How companies deal with the energy price shock

This affects thousands of energy-intensive companies in Germany. An unprecedented exceptional situation has prevailed on the gas market for months, which makes further purchases and the framework for new supply contracts difficult for them. An unexpectedly high demand had met a tight supply.

The Russian war of aggression against Ukraine then caused additional uncertainty and violent price fluctuations. On the spot market, a megawatt hour of gas now costs more than 300 euros – ten times more than a year ago. Large corporations are feeling this – but usually not so hard, because they operate a strategic procurement – but especially medium-sized companies, which often have poor security. For many of them it is even a question of survival.

Only companies that have made provisions can be relaxed. They have concluded long-term supply contracts with utilities or operate financial hedging in order to secure a predictable price for part of their future energy requirements today.

You have entered into some sort of bet with a bank or fund as to how expensive gas will be at a certain point in the future. Sometimes the bank wins, sometimes it pays, it always gets a fee. In any case, the company has planning certainty about the prices, with which it can calculate for many months.

Financial hedging is currently hardly possible

Many large corporations have concluded such contracts, such as the Indian steelmaker Tata Steel, which is represented in Europe with locations in the Netherlands and Great Britain, among other places. This is to protect against sudden swings in the market. However, numerous instruments are used in the purchasing strategy, explains Henrik Adam, Tata Steel board member responsible for European business. “It is still too early to assess the exact effects of the Ukraine war on our business, we are currently analyzing it.”

Anyone who currently has to sign new contracts is in trouble. In the current exceptional situation on the energy market, long-term contracts are also extremely expensive – and financial futures contracts are hardly ever offered. “Financial hedging is out of the question for companies because of the extremely high prices on the markets. Nobody wants to secure the current conditions for the future,” says Lars-Peter Häfele, raw materials expert at the purchasing and supply chain consultancy Inverto.

And so the companies are left with what Häfele calls the “golden path”: the attempt to pass on the increased costs to customers through higher sales prices. However, this succeeds in very different ways and depends heavily on contracts with customers and market power.

More on the energy price crisis

This is evident, for example, in the chemical industry. In the bulk business with plastics, large corporations such as Covestro and BASF benefit from clauses that allow increased energy costs to be passed on on a weekly and monthly basis. You can currently do this without any problems because the demand is still very high and the competition is clear.

The situation is different for medium-sized specialty chemical companies. Fast and significant price increases are usually difficult for them. Most companies have long-term, fixed-price contracts with their customers that only allow for quarterly or half-yearly price adjustments.

Many companies in other sectors are also in this bind. “We are in international competition with competitors from countries where energy is still cheaper than in Germany,” agrees entrepreneur Michael R.

Because of the expensive energy, textile entrepreneur Wolfgang Grupp initially preferred to reduce production somewhat and stopped the night shift. However, the feared production stop at his company Trigema did not come about because gas prices have recently fallen from the extremely high level and because Grupp has made its textiles more expensive by up to five percent. According to the entrepreneur, it should have been more to offset energy costs, but Trigema didn’t want to scare off buyers.

Experts advise negotiations with customers and suppliers

Nevertheless, experts advise affected industrial companies to seek intensive talks. “Every customer is ready to talk before he runs the risk of his supply chain breaking,” consultant Häfele knows from practical experience.

He therefore advises medium-sized companies to be more self-confident: They cannot be replaced as suppliers in the short term. Or as a customer: The board of directors of a large chemical company confirms to the Handelsblatt that in many cases the price surcharge is handled cautiously so as not to endanger the existence of buyers of the products.

Experts know: it is difficult to fend off a price increase, but mitigating it is definitely possible. “The contracts should be checked carefully,” advises Häfele. The supplier has to prove how badly he himself has been affected by energy that has become more expensive. It often turns out that the requested price increase is disproportionately high. In the end, you can accept the increase for a limited period of time or share the burden with the supplier.

The great haggling over prices can currently be observed throughout the industry. The difficult negotiations are one reason why hardly any company wants to talk about it publicly. Because even those companies that concluded a long-term gas supply contract on favorable terms last year are by no means protected against energy price increases.

This is pointed out by the CFO of an industrial group from North Rhine-Westphalia, which has secured a low gas price through supply agreements and financial hedging until 2024. He notes that the contracts with the suppliers also contain long-term adjustment clauses.

Purchasing expert Häfele confirms this. “Customers may be on the safe side for twelve months, but beyond that it is likely that they will not be spared the energy supplier’s demands for price increases.” The companies should then quickly seek talks with their suppliers. Every delay and every small price increase bring relief and competitive advantages.

Energy should be bought in tranches

The fact that many companies are so at the mercy of the current gas price caprioles is also due to strategic mistakes. Because management often takes care of purchasing too irregularly, and the topic usually only comes up on the management board’s table once a year.

“Industrial companies should move away from point procurement and procure their energy in tranches at least four different times a year,” advises Tobias Federico, managing director of the consultant Energy Brainpool. It is therefore a matter of buying the required gas or electricity spread over the year in order to hedge against short-term price fluctuations.

The currently difficult phase is likely to last for quite a while for energy-intensive companies. Federico assumes that the situation will calm down a bit in the summer, but could worsen again in winter.

Only when Europe has built more LNG terminals, through which liquid gas can be imported from the USA, for example, would the situation change fundamentally. According to Federico, the price for gas could then settle between 25 and 60 euros per megawatt hour. In the long term – i.e. around the middle of the next decade, Federico expects natural gas prices to be around 25 euros.

More: The federal government is working on a shutdown plan for industry in the event of a gas supply stop