Currency Downturn has Major Implications for the Industry

Aussie’s devaluation will hurt everybody

The financial turmoil gripping world markets is already adversely affecting Australian food-service equipment markets with reduced discretionary spending and the credit squeeze reigning in the plans of many developers.

However, the biggest immediate affect arises from the rapid devaluation of the Aussie dollar against all major trading currencies. This devaluation has been more than almost any currency in the world in the same period.

As the food-service industry is dominated by fully imported products the effects on the market are widespread. Even manufactured products by Stoddart are not immune because so much of the raw material and componentry is imported; from stainless steel bought in US$ to thermostats in Euro.

The most common trading currency, the US dollar, has fallen from a brief peak of 0.98c in July to a recent low of 0.61c. This devaluation of almost 38% in 3 months is unprecedented and places a huge burden on importers and resellers. Most importers have responded by adding a surcharge on products purchased in this currency.

The Euro’s fall of 21% from a high of 0.62c to 0.49c has not been quite so dramatic, however, the more stable historical exchange rates between the Euro and Aussie have meant this devaluation is equally damaging and even more unexpected. Again most importers have added a surcharge to cover this.

Unfortunately, nobody was able to predict the timing or the gravity of these events and therefore it is difficult to know whether forecasts now carry much weight. Latest forecasts from the NAB for the Aussie-USD rate have been significantly downgraded. They suggest no regular recovery of the USD over 70c until September 2009 at which stage they are forecasting a 0.73c rate. This compares to their previous forecast of 0.81c at the same time.

If this bears out to be true, most importers may have to add further surcharges, because current surcharge percentages do not nearly cover the full extent of the dollar’s decline.
This has all happened despite the strong fundamentals within the Australian economy. However, the rapid reduction in resource commodity prices, the sudden action by the RBA to drop interest rates and the general unease in the market, have seen investors rapidly pulling out of Aussie dollars. This panic selling would have appeared unlikely to be repeated up until a few days ago.

However, another sudden drop has just occurred, putting even greater uncertainty into proceedings. It is difficult to see a big increase in the short term, but hopefully we also won’t see any further devaluation down to levels in the earlier years of the decade where the Aussie went under 50c.

For dealers this will mean an increase in purchase prices for the short-medium term that will have to be passed on to end-user customers. Like importers, dealers may have to brace themselves for harder times.

The availability of credit is also drying up which will have an effect on all areas of the market, from Wholesalers down to end-users. Those that manage their credit effectively in this period will have a huge advantage not just from a stability perspective, but also currying favor with suppliers.

The analogy of a theme-park rollercoaster is often used at such times, however, the current market situation lacks any real aspect of fun. However, I would suggest you fasten your seat-belts and don’t expect to get off any time soon.