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Manufacturing sector: Exporting despite the geopolitical context

28 November 2019 by National Bank of Canada
Exporting despite the geopolitical context

Given the geopolitical instability between Canada, the United States and Russia, is exporting now more difficult for Canadian manufacturing companies? Dominic Vézina, from STAS Inc., a company specialized in equipment for the aluminium industry, and two experts from National Bank, provide an update on the situation. 

STAS Inc., whose head office is in Chicoutimi, is a family-run SME specialized in the development, manufacturing and marketing of equipment for the global aluminium industry. The company builds custom machinery, tailored to the needs of each client. It exports to some 40 countries, with the support of its 160 employees. Today, 90% of STAS Inc.'s sales are outside Canada.

As a result of tense Canada-U.S. relations with Russia, STAS Inc. has had to put a few contracts on hold in this area of the world. "Sanctions against Russia were lifted a few weeks ago, however, and projects have started up again," adds Mr. Vézina. The company generates between 10% and 15% of its annual revenues in Russia.

"The geopolitical risk is still one of the many factors to consider when becoming an exporter. We also have to deal with different security, mechanical and electrical standards from one country to the next," points out Mr. Vézina.

Raw material and energy price volatility

STAS Inc. provides aluminium producers with essential machinery—equipment to remove impurities from molten aluminium, for example. However, these producers are at the mercy of supply and demand for this raw material. Fluctuations in aluminium prices can therefore have an impact on the Quebec company's financial results.

Prices for raw materials, like energy prices, can also fluctuate greatly. Shipping bulky goods by truck, for instance, sometimes entails major fuel costs. The same goes for a shipment departing for Japan.

Finding solutions

How can exporters protect themselves against fluctuations in the price of raw materials and energy resources? "We offer entrepreneurs a range of financial products to mitigate the risks of price fluctuations," points out Normand D’Arcy, Senior Manager, International Services at National Bank.

The financial instrument that's generally suggested is a derivative product called a "swap", a kind of financial exchange contract. "Swaps on raw materials or energy products allow you to lock in the cost of your supplies at all times by carrying out a series of recurrent transactions," explains Benoit Marcoux, Director of Derivatives at National Bank.

Swaps also limit price increases for your products if raw material or energy resource costs rise sharply. "Get us involved as soon as possible in your exporting process," recommends Mr. D’Arcy.

This is where the notion of being "partners" is particularly important. National Bank wants to be the one-stop shop for entrepreneurs with a global vision for their SME. "Put every effort into your growth plan and rely on your advisor to mitigate the different risks involved in breaking into international markets," concludes Mr. D’Arcy.

 

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