21 January 2015

Chinese currency switch delivers concrete savings

Concrete specialist Gulf Precast is making significant savings on its raw material imports from China.

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Trade and banking expertise from HSBC is helping a major supplier to the world’s largest airport terminal deliver significant savings.

Abu Dhabi-based Gulf Precast is one of the leading manufacturers of precast concrete components in the United Arab Emirates and is playing a leading role in the construction of Midfield Terminal, a USD2.9 billion extension to the country’s international airport.

When completed in 2017, the 56-gate, 204 check-in desk building will accommodate up to 40 million passengers a year, making it the world’s largest airport terminal. It will also house the UAE’s national airline, Etihad Airways.

Founded in 1984, Gulf Precast employs more than 3,000 people across six factories and can produce up to 1,200 cubic metres of precast components per day, which is the largest precast capability in the UAE.

The company is manufacturing precast concrete components for Midfield Terminal including beams, slabs and columns that are reinforced with steel wire imported from China.

Flagship project

“Midfield Terminal is one of our biggest and most challenging projects and we’ve had to import a lot of machinery and raw material from China, such as crane rails and accessories, as well as strands for the for the prestressed components and special glassfibre for the GRC bridge cladding,” explained Gulf Precast chief executive Elias Seraphim.

“Usually what we’ve done in the past for suppliers in China and elsewhere is open letters of credit in US dollars, and we were paying a lot of charges for that. HSBC then came up with the new idea that we could open letters of credit in the local currency – the Chinese renminbi (RMB) – and that would avoid us paying heavy charges and cut our commission between the Chinese currency and US dollars.”

“When the US dollar and RMB invoices stood side by side, the tangible benefits became clear: a 0.3-0.5 per cent saving on the total cost of each shipment.”

Strategic support

“We worked with the client to help them mitigate the risk of foreign exchange volatility, given their earnings are in dirhams – the UAE currency – which is pegged to the US dollar,” continued Fadi Ghanem, Corporate Sales Manager, Markets at HSBC.

"Putting in place a forward hedge – a contract that agrees the exact exchange rate on a specified future date – not only provided management with clarity on the exact total cost of the shipment, but also saved a further 1.5 per cent."

Both Gulf Precast and their Chinese steel strand supplier, Hubei Fuxing Science and Technology, had settled in US dollars for decades, so a switch to RMB was unfamiliar territory. Until 2009, rules in China also prevented companies choosing RMB to settle their trade. Once it became clear that settling in RMB benefitted both parties, the barriers were quickly removed.

"We quickly realised that RMB settlement could help Gulf Precast better manage currency risk and reduce costs", explained Siragis Salekin, Gulf Precast’s dedicated relationship manager.  

Positive results

Seraphim admits he took some persuading, but is very pleased with the results. “In the beginning we thought, why do this?” Seraphim said. “We’ve been dealing with US dollars for the last 30 years and it was OK – it had been budgeted for. But then we thought, why not? When HSBC explained the advantages to us, we thought it made sense.”

“We’re now a couple of months into the project and when we see the transactions on a daily basis, they look good. We hope it will make a big difference by the end of the project.”

WATCH THE VIDEO:
The CEO speaks on switching to renminbi - Gulf Precast CEO Elias Seraphim talk about the benefits switching his companies import orders from China into renminbi

Disclaimer: This article is not intended to constitute any advice or an offer. Any forecasts or projections are indicative only. HSBC or any of its affiliates accepts no liability, whether express or implied, arising out of or incidental to contents forming part of the article.

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