Navigating Currency Risks in Timber Exports

About the client

A New Zealand-based exporter engaged in the trade of timber logs, supplying international markets, particularly in China and Singapore. The company operates with a focus on high-volume exports while navigating the challenges of fluctuating commodity prices, maintaining consistent shipments and long-standing relationships with overseas buyers.

Industry

Commodities Trading, Timber Exports

Location

New Zealand, with key markets in China and Singapore

Strategy Used

Forward contract

Background

A New Zealand-based exporter operates in the timber log trading industry, serving markets in China and Singapore. Operating on a narrow margin of 5% due to the volatile nature of the commodity market, the monthly export volume amounts to USD 8,000,000.00, with a total FX volume for the year totaling USD 96 million.

Strategy: Forward contract

To hedge against the risk of the NZD strengthening against the USD, potentially reducing profit margins, a strip of Forward contracts with Corporate Alliance FX is entered into. Each Forward contract covers USD 2.5 million for the next 6 months. This action locks in the current exchange rate of 0.6300 (1.5873) USD into NZD for each monthly settlement date, protecting gross margins from adverse currency movements.

Analysis and Benefits

Revenue Forecasting: The Forward contracts allow accurate revenue forecasting on a monthly basis, regardless of exchange rate fluctuations, facilitating effective budgeting and financial planning.

Risk Mitigation: Locking in the exchange rate proactively mitigates the risk of NZD strengthening against the USD, ensuring profitability and operational stability despite currency market volatility.

Assured Conversion: With Forward contracts in place, there’s assurance of converting export proceeds into NZD at agreed-upon rates monthly, regardless of currency market behavior, eliminating uncertainty and fostering confidence in business operations.

Outcomes

As anticipated, the NZD gradually weakens against the USD leading up to the settlement date.

Without Forward Contract:

When the NZD depreciates to 0.6100, the exporter faces challenges when converting proceeds from timber exports into NZD.

Initial Proceeds: USD 8,000,000.00
Conversion Rate at Settlement: 0.6100 NZD/USD
Actual NZD Amount Received: USD 8,000,000.00 * 0.6100 = NZD 4,880,000.00

With Forward Contract:

The exporter secures a favorable exchange rate, mitigating the impact of the depreciated NZD against the USD.

Forward Contract Exchange Rate: 0.6300 NZD/USD
Actual NZD Amount Received: USD 8,000,000.00 * 0.6300 = NZD 5,040,000.00

Utilizing the Forward contract ensures the exporter receives NZD 160,000.00 more compared to not having the contract in place. This strategic decision safeguards profitability and demonstrates effective risk management in volatile currency markets.

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Solution

Payments

Finance

Corporate Alliance Group Pty Ltd (ABN: 58 167 119 226) trading as Corporate Alliance FX (“CAFX”) holds an Australian Financial Services License (AFSL No: 523351) issued by the Australian Securities and Investments Commission, and is registered with the Australian Transaction Reports and Analysis Centre (AUSTRAC) as an independent remittance dealer (Registration No – IND100697688-001).

Corporate Alliance Payments Pty Ltd (ABN: 66 650 245 382) trading as CAPAY is an Authorised Representative (001295931) of Corporate Alliance Group Pty Ltd (ABN 58 167 119 226), and is registered with the Australian Transaction Reports and Analysis Centre (AUSTRAC) as a remittance dealer (Registration No IND100792739-001), and a Remittance Network Provider (RNP) (Registration No. RNP100792739-001).

Corporate Alliance Pty Ltd (ABN: 51 644 169 148) trading as Corporate Alliance Finance (“CAFIN”) is an Authorised Representative (ASIC AR No. 001297733) of Corporate Alliance Group Pty Ltd (ABN 58 167 119 226), which holds an Australian Financial Services Licence issued by the Australian Securities and Investments Commission (AFSL No: 523351).