High energy bill threatens company profitability

Asia's Tech News Daily

High energy bill threatens company profitability

High energy prices can put many companies in trouble. If they can’t pass on the higher costs, the entire profit is wiped out. This is apparent from a study by ABN Amro into the consequences of high energy prices for industry. The bank looked at the 20 most energy-intensive industries in the Netherlands.

“We assume that the gas price will also be a lot higher next year than in recent years,” says Madeline Buijs, sector economist at ABN Amro. And the consequences are significant, according to the research. Higher prices and declining profits are two likely consequences. “We still have a lot to look forward to.”

The 20 most energy-intensive sectors alone have an energy bill of about 7 billion euros in a normal year. This year, variable energy rates are already 3.5 times higher than in previous years. This means that companies spend billions more on energy.

Flexible contracts

The large consumers have generally fixed prices for a few months at the most. There are few long-term contracts, because they usually have higher rates than the daily rates. In addition, long-term contracts often have an obligation to purchase, which limits the flexibility of the companies.

Companies are already feeling the higher prices or will soon notice. Sectors that are badly affected include greenhouse horticulture, chemicals, paper industry, metal producers, food industry, laundries and manufacturers of building materials. A lot of energy is consumed, especially in the manufacture of bricks and cement.

It will be exciting to see to what extent companies succeed in passing on these higher costs to their customers. Many companies have only small margins. If they can’t pass on the higher prices, that wipes out the entire profit. This applies to greenhouse horticulture, the chemical industry, but also to the flour industry, for example.

Charge on

It is uncertain to what extent companies can pass on the costs to customers. Greenhouse horticulture, for example, finds it difficult to pass on costs if there is a large supply of cheap vegetables from Spain or Morocco at the same time. Metals companies supplying the automotive industry are also quite weak against the purchasing power of the car manufacturers. This also applies to the food industry. The supermarkets will not be eager to pay higher prices.

Many sectors also work with long-term contracts. Then the price is often fixed. Then it is difficult for suppliers to have the price adjusted in the meantime.

A weak negotiating position is often associated with small margins. The chance that companies will run into losses is therefore high. That doesn’t necessarily have to be disastrous. ABN Amro expects energy prices to return to more normal levels in 2023. Companies that have some fat on their bones will have less trouble with the high energy prices than companies that are already financially weak.

Less consumer demand

High energy prices also affect companies in a different way. Consumer demand for products will decrease is the fear. Firstly, households have to spend a larger part of their income on their own energy bill.

If products become more expensive, this also means less consumer demand for those products. There is simply less money to spend. Consumers can still use the billions in savings for extra consumption for a while, but the chance does not seem very great. Especially if the situation becomes somewhat uncertain, households like to keep a savings buffer.

Not all companies are affected by the higher energy prices. Companies that generate their own energy or work very energy-efficiently have a clear cost advantage. This will only increase the longer energy prices remain high. Sustainability pays off, concludes ABN Amro.

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High energy bill threatens company profitability | Economy
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