Do currency fluctuations impact earnings? The recent rise in the value of the euro against the U.S. dollar could affect European producers, but it is a complex picture.
In the middle of this year, the European currency--the euro--made some spectacular value gains against the U.S. dollar. From a 2002 high of just over EUR EUR
In currencies, this is the abbreviation for the Euro.
The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. 1.16 to the dollar at the beginning of February, the greenback greenback, in U.S. history, legal tender notes unsecured by specie (coin). In 1862, under the exigencies of the Civil War, the U.S. government first issued legal tender notes (popularly called greenbacks) that were placed on a par with notes backed by specie. steadily lost ground until the euro broke through the parity barrier in mid-July. After a brief spike at just under EUR 0.99 to the dollar at the end of the third week in July, the exchange rate settled down at around US$1.02 for most of August. Even that level represents a 9% drop in value for the dollar since the beginning of the year. Figure 1 shows the dollar's exchange rate against the euro.
[FIGURE 1 OMITTED]
For European holidaymakers traveling outside the so-called "Eurozone Eurozone
same as Euroland
Eurozone n → eurozona, zona euro
Eurozone n → zona euro ," the decline represented an extra spending boost, especially for those visiting the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. . But according to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. calculations from at least one analyst, the drop could also signal a boon for U.S. papermakers.
According to analysts at Morgan Stanley To comply with Wikipedia's , the introduction of this article needs a complete rewrite. , there is a relationship between share performance and exchange rate movements, mainly in terms of the relative performance of U.S. producers versus their European counterparts. A recent paper from the team showed that, in previous periods of fluctuations between the dollar and European currencies, an increase in the strength of the dollar has typically benefited the share index of European producers and vice versa VICE VERSA. On the contrary; on opposite sides. , as shown in Table I.
The analysts also pointed out that, while currency swings are significant, they are still a secondary factor in determining the performance of European companies It may never be fully completed or, depending on its its nature, it may be that it can never be completed. However, new and revised entries in the list are always welcome.
This is a list of companies from the countries in the European Union. within the Eurozone. As the team noted, "Instead, we believe that the industry's powerful cyclical swings are the prime driver of share performance."
That caution is echoed by Jaakko Poyry financial expert Timo Teras. "The value of the dollar affects so many things it is difficult to say exactly what the overall effect would be for European producers," he commented. "Obviously, a weaker dollar has a big impact on sales off paper to countries outside Europe and into the U.S. itself; but a weaker dollar means that hardwood pulp costs less in euro terms."
Teras added that the internationalization The support for monetary values, time and date for countries around the world. It also embraces the use of native characters and symbols in the different alphabets. See localization, i18n, Unicode and IDN.
internationalization - internationalisation of the pulp and paper industry The global pulp and paper industry is dominated by North American (United States, Canada), northern European (Finland, Sweden) and East Asian countries (such as Japan). Australasia and Latin America also have significant pulp and paper industries. means that many larger companies simply gain on one hand while losing on the other. "Big companies like UPM-Kymmene and Stora Enso
Among a broad range of other factors that he felt should be taken into consideration, Teras singled out energy costs as a key component in the dollar/euro exchange rate equation. With dollar-based oil markets underpinning much of the energy sector's pricing policies, the depreciation of the dollar provides a boost for energy-intensive net users at a time of rising energy costs. Equally, net energy providers could be losing out.
Some commentators have indicated that the dollar's decline may already have played its part in aiding the recent months' rise in pulp prices across Europe, especially for hardwood grades. Teras agrees. He explained, "One thing we can say for sure about the strength or weakness of the dollar is that it has a major bearing on how fast or slow the price of pulp goes up or down."
A spokesman for Swedish pulp group Sodra also indicated that recent dollar weakness had made the group's life somewhat easier "The dollar does affect pulp prices, but it should not be overstated o·ver·state
tr.v. o·ver·stat·ed, o·ver·stat·ing, o·ver·states
To state in exaggerated terms. See Synonyms at exaggerate.
o . The price of pulp has been quite low, so increases in the value of the euro against the dollar have made it a little easier for us to reach the prices we want in recent months, in the long term, though, fluctuations cause us very few problems."
While analyzing the specific impact of the relative strength or weakness of the euro and dollar on each company's specific costs or sales is a massively complex task, Morgan Stanley's analysis does provide some intriguing insights. The group targeted net currency flows and hedging policy (where known) as key elements in their analysis of Europe's main producers.
According to the analysts, groups that report in cures and do not have broad exposure outside the Eurozone could suffer declines of 10% or more on normalized earnings Normalized Earnings
1. Earnings adjusted for cyclical ups and downs in the economy.
2. On the balance sheet, earnings adjusted to remove unusual or one-time influences.
An example would be removing a land sale in which a large capital gain was realized. per share, compared with a stable currency regime at previous euro/dollar levels. While the group notes that Stora Enso and UPM-Kymmene are less exposed than most, Morgan Stanley indicates that M-Real, Norske Skog Norske Skogindustrier ASA or Norske Skog, (OSE: NSG) which translates as Norwegian Forest Industries, is a Norwegian pulp and paper company based in Oslo, Norway and etablished in 1962. and SCA (Single Connector Attachment) An 80-pin plug and socket used to connect peripherals. With a SCSI drive, it rolls three cables (power, data channel and ID configuration) into one connector for fast installation and removal. could all be hurt by the cure's strength.
1. The act of drawing a line under; underscoring.
2. Emphasis or stress, as in instruction or argument. the complexity of the calculations, Store Enso noted that net foreign exchange gains actually showed a gain of EUR 10.9 million in its second quarter results. As the company explained, Stora Enso currently hedges 50% of its dollar and sterling cash flows. Although the currency effect of the closing rates on the second quarter was material, the company's dollar denominated debt helped balance the impact of currency fluctuations overall.
On the flip side Flip side
In the context of general equities, opposite side to a proposition or position (buy, if sell is the proposition and vice versa). of the coin, Morgan Stanley's report indicated that companies such as David S Smith and Sappi are expected to benefit from the dollar weakness, because they do not report in euros. That view seems to concur with Sappi's own position.
In its recent interim statement, the company said, "The relative strength of the euro compared to the U.S. dollar is expected to enhance the dollar earnings of Sappi's European business because its sales are predominantly in euros, while part of its costs (particularly purchased pulp) is in U.S. dollars. It is estimated that, other things remaining unchanged, a 10% strengthening in the euro would result in approximately US$ 0.13 improvement in earnings per share. For Sappi's Southern African businesses, a strengthening of the rand against the dollar of approximately 10% would result in approximately US$ 0.11 reduction in earnings per share. On balance, however, the weakening of the U.S. dollar is favorable to Sappi."
As Teras pointed out, "It is almost impossible to say with accuracy what the effect of the dollar weakness will be on these companies without digging into very great detail on every aspect of the business. You'd have to look not only at a company's hedging policy, but also exactly what it did in practice, as well as figuring out exactly what debt was dollar denominated and what was in other currencies. Unless you had Juha Niemela [UPM-Kymmene CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. ] or Jukka Harmala [Stora Enso CEO] work it out for you, it would be a massive task."
Overall, currency fluctuations do provide a crucial dynamic in the pulp and paper trading Paper trading (sometimes also called "virtual trading") is a simulated trading process in which would-be investors can 'practice' investing without committing real money. environment, particularly with respect to trade flows. Still, while it is well worth keeping an eye on the numbers, investors should not expect to see clear links between exchange rate movements and share price performance.
In addition to the inherent complexity of evaluating the inputs and outputs, pulp and paper companies are becoming far more sophisticated in their approach to risk management-and that includes currency movements. As a result, the rise of the cure against the dollar may well affect profitability among some players, but broader industry trends are likely to swamp the impact of currency fluctuations in many cases.
Table I: Performance of European Paper & Forest Company Share Price Index relative to U.S. Paper & Forest Index Share performance of European producers Change in value of euro Period vs U.S. producers currency vs the US$ May 1989-Aug 1992 -54% 30% Aug 1992-Nov 1993 39% -40% Nov 1993-Jun 1995 -2% 25% Jun 1995-Jun 2001 59% -36% Jun 2001-Jun 2002 7% 16% Euro Currency Strength -16% 24% Euro Currency Weakness 49% -38%
IN THIS ARTICLE, YOU WILL LEARN:
* The relationship between share performance and exchange rate movements
* The implications of exchange rate fluctuations for the paper industry
* The effects of the dollar's decline on pulp and paper prices
* To participate in the TAPPI TAPPI Technical Association of the Pulp and Paper Industry discussion board on the industry's financial performance, or to view discussion boards for other topics, go to http://www.tappi.org/index.asp?limit_to=-1&ch=6&rc=-1&Show_only=57
About the author: Jim Kenny is contributing editor/Europe, for Solutions! magazine, and is based in Brussels, Belgium. He is the former vice president of editorial for Paperloop and today heads his own company, DSI (Dynamic Systems Initiative) An umbrella term for a suite of Microsoft products that help manage the Windows environment in large enterprises. DSI was introduced in 2003. . Contact him by phone at +32 2 534 4960, or by email at firstname.lastname@example.org