The future of currencies: Manufacturing

The future of currencies: Manufacturing

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Manufacturing is one of the world’s most globalised industries, and for good reason.

Thousands of businesses working in the sector have unique chains of import and export requirements that are all intricately interlinked. These chains also have strict final production deadlines that must be met in order to generate revenue and profit.

The manufacturing industry is highly susceptible to the impacts of foreign exchange volatility for a number of reasons. Because manufacturing entails long chains of exports and imports, even fairly minor adjustments to rates can make massive differences to projects operating at a global level.

Costs like foreign worker salaries, factory leasing and acquiring materials can all affect manufacturers’ cash flows if they are not carefully managed. Read on to learn more about current challenges and opportunities in Britain’s manufacturing sector.

Challenges for the UK manufacturing sector

Brexit and Covid-19 have created a number of significant challenges for the UK’s manufacturing industry. This sector already has to contend with disruptions to the supply chain, and the UK’s separation from the EU has only made matters more difficult.

Manufacturers from all parts of the UK are currently having to assess their supply chains and ensure that they have adequate security with regard to essential components and critical imported materials. Companies are increasingly faced with the challenges of ensuring that their suppliers are holding the stock that they need and restructuring their intentions for employment, investment and growth amid unpredictable exchange rate changes.

A manufacturing planet filled with parts and supplies, the prices of which are affected by foreign exchange rate fluctuations

Businesses that manufacture goods which are sold in other countries are especially exposed to the risks associated with exchange rate fluctuations. When the pound strengthens against other domestic currencies, manufacturers’ exports may become more expensive for consumers in foreign markets. And the profits that they make on export sales will fall when overseas profits are converted back to pounds.

Industries that purchase large quantities of components and raw materials overseas, such as the automotive industry, which buys 60% of its parts from abroad and assembles them in the UK, also run a high risk of being hit by currency value changes.

Car factories around the world rely on parts and supplies imported from abroad

Alex Christou, co-founder of Eight Lands, an organic spirits producer from Scotland, faced a number of challenges in the wake of Brexit: 'A lot of our ingredients come from overseas; some of the best juniper comes from Eastern Europe, for example, and the citrus fruits that go into our gin are imported, too. We often buy from UK-based companies, so they would have been navigating the many supply chain challenges related to Brexit and Covid rather than us, but we have started seeing some issues in direct procurement of some botanicals in terms of the associated paperwork required to get things into the UK.'

Opportunities for the UK manufacturing sector

Despite the many challenges currently facing the UK manufacturing sector, there are abundant opportunities on offer as well. Companies looking to take advantage of these opportunities should use a hedging strategy to reduce the risk of financial impacts due to exchange rate fluctuations.

Forward contracts can be used to purchase a fixed amount of currency for a specific amount of GBP. This contract constitutes an agreement to buy or sell the currency at a pre-set price at a date set in the future, regardless of the exchange rate prices in the spot market.

This arrangement eliminates uncertainty for manufacturers, particularly when it comes to the amounts of foreign currency that must be paid for imports. By locking in an exchange rate, companies can give themselves more certainty over their costs and profit margins on each order they fulfil.

UK exporters stand to benefit from the recent fall in value of the pound Sterling against the US dollar. The drop in the exchange rate following Brexit has made UK manufacturing more price-competitive than ever before, while increasing manufacturers’ order book volumes considerably. While uncertainty is undesirable for any global currency, a weaker pound can increase UK exports and should lead to an overall boost in economic growth over time.

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