How to soften the blow of a low loonie

Catalyst Paper hedges against a volatile dollar by locking in exchange rates in its contracts

It was a crazy year for the Canadian dollar. How companies like Catalyst Paper are hedging their bets

It’s hard to understate the importance of the U.S. dollar (USD) to businesses in B.C., both big and small. Whether you’re importing coffee or exporting lumber, or perhaps paying contractors abroad in USD, the dollar matters. So in a year where our dollar fell from 93.83 U.S. cents on July 6, 2014, to below 80 cents six months later, many companies on our Top 100 list are feeling the effects of a weakened exchange—albeit not the same effects they may have felt just decades ago.

“The impact of currency on business is a more complicated story than it was 20 years ago,” explains Craig Williams, vice-president of B.C. for Canadian Manufacturers and Exporters. Thanks to globalization, B.C. companies are sourcing technology, machine parts and services from outside of Canada more and more—and exchange rate volatility is affecting these companies at a deeper level. For manufacturers, a low dollar can make it easier to sell abroad—but, increasingly, it can also mean higher production costs and smaller margins.

“Industries reliant on U.S. markets and suppliers have less capacity to respond to exchange rate movements and are potentially at financial risk,” writes Valérie Poulin, a former economist at the Conference Board of Canada, in a 2010 a paper on the historical trajectory of the dollar. But fundamentally, a globalized supply chain—where a manufacturer pays for parts from China in USD—is good for productivity, writes Poulin. Companies just need to figure out how to manage the currency-induced fluctuation in those prices.

And nowhere is up-and-down volatility more pronounced than in commodities. Lumber, copper, gold: all are sold in USD. Export contracts are universally denominated in USD—regardless of the destination—and nearly every financial, from a futures contract to a 10-year term bond, is denominated in USD.

Catalyst Paper, based in Richmond, exports nearly 40 per cent of its bleached pulp—the material from which cardboard and kraft paper are made—to the U.S. All of its pulp, however—be it for domestic or export markets—is sold in USD. In order to lessen the impact of currency fluctuations on its bottom line, Catalyst hedges. By locking in its contracts with buyers at specified exchange rates (for 2014, it hedged the dollar would stay at around 90 cents), Catalyst attempts to lessen the impact that a swing in the dollar would have on its income. It thus avoids having a $5-million contract turn into a $4-million payment. On the flip side, Catalyst could miss out on additional profits were the loonie to rebound.

Still, Catalyst prefers its better-safe-than-sorry approach. While those pre-set prices are important for sales, they’re even more important for managing debt, explains Poulin. Like all major bond issuers, Catalyst deals with debt denominated in USD. A low Canadian dollar makes servicing those debts more expensive. In a note to investors in the final quarter of 2014, the company warned that its earnings could “fluctuate materially” as a result of a loss in converting those payments into the more expensive American dollar—enough to turn a marginal profit into a loss.