U.S. Industry’s Global Need Is a Stable Dollar
The dollar’s recent weakness against the euro and the yen has financial traders and analysts wringing their hands, but has much of U.S. business cheering.
For basic industries such as chemicals and automobiles, the dollar has been too highly valued, forcing companies that pay workers and buy supplies in dollars to pay more, in effect, than competing firms in countries using other currencies.
A weaker dollar begins to remove a competitive disadvantage. However, the dollar shouldn’t get too weak because that would create other problems.
“As in Goldilocks, it shouldn’t get too hot or too cold. We’d like to see the currency go to parity, $1 to 1 euro,” says Brian Ferguson, president of Eastman Chemical Co., a medium-size company based in Kingsport, Tenn., that does business globally.
Currency trading, while still a distant concept for most Americans, is but one of the global economic forces affecting companies, jobs and living standards in the United States and around the world these days. The rise of China’s industrial capabilities is another. There are gains and losses in all such forces, although seldom ones that can be easily predicted.
So it’s a good idea to look at an industry such as chemicals to understand the new world economy.
The chemical industry had $460 billion in revenue in the United States alone last year for products ranging from diaper adhesives and hair shampoo to the building blocks of automobiles and soda bottles. Major companies got about half their sales outside the U.S., through exports or local production.
But sales were hurt by currency movements, as they may be helped this year. “For every 10% rise in the dollar, production of basic chemicals falls 1% to 3%, depending on the specific chemical,” says economist Kevin Swift of the American Chemistry Assn., an industry trade group in Arlington, Va.
“Our domestic customers, such as General Motors Corp., were hurt so we were hurt,” as the dollar rose 30% against the euro in the last two years, says Ann Gualtieri, head of investor relations for DuPont Co., the largest U.S. chemical company.
On the other hand, DuPont gets 49% of its $28-billion annual sales outside the U.S., so too steep a fall in the dollar would hurt it too.
Similar need for balanced analysis applies to China and its rising profile in global production. Only a few years ago China was a market for “any excess production you needed to sell cheaply,” says Eastman’s Ferguson, who worked for four years in Hong Kong and China.
Now China’s chemicals output has risen to $99 billion worth a year, making it fourth in the world behind Germany, Japan and the U.S. Soon it will pass Germany and become No. 3, economists predict.
The quality of China’s goods is rising also, as the case of a sorbic acid plant in Yancheng illustrates. Sorbic acid is a chemical used worldwide as a food preservative in dairy products and bread. A sorbic acid plant in Yancheng, northeast of Shanghai, is now owned by AmeriPac Inc., a chemical distributing company based in Santa Fe Springs.
Stan Chang, owner of AmeriPac, was importing sorbic acid from China as one of many chemicals his firm distributes through 11 centers all over the U.S. A few years ago, Chang was invited to buy the Yancheng plant to bring management to its operations and quality to its output.
It was an opportunity. “The plant was built for less than $4 million, about 10% of the cost of building such a plant in the U.S. or Japan or Europe,” Chang explains. What China lacked was access to worldwide distribution networks for sorbic acid, a deficiency Chang helped to remedy.
Today Japanese and Danish chemical companies distribute Yancheng’s production under their own labels. Eastman Chemical closed a sorbic acid plant in Chocolate Bayou, Texas, in January 2000 because of excess global production and plummeting prices.
Yet Eastman sees China’s rising position as an opportunity. The company is expanding its production of resins, paints and adhesives in China. As living standards rise, Eastman sees a growing market for better grades of paint, Ferguson says.
DuPont is building a second plant for Lycra, its brand name for spandex clothing fabric. Significantly, when DuPont built its first Lycra plant five years ago, it had to import pressure vessels and other sensitive equipment from outside China. For the new Lycra plant, high-quality equipment is available from Chinese producers.
DuPont’s sales in China grew 35% to $487 million last year. “We see it as a long-term growth market,” Gualtieri says. So do other companies. Dow Chemical Co., which has just acquired Union Carbide and could become this country’s largest chemical firm, has three plants in China and is planning more.
All such operations import chemicals into China, one reason the U.S. has a chemicals trade surplus with China, exporting $2.3 billion to that country and importing $1.8 billion from it.
It’s important for such complex global markets that the dollar be strong and stable, not undervalued or overly valued. The currency’s moderate adjustment at present seems just right, economists say.
But why then are financial traders wringing their hands? Because they fear that the dollar’s new weakness will go too far and disturb foreign investors.
One reason U.S. stock prices remain relatively high is that foreign investors have poured almost $200 billion into U.S. markets. If the dollar falls as stocks are declining, foreign investors would be hit “with a double whammy and they could shift money to the euro and yen, causing a downward spiral in stocks and currency,” explains William Rhodes of Rhodes Analytics, a Boston-based financial research firm.
Yes, that’s possible, but the trend is unlikely to go too far, says currency expert John Mueller of Lehrman Bell Mueller Cannon, an economic research firm in Washington.
Don’t forget, Mueller notes, $1 trillion is held as reserves by governments, companies and individuals around the world. The dollar today is even more a reserve currency than it was a few years ago when the deutsche mark was a separate currency and a stronger Japanese economy backed the yen, he says.
Today, everybody has a stake in the dollar’s stability. Mueller believes the dollar-euro relationship will settle at 96 cents in the next few months.
The lesson for industry and currency traders is that the global economy is like a ship at sea--you keep your balance by shifting your weight and watching your step.
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James Flanigan can be reached at jim.flanigan@latimes.com
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Competitive Currencies?
The euro and the Japanese yen have rebounded against the dollar in the last six weeks, but their gains have been modest compared with their longer-term declines against the U.S. currency.
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The Euro
Euro in dollars, monthly closes and latest
Friday: $0.918, up 0.7 cent
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The Yen
Yen per dollar, monthly closes and latest
Friday: 120.24 yen, down .14 yen
Source: Bloomberg News
