Auckland, New Zealand, Feb. 16--Feltex Carpets has become the latest victim of an overvalued kiwi dollar.
The threat of a swinging axe has done nothing to kill off the sense of humor at Feltex Carpets' Upper Riccarton plant according to stuff.co.nz.
As the press wanders through the sprawling 1940s factory, a worker sets a chair up as a mock altar, drops to his knees and pretends to pray for divine intervention to save his job.
Finance Minister Michael Cullen may well be doing a bit of the praying himself with too many Feltexes likely to spell the end of his economic honeymoon.
Cullen has all but admitted praying is the only course to tame the mighty kiwi, which has had a rocket ship ride against the US dollar over the past year.
Cullen has tried jawboning--talking the dollar down by talking about unspecified methods at his disposal--and accusing the currency markets of being irrational. But so far nothing has worked and the currency continues to defy gravity.
The Feltex news coincided with a forecast from BNZ chief economist Tony Alexander of a drop off in Fonterra's payout to as low as $2.50 per kilogram of milk solids in the 2005/2006 season--a level not seen for about 30 years--and potentially knocking hundreds of millions out of the economy.
At that level, as one mid Canterbury large scale dairy farmer noted, there will not only be tears in the cowshed.
"At $2.50 I'd be expecting to get a call from the bank manager. There's a lot of exposure to rural loans."
That pain is likely to spread to towns such as Timaru who will see spending dry up faster than the Selwyn River in a drought.
Brendan O'Donovan, chief economist at Westpac, said the problems such as Feltexes could not be laid solely at the currency's door, it was acting as a catalyst.
Or as Canterbury Manufacturers' Association chief executive John Walley said, it was the straw that broke the camel's back. "The camel was overloaded but it was coping, and now it's flat on its back. Just how many other camels there are loaded up to that extent I'm not sure."
But it is not all gloom and doom. Walley points out that a lot of firms have a natural hedge in that their raw materials are priced in US dollars.
As the dollar has fallen so have their input costs, even though their margins in selling back in US dollars have been eroded.
But if they are selling into other markets, typically Australia, they are still getting reasonable returns.
"My intuition is the sector is a lot more resilient than that (Feltex)." His fear is small firms trying to develop export markets will put it in the too hard basket.
"The high dollar means that people making the stuff get no margin--so why bother exporting," Walley said."What hurts is that we are not developing an export economy."
Also hurting are local manufacturers facing a serious squeeze from imports which are reaching rock bottom prices.
Walley said the Canterbury furniture industry was a prime example. One manufacturer had pointed out imports were no so cheap a new imported leather couch was retailing for less than it would cost them to buy the leather needed to make it.
"It's wonderful for a while (for consumers) but when all the businesses close and the dollar goes back up and there's no jobs to pay for these things."
David Walker, general manager at Kovacs Design Furniture in Christchurch, had expected furniture imports from China to have increased by 35% in the last year to December to more than $90m.
The problem for kiwi firms like his was that the Chinese currency is linked to the US dollar.
And he said kiwi retailers were not particularly loyal to local manufacturers while the Government had not supported the buy New Zealand made campaign.
"It's tough across the board in the furniture industry," he said. So the $64,000 dollar question is how long will the currency stay high.
Westpac currency strategist Johnathan Bayley expected the dollar to peak at US71c in the second quarter of the year, before easing back. But no one should expect immediate relief from the current levels, he said.
"If you look back over time currencies don't peak and drop off sharply. Let's say it make US72c, then we would expect it to drop back down to between US68c and US69c by the end of the year." Bayley said currency cycles were a fact of life for firms which should adjust their business plans appropriately.
That said, he sympathised with exporters struggling to cope with currency fluctuations.
"Without doubt if you are an exporter it cuts you cash flow."
At Feltex the currency has played an important role in the decision to cut staff but there are some large structural problems at the Christchurch plant as well the company is wrestling with at the same time.
The plant--first opened in 1946--is one of only three in Australasia still making traditional woven wool carpets at a time when demand is growing for cheaper tufted wool products.
A walk through the Axminster part of the factory says it all. Of the eight huge carpet looms, only two are still working as demand for woven carpets has halved in the past decade.
Plant manager Noel Stewart said Feltex would probably still be laying off staff if the dollar was at a lower level, but probably in smaller numbers.
"You can't halve your turnover and still pay the same fixed costs. We have to do it to strengthen the company for the shareholders and the staff who remain."
