Strong zloty, weak markets shrink exporters' profits
Poland's trade figures show exports are on the rise despite a strong zloty. But the cooling off of European economies is set to provide an additional squeeze on exporters' profits, loosening their grip on key markets.
Last week the half-year net profits of copper and silver mining group KGHM Polska Miedz saw a drop from zl. 298 million ($71 million) to zl. 57.8 million ($13.7 million), Reuters reported. And on Tuesday of last week, the company's share price on the Warsaw Stock Exchange (WSE) had hit its lowest point since mid-February, closing at zl. 14.
"The zloty-to-dollar exchange rate and copper prices are the two main factors that contribute to the company's position," said KGHM Spokesman Jerzy Pietraszek. "Our export revenue represents some 65% of our total revenue. The strong zloty is not helping exporters, and that includes KGHM."
Despite an unfavorable exchange rate, Poland's half-year balance of payments figures from the National Bank of Poland (NBP) show the value of exports up by 14.2% from $13.2 billion in 2000 to $15 billion this year.
Katarzyna Zajdel, chief economist at Citibank Polska, said exporters are maintaining sales, but seeing profit margins fall to stay competitive. "Polish exporters face the problem that domestic demand is very poor and they are trying to export their products at lower prices just to stay on the market," Zajdel said. "They will probably not continue this type of strategy. Some of them expect that the zloty will weaken and they will make profits. But since last November the zloty has been strong."
Poland's largest export market is Germany, representing 36.1% of the total value of exports in the first quarter of 2001, with revenues from Poland's eight largest European markets amounting to 65.6% of total exports. KGHM's principal export markets, Germany, France and the U.K., have all seen a significant decline in gross domestic product (GDP) growth. "The forecast for GDP growth in Germany for this year is a slowdown in growth to 0.8% from 3.1% last year," Zajdel said. "Italy, our second biggest European partner, has seen 2% GDP this year, down from 2.9% last year."
For KGHM, which works with prices fixed on the London Metal Exchange, the cooling off of the world economy and the steady decline of copper prices throughout the year has added an additional squeeze on profits despite stable demand. "For us this is felt in the price of copper," Pietraszek said. "The economic situation in the U.S. and the economic condition on the European market immediately impacts the price of copper."
Philips Consumer Electronics Polska, for which Europe is its exclusive export market, has seen steady demand for its main product, television sets, in France, Germany, the U.K., Italy and Spain. But according to Andrzej Golyga, the company's president, demand for other technologies such as wireless has not been met as a result of the decline in U.S.-technology stocks. "When it comes to these components, the market is much poorer than last year, and we had to significantly cut production."
Although the slump in consumer demand in the European Union (EU) will lead to a gradual decline in Polish exports, Zajdel remains hopeful that the situation could improve if the optimistic growth forecasts for Europe materialize. Next year's GDP growth in Germany is expected to be 1.6%, only half of its 2000 level, while Italy's GDP is expected to rebound to 2.7%, significantly closer to last year's figure. "The Euro zone is expected to rebound from 1.8% this year to 2.1% next year; still below its growth potential, which is above 3%, but it means that some recovery is expected," Zajdel said. "I don't think we will see a sharp decrease in exports. I think that some markets will be held. The key for the future of exports is the zloty. If it weakens in the future, we can expect an improvement on the export side."
But the strong zloty is far from being the only element affecting profits. Golyga said the steady growth in energy costs, taxes and employee benefits in Poland have also affected the competitiveness of exporters.
