In January 2002 the Argentine government ended the peso's link to the US dollar and in the space of three months the peso fell to about a third of its former value. Most Argentinian companies in the country pay for some or all of their raw materials in US dollars and the rapid devaluation meant some big changes. These changes signalled the start of a critical period for Fuchs Argentina General and Technical Manager Antonio Oliveira. Drastic measures were needed to keep the company, which primarily manufactures industrial lubricants and cutting oils, from going under.
Reflecting on that time, Antonio Oliveira says: "At the start of the devaluation period the big question was: 'What will our real costs be?' At that time the government could not offer any definition of the value of the peso. But as its value changed, my costs were affected, and I had to adapt the price of my products. It was a very difficult time." Antonio Oliveira was not totally unprepared for the new situation.
"I am an engineer but I still have a feeling for what is reasonable even when it comes to economy. I saw how Argentina's reserves were dropping, loans were not being repaid, and everybody knew that the peso's link to the dollar was just a figment of the imagination." "That is why Fuchs was able to quickly adapt its size to the new market position through rationalisation. Nonetheless, the company lost about 30% of its sales in the space of a few months."
"Buying raw materials in dollars and selling products in pesos when the value of the peso was not defined was complicated," says Antonio Oliveira. "It took more than three months for the situation to become clearer. By that time the peso had dropped from being on a par with the US dollar at the end of last year, to being 1.40 to the dollar in January, 2.15 in February, 3.00 in March and 3.60 in May. In the last few months it has hovered at around 3.50-3.80 pesos to one US dollar." The free fall of the peso was a big problem for companies who buy almost all of their raw materials in US dollars but who, almost without exception, sell their products in Argentine pesos.
"Another problem was payment terms," continues Antonio Oliveira. "Before devaluation it was terrible – payment of an account could take longer than 100 days. In early January last year we decided to split our customers into three groups and give each different payment terms. Partners and stable customers were allowed 30 days, 'difficult' or unstable customers had to pay cash and a middle group was allowed 15 days. We stopped delivering to any customers who could not meet the new terms and the decision was not open to discussion. The fact that we changed our policy, one which is still in effect, is the reason why Fuchs in Argentina is still alive today. Nobody can know what the peso will be worth tomorrow."
"Just look here!" he exclaims, indicating a document on his computer showing a jagged line zig-zagging downwards across the screen, which illustrates the fall of the peso against the dollar since the start of 2002. Many global chemical companies stopped their deliveries to Argentina and this was another factor that made life difficult for Antonio Oliveira. "They did not just stop delivering to individual companies or to Fuchs," explains Antonio Oliveira. "But to the whole country. The only way to get goods was to pay in advance and that situation still persists today. We were fortunate because I was able to get raw materials from Fuchs in Brazil, the USA and Germany. We were able to survive thanks to the fact that we are part of an international company."
Suddenly having to raise prices after 10 years of relative stability was also troublesome for Antonio Oliveira. "To start with it was difficult. Our customers naturally did not want to accept the price hikes and some customers stopped buying from us. I showed them the rising costs we had incurred, but some of them stood firm by their decisions. A cost is a cost that you can not just magic away – you have to balance it in some way by passing it on. As time went by more customers accepted that we are in a new situation with new price levels to match and most have come back. Many of our customers export their products and the situation has gradually improved for them."
For Fuchs, the position is looking brighter, and the company is back to full strength with sights set on growth and new markets. "The weak peso has also offered new opportunities," says Antonio Oliveira. "We have taken the first steps in starting export to Chile, something that would have been unthinkable before because the peso was so strong." "We have now started to manufacture new products with naphthenic oils and this will also help to strengthen our position as number one in our speciality products sector." Fuchs in Argentina placed its first order with Nynas Naphthenics soon after the worst economic crisis had passed.
Antonio Oliveira continues: "We used to only buy paraffinic oils but because I have worked as a chemist I am familiar with the great advantages of naphthenic oils. At the same time it was not easy to change from paraffinic to naphthenic oils – on the one hand the price is higher, and on the other you have to change product formulations. But there are advantages to the formulation changes that help compensate for the higher raw material price which mean that the final price is about the same. But the advantages for customers are just fantastic!"
Antonio Oliveira is now convinced that his products maintain the same high quality as similar products from the USA or Europe. "It is a pleasure for us to be able to manufacture and supply such high quality products," he says proudly. "Fuchs in Argentina is now working with naphthenic hydrotreated products. It is not a dream, it's reality. Another important aspect is the question of toxicity. Many customers handle our products on a daily basis – year in, year out – so for health reasons products made with naphthenic oils are better too."
The fact that Antonio Oliveira and his 25 colleagues at Fuchs in Argentina have weathered one of the country's worst economic crises in recent times is something he can now put behind him. New goals have appeared on the horizon. "We can now consolidate our business, and we have just started marketing new products based on naphthenic oils. Offering better products at the same price as before is a challenge and something everybody wants to achieve. We want to be like successful sportsmen, constantly striving to achieve better results."