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Making the Most of Currency Transfers

It is no secret that metal prices have been falling throughout 2013 as the ‘mining investment boom’, largely driven by China, abates. Whilst this has helped to reduce the cost of raw metals, so too has demand for certain cast metals and manufactured products softened in certain parts of the world.

With this in mind, Smart Currency business director, Carl Hasty, looks at currency trading within the cast metals industry and its potential role in cost mitigation and profit protection.

It is encouraging to see that as 2013 has progressed, the health of the UK economy has been building. While the ride has not been a smooth one, the overall trend has been one of increasing manufacturing activity, improving business confidence and strengthening forward purchase orders. 

As a result, the OECD (Organisation for European Co-Operation and Development) in August nearly doubled its expected growth forecast for the UK economy for 2013 to 1.5%, up from only 0.8% growth forecast just three months earlier.

However the global economy still sits on shaky ground: the Chinese economy has persistently shown signs of weakness throughout the year; the Eurozone continues to struggle with its ongoing debt problems, and will do so for quite some time to come; and concerns abound regarding the impact of stimulus tapering on the US economy. 

Given this uncertain trading environment, manufacturers need now more than ever to maintain efficient operating procedures and exercise strict cost controls to keep their business on track - both for resisting the effects of any new economic slowdown, should one arise, and conversely to maximise opportunities for growth as conditions become more buoyant. 

Sadly as part of this exercise, all too many companies overlook the role that currency plays on their bottom line - and the effects can be substantial, to say the least. 
The rate at which currency is secured to import a raw material will ultimately determine its true cost. If the cost of a single tonne of Grade A copper sits at $US6,771.00, at an on-the-spot exchange rate of $1/£0.6397, that purchase equates to £4,331.41. Add to this a transfer fee of as much as £30.00, as the majority of banking institutions typically do on every individual transfer, and the final cost of the import in Sterling is £4,361.41.

However if, with help from specialist advice, a 3% improvement on the exchange rate was achieved, delivering a more preferable exchange rate of $1/£0.6205 to make the purchase, and that provider also did not charge a transfer fee, the import would cost £4,201.41 - a saving of £160.00 for the same product from the same supplier. For a regular monthly purchase, assuming the exchange rate maintained this level, that saving adds up to £1,920.00 over a year.

Then take the export of the end product, whatever it may be, sold on the international market at a hypothetical price of $US10,000.00 per unit. Using the identical exchange rate from a typical banking institution, the product would sell for £6,397.00 at $1/£0.6397 which, less their £30.00 transfer fee, would net £6,367.00 on the sale. 

Compare that with a 3% better exchange rate offered elsewhere, which would equate to $1/£0.6589. With such a rate, and no transfer fee imposed, that same sale would net £6,589.00 - an additional £222.00. For a monthly sale, once again assuming the exchange rate maintained this level, the difference equates to £2,664.00 in additional revenue.

Over the course of one year, simply by seeking an alternative service provider offering superior exchange rates and not charging transfer fees, this hypothetical company is £4,584.00 better off. And what business would not benefit from an additional £4,584.00 in its account?

Of course, exchange rates do not remain static. In the time between purchasing a raw material and exporting the finished product, exchange rates will have moved an infinite number of times. Such uncertainty plays havoc when it comes to determining budgets. Adverse currency movements at the point of receiving invoices from abroad can also have the unwelcome surprise of denting, or even wiping out, the profit margin. Add on top of this the volatility in raw metals prices, and the variability in costs and profitability becomes virtually impossible to navigate.

What many business operators fail to realise is that there are also tools available to manage this risk. A stop loss, for instance, enables a company to set a rate at which it is not willing to go below to transfer funds. This effectively guarantees a minimum rate of exchange at which a transfer can be made. 

At the other end of the spectrum, a forward contract allows a business to secure a preferable rate of exchange to use for future transfers. Such a service can enable a company to capitalise on short-term movements in the exchange rate in their favour, for use in future transfers at which time that external factors may have reversed this swing into a loss-making scenario.

The point to take from this is that there are options available for enhancing the value of currency transfers that work to boost a company’s bottom line and deliver more budgetary certainty than is available when trading on the open market. 

It is imperative for all companies in the cast metals industry to fully comprehend the implications of currency exchange rates on the value of their international transactions in order to prosper. By seeking out superior services from specialist providers - just as would be done when it comes to utilising other B2B services - and taking advantage of options designed to minimise the risk associated with fluctuating exchange rates, substantial savings can be achieved. 

With a new calendar year just around the corner, now is the perfect time to implement or update corporate currency risk strategies to ensure international payments are not needlessly haemorrhaging funds from a company’s international operations.

Contact: Connie Shek, corporate PR on Tel: 020 7898 0500 or visit www.smartcurrencybusiness.com