Open letter from the Chair of the Cornwall Group, Mark Mitchell, about why the current pricing model is broken.
Energy surcharges. Let’s be honest, none of us like to see that extra line on our invoices, but they have historically been the best way to reflect the volatile nature of the energy market.
They can iron out the unpredictable fluctuations in the price of energy. They are not permanent rises, and so they can go down as well as up. They are tools that everyone uses, so it is something of a level playing field. And once the situation settles, they can be removed altogether, and we can carry on as before.
But I think it is time to rethink energy surcharges in the glass industry.
I’ve actually seen more harm done than good as those temporary price fluctuations have been crudely and inconsistently applied, leaving small glass processing companies scratching their heads and losing out on £1,000s as they’ve taken serious hits to their bottom lines.
When you have a crisis, you expect people to work together to overcome those problems. And let’s be very clear: a volatile energy market for an energy-intensive industry such as glass, is a crisis – especially when you see companies struggling to survive because of it.
The major glass manufacturers run the risk of using energy surcharges to pass on their problems further down the supply chain, sometimes with only 48 hours’ notice.
Primarily, the energy surcharge isn’t based on a single mechanism. So, you’ve got some companies basing their surcharge on the price of oil on the London Stock Exchange, others will track gas, while others with follow other stock exchanges. And some will change their minds after a few months and switch mechanisms. The result is lots of different surcharges all coming out at different times of the month, and with different lead-in times.
This doesn’t fit with the main principle of a surcharge, which is to offer stability and certainty. And it is up to companies like Cornwall Glass Manufacturing and Mackenzie Glass to pick up the pieces and make sense of it all for our customers. We are the ones having to create sensible lead-in times for surcharges to take effect, and we are the ones left with the bad debt when companies fail because those increases are not fully passed on.
And I am certainly not passing judgement on our customers. Not all companies have the resources that Cornwall Group companies have. Many of them are owner/managed and very hands on, and so they spend less time paying attention to surcharges and updating accounting software.
I speak to companies who are genuinely on the back foot when glass manufacturers give little notice to surcharge increases, and don’t flex their prices accordingly. They tell me that they don’t want to be adjusting their accounting software every five minutes.
I know that’s dangerous, and I know it can lead to falling profitability, but this is an industry that isn’t geared up to managing a chaotic system.
I think it is time for the industry to look at the issue of energy price volatility and to devise a method that benefits the many and not the few.
Don’t forget that there is a bigger picture, which includes: reduced supply as the glass manufacturers divert resources to European operations; further energy prices as fixed-term prices come up for renewal; rising inflation; and labour shortages.
We need to act in the best interest of the UK industry where we can, and by rethinking energy surcharges, that will be a positive first step.