For tanners exchange rates are important

Redwood Comment
Published:  07 December, 2016
Mike Redwood

The political events that have hit the headlines in the past few months, such as the UK referendum, the American election and the Italian referendum, have created great concern with their long-term implications. How will geopolitics look if the U.S realigns its positions on China, Russia and Iran? What does the future of world trade look like after many decades of generally full supported growth? Will the EU and the euro survive, and how will the complex regulations and agreements that exist at the moment look with a waterfall of events all cascading from it? 

This is a lot for tanners to take in, but so far only one issue has really impacted almost everyone. That is currency. The UK voted Brexit and sterling declined 10%; Italy voted ‘no’ and the euro fell, America voted and the US$ fell. All subsequently regained at least some of their losses; but around the world attitudes at once started to change. Part of the Italian vote related to a desire to have an Italian currency independent of the euro that could be devalued. Add to this the fact that the "diplomacy by Twitter", which has been introduced by the incoming U.S. President elect, has started with an attack on China for allowing, or orchestrating, a devaluation of the Chinese Yuan.  “Did China ask us if it was OK to devalue their currency…?”

For tanners, who have to deal with the everyday, currency has always been important. Few tanners are able to both buy raw material locally and sell their leather locally: for everyone else currency matters. Looking back in history, hides, skins and leather, were always among the major traded materials worldwide and this has only increased with modern levels of globalization, and additional semi-processed stages moving across the world. Add in importation of specialised leather chemicals and we are looking at some 60% of the input costs being subject to the vagaries of currency, plus whatever proportion of the sales are exported.

Reduction of risk

For some companies, dealing in currencies such as the euro or the dollar might allow a balancing of foreign currency and reduction in the risks if they buy and sell in the same currency, but they are the fortunate ones. For most, managing currency is one more worry in the complex world of leather. Stability, which tanners crave looks to be replaced with an unpredictable volatility.

So, tanners are going to have to brush up on their skills in buying or selling currency forward, hedging and all the other complex aspects of exchange rate management; and still do a bit of scenario planning for some potentially big geopolitical shifts.

Mike Redwood

7th December 2016

mike@internationalleathermaker.com

Follow Mike Redwood on twitter: @michaelredwood

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