Almost a month on from the Brexit vote and the dust is beginning to settle. The FTSE100 dropped sharply but has since recovered and now exceeds pre-vote levels as investors look forward to increased international sales. The FTSE250 also fell and although it has recovered somewhat it hasn’t reached pre-vote levels due to worries that these mid-sized firms mainly sell in the UK market which is predicted to have lower GDP growth. Meanwhile the £/$ exchange rate has fallen by 12% and the £/€ rate by 9%, at the time of writing, with little signs of recovery.
So what does this mean for UK Procurement? If new trade agreements take many years to negotiate then raw material and packaging buyers can look forward to new import duties and long delays at customs clearance while agents struggle to release urgent orders from bonded warehouses. But the UK Government is showing no sign of triggering Article 50 of the Treaty on European Union so import duties won’t be a concern until 2019.
The immediate issue for Buyers is likely to be the adverse exchange rates on goods sourced abroad, commodities traded in $ and goods purchased in the UK that contain a significant proportion of imported raw materials. The key question is how exchange rate risk is managed in these contracts and whether the buyer or seller is responsible for that risk. So, if you have a 12 month fixed-price sterling contract with an overseas supplier you can legitimately expect them to have arranged a fixed exchange rate with their bank and they shouldn’t be trying to hike prices.
In the opposite situation where you are buying a commodity in dollars you could have bought sufficient dollars at a forward exchange rate to protect you from adverse currency movements. If you think that this stops you making a “profit” on positive currency movements then you should be working for a foreign exchange broker. The bottom-line is that your company makes profits by being good at its core skills: baking and packing biscuits, manufacturing and marketing dishwasher tablets, cooking and canning dog food, and the directors shouldn’t expect Buyers to be gambling on the foreign exchange markets.
There are plenty of sophisticated hedging techniques to avoid being caught out by commodity and currency movements, including the “natural hedge” – earning revenue from sales in the same currency that you use to buy raw materials, and they are all designed to ensure that you end up paying a predictable amount that allows your business to make money on its core business.
Sure, continuing adverse exchange rates are likely to lead to higher costs in the medium-term which will lead to lower margins, higher selling prices or, preferably, new sourcing strategies. But the weaker pound after the Brexit vote shouldn’t cause immediate problems unless you’ve just lost a large bet.
We’re interested to know how your company is dealing with the challenge of adverse exchange rates and whether you share our views on the need for new sourcing strategies in a post-Brexit world.
by Paul Lee