many different things."

Institute of Economic Research director Alex Sundakov says the impact of the lower kiwi against the greenback - the currency creating most of the fuss - tends to be greater on imports than exports, as a higher percentage of imports are denominated in US dollars than are exports.

Manufacturers paying for their imported components in US dollars and exporting to countries such as Australia where the kiwi's fall has been smaller have been especially hard hit.

Mr Thompson says that a lot of imported components and raw materials must be paid for in US dollars even if they are not sourced from the US.

Unless the manufacturer then exports to the US, they get only the exchange rate's downside.

Even though manufactured exports to the US have been growing rapidly - up almost 50 per cent in the past year - much is high-tech equipment that contains a high proportion of imported content.

Deutsche Bank chief economist Ulf Schoefisch expects export prices to increase overall by about 8 per cent for the September quarter, lifting the annual rate to over 17 per cent.

But he cautions that the actual revenue benefits to New Zealand manufacturers will not be as great, certainly not in the short term.

That is because manufacturers who have hedged the currency tend to go longer on exports than imports and their downside comes through more quickly than their upside.

Manufacturers Federation president David Moloney says that the dollar has gone so low that another couple of months below US45c and exporters may have to look at laying off staff.

That tendency would be exacerbated if the Reserve Bank raised interest rates to curb the inflation being driven by higher import prices.

But Mr Sundakov did not expect manufacturers to resort to staff layoffs or anything so drastic.

Rather, the impacts would be medium, rather than short-term.

Even though competition from Asians exporting to Australia is stronger and our exports make up a lower percentage of Australia's total, the opportunities for our exporters across the Tasman are looking bright.

Australian inflation at wholesale and retail level is running ahead of ours and wages are on the move, rising more than 10 per cent on an annualised basis.

So how are manufacturers coping?

Some are living off reserves from the last quarter of last year, when vigorous consumption helped lift profits to record levels, says Mr Thompson. But others are already cutting back on investing in new plant and equipment, much of it imported.

What rate would make them happy?

Mr Thompson cites 80Ac, 53USc and 33p as the keys. Mr Moloney says anywhere between 50USc and 55c would do fine.

Mr Markham just wants more Americans to take baths.