Australia's other solar energy industry nemesis; currency fluctuation

Without a shadow of a doubt, the ebb and flow of political favour is the Australian solar industry’s biggest challenge. One day we are saving the world from the biggest moral challenge of our time, the next we are (allegedly) driving energy prices up and causing the collapse of the manufacturing sector.

Like many of you, I’ve ridden this solar coaster for decades and its only saving grace is that there is a never a dull moment. Ever.

When we were working on our forward forecasts this year, it became clear that foreign exchange rates could well be our second biggest nemesis this year (after the complete unravelling of every solar support program in the country).  Having worked for a manufacturer who imported raw materials in the past, I can vividly recall having to increase prices by 30% at the start of a year and ending the year almost 30% below where we started. That sure made for some interesting conversations with my customers.

Today, the Australian solar industry is at a very different place. Thousands of companies, tens of thousands of employee’s and a lot more companies directly importing huge volumes of product. The last few months has seen the strength of the Australian dollar tumble dramatically, with AUDUSD falling from 0.9485 to 0.8757, and USDEUR from 0.6938 to 0.6471 between the start of November and the start of February. If you were making an AU$200,000 transfer, that equates to a loss of US$14,000 and €11,340 respectively, in the space of just three months.

Whilst importing container loads of solar panels directly might seem like a simple way to make an extra clip, the foreign exchange risk can wipe out the unwary in a blink.This risk is one of the reasons we spend a lot of time talking with currency advisors, particularly around forecast time. I recently checked in with Greg Browne from World First Australia (a leading currency exchange broker) to understand what the big issues are right now.

 “Focussing on the last month or so, news out of China was enough to put the Aussie dollar on the back foot in January without yet another weak data month,” says Browne. “Even without a Reserve Bank of Australia meeting in the month, the market was being cautious in adding to AUD above 0.90 in AUDUSD terms following the Bank’s decision to soft target that level as an upper bound for the pair. AUDUSD spent one day above 0.90. It was taken lower by a poor jobs number that showed 22,000 people lost their jobs in December against an expected 10,000 gain and has not since recovered.” 

“The stories from China are enough to potentially press the AUD lower still in the coming months too. They have been experiencing a contraction in the country’s industrial production, lower construction PMI numbers since July of last year and there is a general fear of China’s currency weakness. There is also the issue of “dis-inflation” which is a growing trend in a number of advanced economies around the world and this could emerge in Australia too. We do expect Reserve Bank of Australia action soon which should ease this pressure but right now, it’s a watch and see situation.”

For businesses in the solar energy industry involved in importing or exporting, fluctuations in the currency markets can obviously seriously affect their bottom line and the big take way from Greg is this; it is entirely possible
that the AUDUSD rate could get worse. Although we run a wide variety of scenario models for our forecasts, we have factored in a decline in the AUD against the USD in several scenarios. To put this in perspective, we have been tracking the change in AUDUSD and AUDEURO rates against PV prices for several years and the graph below shows the ebb and flow of the difference in stark terms.

The real question then is what can you do about this risk if you are importing or exporting solar equipment? The first rule is to be realistic about the risks you are taking on. Currency exchange rates have demonstrated again and again that they can move dramatically and quickly in our ever more connected global economy.  The risk is real and adds up very quickly.

The second rule is to look hard at the supply chains you are using and minimise your risks by working with currencies that can work better for you.  Some wholesalers offer foreign exchange clauses that allow them to adjust prices quickly, others will absorb changes for you and so on. Sometimes a big partner can help but the key is knowing what your exposure is.

The third rule is to get some great advice.  Unless you want to spend your whole life becoming a foreign exchange expert you’re far better off working with people who dedicate their lives to this area.  Luckily, there are locally based companies specialising in the solar sector too. Whether it’s World First or someone else, find a trusted partner who understands the solar sector and whom you can work closely with.

Whilst our current focus is quite rightly on the RET, I have personally watched some of my clients lose tens of thousands of dollars in days, by simply being caught off guard. A few dollars spent on advice and hedging strategies would have made all the difference. The recent changes and risks of currency fluctuations are something I will certainly be highlighting in my submission to the RET review.

http://theenergycollective.com/solarbusiness/346746/australia-s-other-solar-industry-nemesis-currency-fluctuation