The impact of sustained weakness in the euro on eurozone corporates, while positive for profitability on average, would vary significantly across sectors and would only be a material benefit to a minority of companies, according to Fitch Ratings.
The credit ratings agency (CRA) estimates that most European manufacturers have a higher proportion of euro-denominated costs than revenue and that a weak euro is therefore good for profits. This is particularly true for continental aerospace and defence companies like the European Aeronautic Defence and Space Company (EADS), which benefit from the sector’s convention of pricing contracts in US dollars, and for some premium car manufacturers, such as Daimler, which have large production bases in Europe and a broad customer base outside the continent.
Any significant benefit would only come from a sustained fall in the euro, as manufacturers make extensive use of currency hedges – in some cases lasting as long as three years. Fitch published a report in February 2011 on the potential winners and losers from a hypothetical fall in the euro to parity with the US dollar. Although it does not expect such a sharp decline for the euro, the currency has steadily pulled back from a peak against the US dollar early last year and the report indicates the relative exposure of different sectors.
Among other sectors Fitch finds the impact of a weak euro to be more mixed. Gas-based electricity generation, for example, is vulnerable to the cost of imported gas. As the euro depreciated, companies using locally-sourced lignite, nuclear and other fuels, such as Electricite de France (EdF), could benefit to the detriment of generators that rely heavily on imported gas if priced in US dollars. Long-term gas import contracts tend to be denominated in dollars as well as in euros; however the bigger concern around long-term gas contracts remains that the gas price in the contracts is largely linked with crude and heating oil, while spot prices for gas are below spot prices for oil.
Non-food retailers would generally see little impact, but clothing retailers and others that mostly buy from Far East suppliers would face modest pressure on profits arising from a sustained euro depreciation as most contracts are in dollars. Still, pricing pressure from wage inflation in supplier countries would remain a bigger issue for these companies. Non-food retailers are addressing this by seeking new suppliers in lower-cost countries.
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