• Rising energy prices and their impact on the manufacturing industry: which sectors are being hit the hardest?

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    The increase in energy prices throughout 2021 as a result of the combination of the sharp rise in global energy demand (due to the reactivation of the economic cycle) and a certain weakness in supply (due to geopolitical problems and the change in the energy model towards non-fossil fuels) has led to a global energy shock. In 2022, the geopolitical context is putting extra pressure on international gas and oil prices, which could aggravate the already significant impact of the energy bill on Spanish industry. This article examines the specific impact of rising energy prices on manufacturing, analysing which sub-sectors are being most affected and to what extent they are exposed to more sustained pressure on energy prices.

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    Manufacturing, a major consumer of energy

    First, we must determine how the different sectors and agents in Spain’s economy consume energy. A survey of physical energy flows provides useful information on energy consumption, disaggregated by energy type and sector of activity. In this case, we have analysed the consumption of electricity, natural gas and oil, the three products whose prices are currently experiencing the largest hikes.7 As can be seen in the charts below, manufacturing industry as a whole is a major consumer of energy from these three sources, accounting for slightly more than half of the total energy consumed, well ahead of energy suppliers, which account for 64% of the natural gas consumed in Spain to generate electricity, and households, consumers of 26% of the electricity. Other very important sectors for the Spanish economy, such as hospitality services which are closely related to the key sector such as tourism, and the transport of goods, a major consumer of oil products, come a distant second in terms of energy consumption. We can therefore deduce that industry’s energy consumption is indeed very high and energy prices are therefore key to its performance.

    • 7. According to Spain’s industrial price index (INE) for February 2022, the supply price for gas grew by 99% year-on-year, that of oil refining products by 59% and electricity by 62%.

    Energy consumption of oil, gas and electricity by businesses and households

    Last actualization: 04 May 2022 - 08:51

    Manufacturing industry consumption by energy type

    Last actualization: 04 May 2022 - 08:58
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    Consumption of the three types of energy source (oil, gas and electricity) is not homogeneous across the sector. For example, within the total oil consumed by manufacturing industry, 95% is consumed by the oil refining industry itself, which uses this energy source mainly as an input to produce oil derivatives (two thirds of its consumption is crude oil). Such idiosyncrasies do not occur in the rest of the manufacturing sectors, so the exposure of each sector to the prices of the three utilities is very different. This is shown by the chart below, where great variability can be seen in the type of energy products consumed by each industry, although there is a larger number of industries that consume more electricity. There are also some industries with a higher consumption of other types of energy products, such as the plastics industry which consumes a relatively large amount of thermal energy, and the cases of the furniture, wood and paper industries, which consume wood for energy purposes (i.e. the burning of wood waste), as well as for production.

    Great variability can be seen in the type of energy products consumed by each industry, although there is a larger number of industries that consume more.

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    Source: CaixaBank Research, based on data from the National Statistics Institute.
    Rising energy prices are putting pressure on production prices

    The intensive use of energy products has left the manufacturing industry highly exposed to the current energy shock. One of the main effects of this shock has been some sub-sectors passing on higher energy costs to their industrial production prices, showing a certain capacity to raise the prices of their products. Spain’s Industrial Price Index (IPRI), which is compiled monthly by the National Statistics Institute, recorded a 10% rise in 2021 in manufacturing industry prices, the highest since 1985. Moreover, the year-on-year rates showed a clear upward trend throughout the year, in line with the intensification of the energy shock in recent months, ending December with 15.5% growth. It should be noted that this upturn in industrial prices is occurring on a global scale, so it has not translated into a worrying or significant loss of international competitiveness on the part of Spanish industry.

    The oil refining, metallurgical and chemical industries have seen the largest increase in their product prices.

    However, to fully understand the impact of the energy shock on each industry, it is not enough to know what types of energy they consume; we must also analyse the relative weight of energy consumption within their cost structure. For this purpose, we have used the input-output tables prepared by Spain’s National Statistics Institute (INE) to calculate what proportion of each industry’s revenue is used to pay for intermediate energy consumption, broken down by industrial branch.8 

    • 8. The INE input-output tables correspond to 2018. This analysis takes the following products into account: Coke and refined petroleum products, Consumption of electricity, steam and air conditioning, and Consumption of manufactured gas.
    The auxiliary sector to construction, metallurgical, paper and refining industries are the biggest consumers of energy

    The results of this analysis indicate that expenditure on energy inputs accounts for 4.1% of total manufacturing industry revenues (output at sales price). A priori, this figure would not reveal whether energy is a production factor that uses too large a share of the sector’s resources. However, there are five industrial branches (chemicals, metallurgy, oil, paper and the auxiliary sector to construction) that are relatively energy-dependent, ranging from 7.2% (chemicals) to 13.6% (auxiliary sector to construction). These more exposed industries were under more pressure to increase the sale price of their products given the rise in energy prices experienced in 2021. This can be seen in the scatter chart where, if we exclude the case of the auxiliary sector to construction, the correlation between the increase in industrial prices and the relative weight of energy consumption have a very clear positive correlation. In the specific case of the auxiliary sector to construction (manufacturers of cement and other non-metallic minerals), their greater exposure to energy has not been passed on to prices due to the fact that a large part of the sector’s sales were made at prices agreed at the beginning of 2021, although by 2022 we should start to see their sale prices rise.

    Share of energy consumption

    Last actualization: 04 May 2022 - 09:12
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    Source: CaixaBank Research, based on data from the National Statistics Institute.

    Although this analysis is very illustrative, given the situation we are experiencing in 2022 with the war in Ukraine putting pressure on energy prices, we must necessarily go a step further and determine the pressure that could be felt by each industrial sector to raise its prices, seeking to safeguard their margins but sacrificing part of their demand. We have therefore also analysed the sensitivity of the sector’s economic performance to an increase in the supply price of gas, electricity and oil in Spain. Consequently, we are no longer only considering the relative weight of energy in the factors of production but also its share the total cost structure, including employee remuneration. To do so, we have cross-referenced the energy consumption exposure calculated from the input-output tables above with the national accounting data for each industry available for the year 2019. This allows us to analyse how the gross operating surplus (GOS) of each industry would vary in a scenario of increased costs due to higher energy prices, in the hypothetical case they do not adjust their sale prices.9 Specifically, for this exercise we assume an annual increase in energy prices of 50% for gas, oil and electricity, similar to what was observed in 2021.10 

    • 9. Gross operating surplus is equal to production at market price minus the total cost of intermediate consumption, employee remuneration and net tax payments. It can be assumed to be an estimate of the sector’s profits.
    • 10. At the close of 2021, the increase in energy prices in Spain was 60% for oil (Brent) and 47% and 53% for the sale price of gas and electricity, respectively.

    Sensitivity of the gross operating surplus

    Last actualization: 04 May 2022 - 09:15

    According to our results, under the energy price increase scenario we have defined, the manufacturing industry’s GOS would fall by 17% if prices were not adjusted to sale prices, revealing that the industry is obviously under pressure from electricity, gas and oil prices in terms of its margins and therefore its sale prices. As can be seen in the chart above, the sectors identified previously as being most exposed to energy prices are also experiencing significant pressure on their GOS. In this case, the most prominent case is the oil refining industry which, if it did not pass on the shock to its sale prices, would see its margins become negative (a drop of more than 100% in its EBITDA), indicating the industry’s need to adjust prices as much as possible to the changes in gas and oil prices, something which, on the other hand, it is able to do thanks to the low elasticity of its demand. One of the key findings of this analysis is that, in addition to the average impact being high, in just one third of the industries are their profits only moderately sensitive to higher energy prices, with pharmaceuticals being the least exposed to energy costs.

    In just one third of the industrial sectors are their profits only moderately sensitive to higher energy prices.

    On balance, it seems clear that manufacturing is considerably exposed to increases in energy prices. According to our analysis, the metallurgical, chemical and refining industries (12% of manufacturing production in Spain) are highly exposed to the energy shock. Moreover, these are also the industries that are most likely to pass on the current rise in energy bills to their sale prices, taking advantage of the fact that their demand is relatively inelastic over the short and medium term.

    On the other hand, there are a number of industries where the increase in the cost of energy products is having a major impact on their profits but these have not yet passed on their higher costs to their prices, although we expect them to do so during the course of this year. These would be sectors such as the auxiliary sector to construction (in fact, this is a frequent demand by the sector), the wood industry and paper industry. Such sectors account for between 20% and 25% of all manufacturing activity.

    At the opposite end of the scale are those industries whose energy consumption appears to be somewhat lower, such as the manufacture of electronic and computer products, pharmaceuticals and textiles, among others. In this case, pressures on energy prices should not have a direct impact on their sale prices, although there is likely to be some kind of knock-on effect due to price hikes for other industrial intermediate products coming from industries more affected by energy prices.

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Electricity prices are sky high, but what about household bills?

We analyse individuals’ electricity bill direct debit payments made from CaixaBank accounts to determine how the increase in prices affected the finances of Spanish households.

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2021 was a turbulent year in the electricity market.1 Prices rose alarmingly beginning in July and the year ended with the megawatt hour (MWh) at around 300 euros in the wholesale market.2 In an attempt to reduce the impact of this price increase on consumers, the government implemented several tax measures, such as a VAT reduction and a temporary suspension of the electricity production tax. At the same time, the rates by hourly tranche throughout the day were also modified to encourage more efficient energy use. So the question is, what was the final impact on the pockets of households?

To answer it, we looked at the direct debit electricity bill payments of individual CaixaBank customers.3 Of course, the amount that a household pays for its electricity bills depends on many factors: the amount of energy consumed, the price of that energy, the taxes in force, the contracted tariff, etc. In the end, however, what affects household consumption is the amount they end up paying for their energy supply at any given time. Yet, despite everything that has happened, the median electricity bill during 2021 was quite similar to that of 2018,4 a pre-pandemic year with wholesale market prices similar to those of the first half of 2021. In Q1 2021, the median electricity bill (i.e. the amount at which half of households paid less and half paid more) was 68 euros, the same amount as in Q1 2018. In Q4 2021, the median bill amounted to 60 euros, which was 3.6% lower than the median bill in Q4 2018.

  • 1. For more details on the factors behind the rise in electricity prices, see the Focus «The impact of the rise in electricity prices on the Spanish economy» in the MR12/2021.
  • 2. In the first half of 2021, the average price per MWh in the wholesale market was 60 euros.
  • 3. To do this, we added together the direct debit electricity bill payments for each individual customer each month (we excluded companies and self-employed workers). We also differentiated between customers on free-market tariff contracts (usually with a fixed price for the duration of the contract) and those on the regulated PVPC tariff with one of the suppliers offering these regulated prices (see https://sede.cnmc.gob.es/listado/censo/10).
  • 4. For 2021 as a whole, the median average bill stood at 743 euros, compared with 748 euros in 2018 (–0.6%, and –5.1% after adjusting for inflation).
Spain: monthly evolution of the median electricity bill
The median bill on the free-market tariff decreases, while that of the regulated market increases

However, this outcome changes dramatically if we analyse it based on the type of contract each household has. In the regulated market, which corresponds to 39% of households,5 the median bill in Q4 2021 amounted to 54 euros, 13% higher than in Q4 2018 (+28% compared to Q4 2019 and +32% compared to Q4 2020).6 In the free market, on the other hand, the median bill in Q4 2021 fell to 61 euros, 16% less than in Q4 2018 (–18% compared to Q4 2019 and –14% compared to Q4 2020).7 These marked differences are due to the fact that, in the free market, energy prices are fixed for the period established in the contract and are only updated when the contract is renewed, so the tax cuts have benefited households on this type of contract. In the regulated market, in contrast, energy prices are variable and change every day and every hour (corresponding to the so-called voluntary price for small consumers, or PVPC in Spanish), so the price increases have been transmitted quicker to consumers’ electricity bills and have exceeded the tax cuts.

  • 5. i.e. of private consumers with a contracted capacity of less than 10 kW (Electric Indicators Bulletin, November 2021, CNMC).
  • 6. For 2021 as a whole, the median average bill in the regulated market stood at 579 euros (559 euros in 2018).
  • 7. For 2021 as a whole, the median average bill in the free market stood at 861 euros (902 euros in 2018).
Spain: monthly evolution of the median electricity bill in the free market (fixed-price tariff) and in the regulated market (PVPC tariff)
Spain: change in free-market electricity bills (fixed-price tariff) and change in regulated-market electricity bills (PVPC tariff)
The increases in electricity bills are concentrated among households with greater electricity consumption in the regulated market

If we analyse the question based on what consumers spent on their electricity bills, we see a widespread reduction in the amount paid by those on free-market tariffs in Q4 2021, among both lower bills and higher bills. Specifically, bills in the 10th percentile (25 euros) were 21% lower than in 2018, while in the the 90th percentile (142 euros) they were 12% lower than in Q4 2018. In the regulated market, in contrast, the higher bills are more adversely affected by the higher energy prices. The 90th-percentile bill (119 euros in Q4 2021) was 22% higher than in Q4 2018, a significantly higher increase than the median bill. On the other hand, the temporary price reduction for consumers benefiting from the social credit can be seen in lower-value bills: the 10th-percentile bill in Q4 2021 (18 euros) was 18% lower than in Q4 2018.

In short, 2021 was a roller-coaster year for electricity bills, but it did not affect all consumers alike. As for 2022, it does not look like it will be any less turbulent. Part of the price increase in the wholesale market in 2021 could be transmitted to the free market as contracts are renewed, although if prices in the wholesale market are reduced, this effect will be temporary. What seems clear is that electric bills will continue to give fuel to the conversation.