Currency Woes II

I plotted the last Ten years worth of Exchange Rates, one below the other to see how they influenced each other over time:

Top: Rand per US Dollar

Center: Rand per Euro

Bottom: US Dollar per Euro

Do you remember when the US$ cost almost R14.00 in Dec/Jan 2001/2? See the top chart. At that time, the US$ to Euro was almost at unity (equal value).

At the time I was exporting paramotors, pricing in US$ so we made a mint in Rands... in fact, we were subsidising our local sales into South Africa with the profits from exports... we were in fact selling our locally manufactured paramotors BELOW COST OF MANUFACTURE into our local market, as we exported most of our production.

Then in 2005 the economics changed and we received less than R6.00 per US$, making it impossible to export profitably, hence impossible to subsidise local sales.

We reverted to importing paramotors for our local market which were attractively priced at the time, then the Rand went to about R7.00 to R7.85 per US$ in 2007 making imports a bit pricey, then in 2008 we suddenly face  R9.00 to R10.00 per US$ making imported paramotors, paragliders and emergency chutes, far too expensive.

Actually we are importing mostly (85%) from Euro based economies (Italy and Spain), but the situation looks much the same. Notice how the top two graphs (US$ & Euro vs Rand) moved in similar rhythms in terms of timing. Around R8.00 per Euro is a well balanced rate (facilitating both imports as well as exports), however at the current R14.00 per Euro, imported products are absolutely way overpriced in south Africa and no-one is buying! (though exporters are smiling)

I just do not have the courage to start manufacturing again. The stresses of staff and labour unions, as well as dealing with so many local sub-contractors whose workmanship and quality-control impacts on our quality and reputation, is just too much to cope with.  Even if we overcome these problems, how long will it be before the economy again swings towards an importers market, causing staff layoffs and requiring another whole change in business structure again?

Working under such a volatile economy with such a widely swinging currency sure makes for interesting (read "difficult") trading conditions.

Even if we do manufacture paramotors locally, I do not think anyone will start manufacturing paragliders or reserves in SA anytime soon and, without affordable wings, few people start flying in our country, so there will not be a ready local market to purchase our locally manufactured paramotors.

Now we have an interesting phenomena... While the Rand weakened in the last few months compared to BOTH the US$ as well as the Euro (top two graphs), notice how the US$ first weakened against the Euro (bottom graph), and recently regained some strength again, but both movements (down and up) caused the Rand to weaken even further against both currencies!

What gives? Can anyone explain this?  

Where to from here? I guess it is anyone's guess... my Crystal Ball has trails of smoke pouring out of it...

Currency woes

On 16 October (before I started this blog), I posted the following to some local email groups. I thought it worth reproducing here:
-------------------

Catastrophic Collapse of the South African Rand (Our national monetary currency).

We have just witnessed a historical event, never seen before, but I fear
this may be just the start.

To put things into perspective... during the first half of October 2008,
the typical daily movements in our currency (based on 9am spot fixes) have
been in the ranges of:
Euro to Rand: -3.2% to 1.59% (-39c to +21c)
GBP to Rand: -3.36% to 0.99% (-53c to +16c)
US$ to Rand: -3.41% to 2.35% (-30c to +22c)

This morning we woke up to (SA) overnight trading on the international
markets, that have led to a sudden overnight change in the value of the
Rand of:
Euro: -11.61% (R1.48 loss)
GBP: -11.88% (R1.94 loss)
US$: -13.52% (R1.26 loss)

These are the largest single daily losses on our currency, EVER !!!!

For those of us working on margins of 10% or less (seems to be almost
everyone in this difficult economy), our overnight increase in replacement
landed costs on imported goods, has wiped out our profits in one blow.
This means if we sell an item today and replace it immediately, our
replacement cost is higher than our selling price!

When margins are higher and exchange rate movements are in their normal
range, we can ride the highs and lows (do Rand-Cost-Averaging on imported
goods), to maintain a relatively stable pricing structure locally.

However, with these drastic movements, this is impossible to achieve and
would be financial suicide.

For some time now I have priced many of the big-ticket imported items
(paramotors, wings, reserves, etc) in the currency of my supplier, with the
rate payable being that of the last spot fix on the date my customer pays
me. However, due to the generally downward slide of the Rand, many of
these deals were done at a loss, due to the timeframe from when I order the
goods, receive the pro-forma invoice, take this to my bank for payment,
process XC controls and wait for the final forex transaction to go through.
This can take up to 7 to 10 days during which time I am losing out on
exchange rate losses.

At the current volatile rates, it is simply impossible to fix a price until
AFTER the final forex transaction. Even then, some of my costs follow
later, such as freight charges, which are also affected by XC rates.

On items imported for stock, this is less of a problem. However on items
imported on demand, this represents a major problem for which there exists
no easy solution.

The only option remains to provide our local customers with an ESTIMATE instead
of an invoice to make their payment on subject to exchange rate movements
(indicating the foreign value and the quoted rate). The invoice will follow
only AFTER the final forex transaction reflecting the actual exchange rate
acquired and the final Rand price.

The customer will then need to "top-up" his payment if the Rand lost
ground, but will receive a refund if the Rand strengthened between his
initial payment off the quote and the exchange rate on the day of the
actual transfer abroad.

This sucks, but desperate times call for desperate measures.