Energy intensity
Sector Deep DivesThe share of revenue or of cost of goods sold that energy represents, which decides whether an energy price move is a line item or a competitive problem.
Also written: energy cost intensity, energy exposure
In chemicals, cement, glass, steel, aluminium, fertiliser and paper, energy is a large enough share of the cost base that its price sets the competitive position of a plant rather than merely affecting a cost line. Energy intensity is the measure of that exposure, and it is the first thing to establish before forming any view on a European producer's margin.
The reason it matters for European coverage specifically is that a domestic producer competes against product imported from regions where energy costs less. When that gap is wide and persistent, the margin shortfall is structural rather than cyclical, and the two demand opposite treatment. A cyclical move argues for normalising to a through the cycle margin. A structural reset means the through the cycle margin taken from history is too high, and possibly that some capacity has a shorter economic life than its accounting one.
Pass through is what determines how much of a move the producer actually absorbs. Contracts with indexation to a published energy or feedstock index transfer the exposure to the customer; contracts without it leave it with the producer for as long as they run. Even where prices can be raised, the lag before increases stick is a real cost, and the ability to raise them at all depends on whether the marginal supplier in that market faces the same input cost or not.
Hedging changes the timing rather than the outcome. A producer covered for two more years is reporting a margin that has not yet met the current market, which is useful to know in both directions, because it tells you when reported earnings will start reflecting reality.
Worked example
A producer has cost of goods sold of 900 on revenue of 1,000, of which 200 is energy, so energy is 20% of the cost base.
A 30% rise in energy adds 60 of cost. Margin falls from 100 to 40 unless price rises, so a producer able to pass through half of it lands at 70 and one able to pass through none lands at 40.
Whether that gap closes depends on whether the competitor setting the market price faces the same input cost, which is exactly the question an imported substitute raises.