Watching the loonie climb higher and higher might give you a patriotic thrill — like seeing a flock of Canadian geese go by, or watching the RCMP do their famous musical ride — but seeing a flock of profit warnings from companies affected by the higher dollar probably won't give your inner investor goosebumps. The real effects of a stronger currency are starting to be felt, on both the micro and the macro-economic level, and they will take time to play themselves out. To paraphrase Bette Davis, fasten your seatbelts — it could be a bumpy ride.
To see the real-world impact of the higher loonie, look no further than Potash Corp. The world's largest fertilizer producer said Tuesday that as a result of the higher currency its earnings for the quarter will be cut almost in half, to 55 cents (U.S.) a share from a previous estimate made just two months ago of 90 cents. Most of the analysts surveyed by Thomson Financial/First Call were looking for a profit of about 84 cents. Most of the reduction is a result of foreign exchange losses, the company said, while some is as a result of layoffs at U.S. plants.
Then there's Stelco. The steel maker announced that its loss for the current quarter will not be smaller than the previous quarter — as it assured analysts it would be just two months ago — but at between 83 cents (Canadian) and 92 cents a share will actually be up to twice as large, and as much as four times what analysts were expecting. In addition to high energy costs and slumping demand for Stelco's products, the company said that it suffered from exchange rate problems as well, and that up to one quarter of the loss was as a result of the higher Canadian dollar.
Pulp and paper giant Abitibi-Consolidated, the world's largest newsprint producer, said last week that it was chopping its dividend by 75 per cent to just 2.5 cents from 10 cents, due in part to the rising Canadian dollar. Every one-cent increase in the loonie shaves an estimated 3 cents off the company's bottom line. Like most forestry companies, Abitibi's costs are all in Canadian dollars, but its products are sold in the United States and elsewhere in a market that is priced in U.S. dollars.
The biggest effect by far, of course, is on companies whose product comes from local sources, but is exported to foreign buyers, and/or priced in U.S. dollars, and that is a large part of the Canadian economy. Alcan's first-quarter profit, for example, fell by 85 per cent in part because of the higher dollar, and it took a special charge of $96-million (U.S.) for the effect of a stronger currency. Meanwhile, Algoma is laying off 600 people and trying to cut costs by $40-million (Canadian) a year, and Falconbridge recently announced that it cut 85 jobs at a zinc/copper mine.
The exchange rate can have a bigger impact for such major exporters than even the price of the commodity they are selling. For every cent that the Canadian dollar rises — and it has risen by more than 10 cents since last fall — earnings at companies such as Inco are cut by millions of dollars. Teck's are cut by about $8-million (U.S.) for every cent the dollar climbs. According to Merrill Lynch, the rise in the dollar could cut earnings on the S&P/TSX index by 20 per cent this year and up to 40 per cent over the next two years.
But it's not just fertilizer or metal and minerals companies. Canadian Pacific Railway said it will take a charge of $152-million (Canadian) to account for layoffs and restructuring moves in the northeastern part of its North American network. Many of those moves were made necessary by the higher Canadian dollar, the company said. "We are not satisfied with the current rate of progress toward our long-term financial objectives," said CP CEO Rob Ritchie. "This situation has been exacerbated by the unexpected rise in the value of the Canadian dollar."
Royal Bank of Canada said in its latest quarter the climb in the loonie cut its profit by $15-million, while Bombardier's aerospace revenue fell to $2.4-billion from $2.7-billion in part because of the higher dollar. Exchange rates can also hit the major financial institutions such as insurance companies: Mario Mendonca of CIBC World Markets has said that if the dollar stays high Manulife's 2004 profit could be cut by $129-million or 9 per cent, Sun Life's could fall by $137-million or 8 per cent and Canada Life's could drop $46-million, or 8 per cent.
It's true that some Canadian companies and industries got too used to having a low dollar over the past decade, and that adjusting to a higher currency is likely to force many of them to become more efficient and more productive. But the fact is that the real-world impact of those improvements in efficiency will be more layoffs, more plant closures, more restructurings and lower earnings for some of Canada's leading companies. That is something investors will have to get used to while they are feeling a warm glow of pride at the rising loonie.
E-mail Mathew Ingram at mingram@globeandmail.ca
Mathew Ingram's past columns and a short biography are here
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