March 10, 2016 / 3:00 AM / a year ago

Canada manufacturers see expiring forex hedges lifting exports

Technicians work with a keyboard functional tester in an undated photo supplied by Canadian aerospace firm FTG March 9, 2016.Firan Technology Group Corporaration/Handout via Reuters

TORONTO (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.

At Laval Tool and Mould, which exports 90 percent of its products, mostly to Mexico and the United States, President Jonathon Azzopardi said business is booming.

"There have been companies we've been trying to break into for five years in Europe who look at the Canadian dollar and say 'This is a good opportunity'," he said. "Now we're kind of like the low-cost country."

A BPI certified 100% compostable single-serve pod is seen in an undated photo supplied by Club Coffee in Toronto March 9, 2016.Club Coffee/Handout via Reuters

Canadian exports reached a record C$46 billion in January when the currency hit a 12-year low, with volumes up 8.8 percent from a year earlier. Consumer goods and motor vehicles and auto parts were the standouts, each jumping roughly 40 percent on the year.

Michael Dolega, senior economist at TD Bank Group, noted it takes several quarters for firms to ramp up production and gain market share based on currency moves.

The expectation that the factory sector would have turned on a dime when the dollar dropped annoys John Pigott, chief executive of Toronto-based coffee pod maker Club Coffee, which exports about 40 percent of its product.

"It's not as simple as everybody thinks it is ... we had to let hedges and futures run. As well, you have to wait for contracts, they don't happen overnight," he said. "I honestly think the Bank (of Canada) is sometimes lagging what is going on in reality in the marketplace."

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LOCKING IN THE WIN

Canadian manufacturers say they want policymakers to do more to support the sector now that the oil patch - seen as the favorite son under the former Conservative government - has slumped.

To keep the momentum, the government and central bank need to understand the value of a weak Canadian dollar and help companies reinvest in innovation, said Azzopardi, who has almost doubled his Canadian workforce since 2013 to 74.

Government support for education and the training of more skilled workers is also key, he said.

Having been on the wrong side of a strong Canadian dollar just a few years ago, FTG's Bourne is trying to extend as much of the benefit as he can, expanding the bank facility he uses to hedge his U.S. surplus for three years rather than just one.

But Azzopardi said the currency game can be as risky as it is beneficial. If Laval Tool and Mould drops prices today to win a contract, it could get burned if the Canadian dollar is back at par with the U.S. dollar when the delivery time arrives.

"If it is a project I know is close, I can offer more - I might offer 10 percent (price cut)," he said. "But I have some projects that take 2 or 3 years to become a reality, and you saw what the exchange rate can do in two or three years."

Editing by Alan Crosby

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