By JAMES R. HAGERTY
The slumping U.S. dollar is opening new sales opportunities abroad for American manufacturers, who are worried about a sputtering economy but also concerned about how to cope with a volatile currency market.Many U.S. companies—from coal miners to a producer of tugboat clutches—are seeing stronger demand in Europe and Asia as the weak dollar makes U.S. goods cheaper there.
Tim Harrison for the Wall Street Journal
A Logan Clutch employee works on clutch parts for airport snowblowers.
The weak dollar is helping Consol Energy Inc., a big Pittsburgh-based coal and natural-gas producer, compete with South African and Australian miners for coal sales to the key Chinese market, says Bob Pusateri, Consol's executive vice president for marketing. To improve its export prospects, Consol opened offices this year in Shanghai, Beijing, Seoul, Tokyo and Zug, Switzerland, through a partnership with a trading firm.
Last week, the Commerce Department reported that U.S. imports grew much more rapidly than exports in August, widening the trade deficit and further damping the dollar. Expectations that the Federal Reserve will create more currency to buy bonds also are driving down the dollar's value.
The rapidity of the dollar's drop has some companies on edge. "The volatility is what really kills manufacturing," says Ron DeFeo, chief executive of Terex Corp., a big maker of cranes, excavators and other construction equipment, based in Westport, Conn. "We can plan for a certain bandwidth of currency variation," he says.
For instance, the company uses forward contracts, which lock in currency-exchange rates on certain future dates, and it buys parts in a variety of currencies. "We're fine for now," Mr. DeFeo says, as currency rates haven't reached "extremes." But a further, sustained drop in the dollar would force Terex to rethink where it buys some of its parts and where it makes certain products. The executive says the last thing he wants to see is "a yo-yo situation," with currencies bouncing up and down.
A strong dollar tends to help Terex, making it easier to sell machinery it makes in Europe to U.S. customers. But Terex also exports machinery from the U.S. With plants in both places, Mr. DeFeo says, to some extent "we have a natural hedge" against currency swings.
But Mr. DeFeo says governments shouldn't see a weaker currency as a cure for their economies: "Currency weakness is not an export strategy, in my opinion." Though a weak currency can help exports, at least in the short run, he would rather see a strong dollar "because it's a reflection of the U.S. economy" and its overall health.
Despite the weak dollar, Joshua Shapiro, chief U.S. economist for MFR Inc., an economic advisory firm in New York, expects U.S. export growth to slow to a range of 4.5% to 5% next year from an estimated 8.4% in 2010 because buyers of manufactured goods have largely rebuilt depleted inventories.
Ken Matheny, a senior economist at Macroeconomic Advisers LLC in St. Louis, is more bullish. He says the recent drop in the dollar will help keep export growth robust in the next couple of years and help buoy overall U.S. economic growth.
Andrew Logan, president of Cleveland-based Logan Clutch Corp., a maker of clutches for industrial and marine equipment, including tugboats and snow-removal equipment, began carting its products to trade shows in Asia and Europe 18 months ago. His efforts paid off. Exports at the family-owned company this year are running at about 20% of sales, nearly double the rate last year, Mr. Logan says.
"When the dollar started to slide and stay there, we had more European customers interested in our products," says Mr. Logan. Some overseas customers believe the dollar will stay weak for a long spell, and that means "they're more willing to make a commitment" to buying Logan clutches, which are designed to cut energy costs, he says.
With oil priced in dollars, one risk is that oil producers could push up their prices to compensate for the decline in the dollar value of their products, says Joseph LaVorgna, chief U.S. economist for Deutsche Bank AG in New York. Higher energy costs could shatter American consumers' already-fragile confidence, and thus drag down manufacturers, which also would be hurt by higher energy costs.
Business confidence already is wavering amid signs the economy remains anemic. A Business Council survey of CEOs, released last week, showed one-third expect improving business conditions over the next six months, down from two-thirds in May.
Despite the gloom, says Larry Kantor, global head of research for Barclays Capital in New York, the weak dollar "is a net plus for the U.S. economy." In the absence of free-trade agreements,A weaker dollar "is one of the few ways you can get exports going," says Mr. Kantor, who thinks many U.S. energy, industrial and agricultural companies will benefit.
For global companies based in the U.S., the impact of currency swings can be muted because they have factories in many countries and costs in a variety of currencies. At St. Paul, Minn.-based 3M Co., whose products ranging from dental supplies to films used in computer screens, the weaker dollar provides only a small boost, says Steven Winoker, an analyst at Sanford C. Bernstein & Co. He recently lifted his forecast of 3M's 2011 earnings to $6.20 a share, compared with his forecast of $5.54 in 2010. The 2011 forecast is about three cents more than it would have been without the dollar's drop.
A 3M spokeswoman declined to comment.
"We tend to manufacture where we sell our products," says Glenn Eisenberg, chief financial officer at Timken Co. The Canton, Ohio-based maker of roller bearings, gear boxes and other industrial goods has manufacturing plants in 12 countries. As a result, he said, currency swings "tend not to be a big issue," but the company does try to "immunize" itself against them by using forward contracts. In the first half of 2010, Timken says, currency fluctuations added about 1% to its global sales in dollar terms.
For some smaller companies, the dollar's weakness offers greater potential benefits because they are growing from a small base. Ron Overton, president of Overton Industries Inc., a tool-and-die company in South Mooresville, Ind., recently hired a marketing company in Chicago to help find more buyers in Japan and elsewhere in Asia.
With the dollar on the ropes, "We have a little bit of a price advantage," says Mr. Overton, whose company traditionally has relied on North American for nearly all its sales.
At Webco Industries Inc., a maker of metal tubes based in Sand Springs, Okla., the weak dollar helps in another way. Along with spurring exports, it makes its products less expensive than imports. It is "going to help us be insulated against foreign competition," says Mike Howard, chief financial officer.
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