in miniature


The dollar is at multiyear lows against the euro, the Japanese yen and the British pound. What are the ripples being felt in the OP sector?

Another year on and, at Christmas 2004, the dollar camp is still full of bah humbug. Record figures abound: at the time of going to press, the dollar was floating at a record 12-year low against the pound at $1.928; an all-time low of $1.329 against the euro; and against the dollar, the yen had risen slowly to a four and a half year high of ¥105.6.

Not a pretty picture. In fact, the dark patch has never been so gloomy. But, as Chris Conkey, chief investment officer at Evergreen Investments has been quoted as saying: "It’s not a bad thing until it is."

And quite simply, for many, it’s not. With the current slow economy in Europe, feeble dollar translations have provided international US-based corporations with a welcome way of offsetting balance sheets into their favour. In fact, analysts estimate that dollar depreciation contributed as much as 2-3 per cent to their profits in this year’s Q2.

Big OP cheeses Office Depot and Staples are good examples, says Dan Binder, SVP at Buckingham Research. He says: "Both companies saw weaknesses in their European business in the last quarter. But this was partially offset by the currency translations back into dollars, which made sales and earnings look better."

Take Q3 results at Depot’s international division, for instance. In local currencies, sales declined 5 per cent and operating profit dipped 10 per cent on last year’s levels. But, totted up in dollars, sales were up 4 per cent on 2003 levels and operating profit declined just 1 per cent – not so bad.

"Staples, which echoed the same issue with its European sales, also managed to post an incremental sales and earnings benefit," says Binder. "European sales for Q3 increased 15 per cent in local currency, but 24 per cent when translated into dollars."


But of course, as the dollar weakens, US retailers across all industries are getting less bulk for their buck when importing from overseas – and the importers themselves are getting less buck as a result.

"Currently about one in every five dollars that the US consumer spends on goods (excluding gasoline) is on imports," says Diane Kutyla, an economist with Deloitte. "As the dollar continues to weaken, imports are becoming more expensive for US consumers and for retailers.

"Some retailers are attempting to offset these rising prices by looking to other sources, either domestically, or from emerging-market countries such as Asia, where the value of the dollar has not fallen as sharply as it has against the euro. Some are also cutting back on other costs or increasing productivity, to offset rising import prices," she adds.

But she claims that OP retailers are less impacted by the weakening dollar than several other retail sectors. This is because several of the product groups they sell – computers, stationery and office furniture, for example – have been experiencing deflation, or declining prices, at retail level.

According to the US Labor Department, retail prices for IT hardware and services are currently down 7 per cent from a year ago while for stationery they are down 1 per cent.

One option for retailers trying to compensate for rising import costs is upping retail prices. But competition makes this a tough one – the dreary Thanksgiving at Wal-Mart provides a solemn lesson. A less-huge-than-normal discount strategy sent its customers in flocks to the competition and, as a result, sales grew only 0.7 per cent in the month of November.

On the flip side, retailers in Europe are benefiting from cheap US products to their right, and cheap Chinese products to their left (China’s currency is, for the moment, still pegged to the dollar). Consequentially, US manufacturers are seeing demand for their relatively inexpensive exports rise and, as a result, are lining their pockets and taking on new staff.

According to the Institute for Supply Management index, which measures the breadth of economic activity across the US manufacturing sector, November was the 18th month in a row where the index has been above 50, indicating steady growth in the sector. Paper manufacturers like International Paper and Weyerhaeuser, for example, have ridden a nice, steady wave of late by undercutting their European competitors.

The dollar’s weakness has also led Morgan Stanley to raise global manufacturer 3M’s 2005 earnings estimate to $4.20 per share from $4.10, and that of 2006 to $4.65 from $4.50.

Despite this, other OP manufacturers report that the weakening dollar has not affected them much at all. Stewart Murdoch, marketing director at Avery Dennison, says: "Manufacturers like us with a strong European base are not impacted hugely. If we are importing products back from the Far East with pounds, we get a lot, and we can then send dollars back to an American HQ, which works out great. But we do not source a lot from Asia so this does not really affect us."

President/CEO of Esselte, Magnus Nicolin, tells a similar story. He says: "Since Esselte has such a global presence with an equal amount of both revenues and cost in dollars and euros respectively, we are not very affected by the dollar’s decline."


Another downfall of a stumbling dollar is that many OP manufacturers in the US which source from Asia could see their costs rise. As time goes on (and contracts are renewed), many believe that Asian companies will be certain to up their prices to share the risks and rewards of currency changes. "Prices are not too outrageous yet but we will undoubtedly see them go up in time if the dollar continues to fall," predicts Avery’s Murdoch. "And Asian markets move quickly so this could even happen within the next six to nine months or so."

Gail Dudack, chief investment strategist at SunGard Institutional Brokerage, disagrees. In a recent interview with BusinessWeek she said: "Things aren’t working that way this cycle and it’s unlikely that will change." She claims that since countries in Asia depend on exports for economic growth, they cannot afford to raise prices, because anything that hurts the US economy hurts them too. "They’re holding the line on prices, taking a hit to their profit margins instead," she says.

Others argue that a weak dollar could have other, more adverse effects on the OP sector. Nicolin estimates that with the expected strengthening of the Chinese and Far Eastern currencies (against a weakening dollar), China as a manufacturing base will become less competitive in favour of US-based manufacturing again.

But then – as ever – there are contrary beliefs. Avery’s Murdoch, for instance, claims that if labour costs stay low, companies will continue to source from Asian countries such as China.

So what of the future? Many believe the dollar is locked in a downward cycle for the short-term in order to unwind the record US current account deficit (although this, too, is contested). And Federal Reserve Board chairman Alan Greenspan himself has conceded that a further decline in the greenback’s value is inevitable.

The OP sector, which shares the same raw materials as mammoth sectors such as electronics and toys, is merely a tiny part of the raw materials economy with relatively small buying power. All it can do is sit back and wait.

But not too long we hope. Although many OP players may continue to enjoy the ride for a while yet, an ever-shrinking dollar would be impossible to sustain over the long term. As Evergreen’s Conkey says: "A declining currency is like alcohol – a little bit may be good, but how do you stop-

When it comes to the global push and shove, trading links are vital. Europe cannot afford to see its goods left unsold and the US cannot afford to see this link disintegrate.