Sector well prepared for managing FX risk

According to a study, ‘Export support - How UK firms compete abroad’, undertaken by EEF and supported by Barclays, foreign exchange risk is the main challenge facing manufacturers, as they spread costs around different locations and purchase more content from overseas at a time of increased exchange rate volatility. Trading in Sterling is the most popular method of alleviating FX risk, used by 42% of those surveyed. This is followed by forward contracts, which increases in use with company size: 52% of firms with 500 employees or more use FX forwards, compared to 24% of those with fewer than 100 employees. Natural hedging and active spot trading is particularly favoured by mid-sized companies, but there are many structured FX solutions which could really help a company protect their budget rates and also participate should the exchange rate move in their favour in the future. The survey also found that overdrafts are by far the most common source of funding for exporters, used by 43% of firms selling abroad. There are a number of alternative methods of financing export sales which are available, often affording a company significant benefits compared to the conventional overdraft option. The alternative trade finance solutions are based on helping exporters manage the risks and cash flow challenges faced with trading abroad. They can ensure what is sold, is paid for and can enhance a business’ competitive edge by maximising cash flow and leveraging the finance facilities needed for expansion into overseas markets. The growth in manufactured exports continued in 2006 despite an increasingly unfavourable exchange rate, and there is a growing interest in emerging markets, particularly in Eastern Europe and Asia. The survey examines the move into these wider markets, as well as reporting on opportunities and threats to, and the needs of, UK exporters. The support provided by UK Trade and Investment (UKTI) is also analysed. Angela Potter, head of Barclays International Trade and Cash Solutions said: “The recent growth in export volumes demonstrates that manufacturers are rightly looking to new markets to continue to grow their businesses. However, with increasingly tricky trading conditions there is a danger that many of them are operating at a disadvantage to their competitors, both at home and abroad. I would urge exporters to use all the weapons in their armoury to ensure that they both manage FX risk and use the most efficient and appropriate forms of trade finance available.” Steve Radley, chief economist of the EEF added: “All the signs show that the strength of sterling has not sapped manufacturers export performance, indicating the increasingly sophisticated strategies they are adopting to control their costs and maintain competitiveness. However, increased exposure to export markets brings extra risks with foreign exchange and more can still be done to manage this effectively.”