High dollar putting hurt on manufacturing

00:26, Jan 28 2013

The boss of Hamilton Jet is warning its profits will be virtually wiped out if the Kiwi dollar does not fall, calling for the government "to do its bit" to weaken the currency.

Opposition parties have organised an inquiry into manufacturing to address the decline in jobs and companies in the sector, which kicked off in Parliament this morning.

Prime Minister John Key has labelled the process a "political stunt" because it was not invited to take part.

The New Zealand Manufacturers and Exporters Association (NZMEA) gathered a panel of substantial manufacturers for a panel session, including Keith Whiteley, managing director of Christchurch-based CWF Hamilton.

The company pioneered jet-engined boats in the 1950s, and now make engines for boats weighing up to 300 tonnes, a world leader in its market competing against Rolls Royce Marine.

Whiteley said monetary policy which targeted inflation above all else had passed its used by date, and the exchange rate must be taken into account.


The company used an "aggressive" hedging strategy - where currency contracts are purchased as a fixed exchange rate - which meant it was currently operating as if the kiwi dollar bought US74c and the 56 euro cents (verses the current spot rate of about US83.6c and 62 euro cents).

However over the next 2-3 years the current hedge contracts would expire, and if the dollar did not fall, net profits before tax will drop from 9 per cent of revenue, to 2 per cent.

"If this [high dollar] were to last for longer than the next two to three years of hedging we have left, then we have a problem."

Hamilton has conducted research which showed it could improve production by 50 per cent by investing $20m, a move which would cut labour costs. However if the dollar was to appreciate by 5 per cent, all of the gains would be wiped out.

"Given the current upward pressure on the New Zealand dollar, this does not present itself as a great investment proposition," Whiteley said.

"We think it's time that the government did its bit. The single monetary policy goal of targeting inflation alone, while relevant in the 1980s  when inflation was out of control is now passed, in our view, its used-by date," Whiteley said.

"Exchange rate consideration must become part of the mix."

Gordon Sutherland, managing director of AW Fraser, a bronze foundry which processes 25 per cent of New Zealand's scrap copper, labelled the government's 'hands off' approach to the exchange rate "insane".

The company manufactures equipment for oil wells in the Middle East and mining operations in Australia.

Sutherland told the panel of opposition MPs that he often read that companies should "raise prices" to improve profitability.

"I'm a businessman, don't you think I put my prices up as often as I can? That's what business is about, you charge as much as the customer feels the value of your product."

The company sold most of its products in US dollars, the dominant currency around the world, and few customers had any sympathy for the rise in the New Zealand dollar.

Sutherland said in previous economic downturns the kiwi dollar had also fallen, offsetting the fall in demand. However this time "the world has changed" with US and European governments taking extensive action to weaken their own currencies to help domestic economies.

"We sit back, and do nothing, and we hope it's going to change. We all know the definition of insanity is keep doing the same thing and hope it will change. It's insane."

John Walley, chief executive of the NZMEA said as well as the  strength of the New Zealand dollar, there were a number of other measures used offshore which might not make objective sense, but which were used by other governments to create a bias in favour of activity.

"It's about levelling the playing field in some regard."

These included tax credits for research and development, and accelerated depreciation on productive assets.