Whenever the Canadian dollar scales new heights - as it has with its recent foray into in the $1.05 (U.S.) range - the focus of concern lands in the same place: The factory floor.
Canada's manufacturers ship about half of their production outside of Canada, the vast majority to the United States. Those sales in U.S. dollars are worth less in Canadian-dollar terms every time the loonie goes up relative to its U.S. counterpart.
That puts increasing pressure on profit margins, since manufacturers' expenses get no such break - they are largely incurred in Canadian currency. The biggest of those expenses are typically labour costs; many critics feel the currency is largely to blame for the disappearance of nearly half a million manufacturing jobs - more than 20 per cent of the sector's work force - since the Canadian dollar rose above 80 cents (U.S.) in 2004.
Yet as the dollar has soared over the past year, factory employment has actually risen in Canada, suggesting the relationship between a high loonie and a weak manufacturing sector is not black-and-white. Canada's manufacturing sector encompasses a range of businesses, with a wide range of profit margins. For an investor in Canadian stocks, it's beneficial to know which manufacturers are in better shape than others to withstand a $1.05 loonie.
NOT ALL CREATED EQUAL
Marc Pinsonneault, senior economist at National Bank Financial, recently examined what impact a $1.05 dollar would have on profit margins of 18 manufacturing segments, compared with their fourth-quarter 2010 margins (when the currency was 6.4 per cent lower).
He found that some segments - primarily motor-vehicle and transportation-related manufacturers, as well as clothing companies and much of the forest-products sector - are not only highly vulnerable to the rising loonie but already had thin profit margins to begin with; in some cases, the currency rise obliterated their profit margins.
Metals producers, electronics makers, chemicals and rubber/synthetics firms have also been hit hard, but had healthier profit margins to begin with. And producers of non-metallic minerals (glass, clay, concrete, etc.) and food-and-beverage products are probably relatively unscathed.
Of course, further dollar appreciation would add to these impacts. But if the recent pullback in oil continues, manufacturers might have less to worry about in the coming months.
The loonie has closely tracked oil's fortunes over the past three years. If oil's downward correction continues - as many forecasters expect - this trend implies that the currency will moderate with it.Report Typo/Error