Currency hedges still hold

By PAM GRAHAM

Carter Holt Harvey provided an insight last week into how much the rising New Zealand dollar is hurting the country's largest exporters.

We are protected for at least a year was the message from the largest forest owner, which is more worried about what is happening to competitors' currencies, particularly the Chilean peso.

Exporters suffer when the currency rises because income in other countries converts into fewer dollars when it is brought home. This can be avoided by fixing the exchange rate in advance in currency hedges.

Carter Holt has 100 per cent of its income this year hedged at an average rate of 0.444 US dollars, but only 25 per cent is protected next year at an average 0.416 and 19 per cent in 2005 and 2006.

The company was 92 per cent hedged at an average 0.423 last year.

However, any new contracts to fix the currency will be at much higher levels. The kiwi dollar is around 0.55 now.

The good news is that if it remains near present levels existing hedges until 2007 will save the company $290 million of income that would otherwise have been lost to the rising dollar.

Last year, the kiwi dollar rose 17 per cent against the US dollar, 15 per cent against the Australian dollar, 8 per cent against the euro and 30 per cent against the Chilean peso.

The movement in Chile's currency was worrisome if sustained, said Carter Holt's chief financial officer, Jonathan Mason.

"Chilean pulp and logs are going into Asia against New Zealand logs and pulp. Chile is now making better money because the US dollar they earn converts into more Chilean pesos whereas our sales in US dollars covert into fewer New Zealand dollars.

"So, Chile over time could put in more capacity and will have a more competitive cost position to us."

Mason also noted that if an operation was more profitable "you can also be more aggressive in getting share in Asian markets".

"Things do not change in one year but if this trend were to continue it would be a big issue, not just for us, it would be big for Fonterra and other exporters," he said.

Fonterra chief executive Craig Norgate recently told shareholders concerned about the effect of the New Zealand dollar's rise that its foreign exchange cover was shielding the co-op from the worst impact of the currency movement this season.

"The rise, however, has more than offset recent positive increases in commodity prices and will impact payout next season," he said.

Kiwifruit exporter Zespri has greater exposure to the euro and the yen than the US dollar because its main markets are Europe and Japan.

A Zespri spokeswoman said the company was partly hedged but could only "crystal-ball gaze" in such a fluid situation.

There would be a harmful impact on growers' returns but just what that would be was even more difficult to assess while fruit was still at an immature stage and there were no estimates of crop size.

Meat company Affco told its shareholders last week that the rising dollar was a concern but the company had hedged against the eight main currencies in which it traded to minimise impacts.

Mason argues that some currency scenarios are positive for Carter Holt Harvey. If the US dollar weakens against all currencies, US dollar commodity prices tend to rise because everyone pushes for higher prices and the income back to New Zealand is still protected by hedges.

So far this year the New Zealand dollar has risen 7 per cent against the US dollar but it has been because the US dollar has weakened against many currencies.

Rising currencies also tended to galvanise companies to reduce costs, said Mason. "We won't just sit back and say, 'Gee whizz, we are going to be less profitable now'."