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Multiple industries face further cost pressures which could lead to reduced consumer spending
Thursday 14 Oct 2021 Author: Martin Gamble

A perfect storm has created a nasty energy shock which has seen natural gas, oil and coal prices soar this year. This isn’t just a UK issue, but a global problem in part exacerbated by the strong economic rebound. The fallout could soon be seen in the results from manufacturers and other sectors.

Despite the UK economy being around three times larger than it was in the 1970s it today consumes two thirds less energy according to government data. This is testament to the efforts made to reduce energy intensity as well as a big shift from a manufacturing and agricultural-led economy to one based on services.

For example, manufacturing and heavy industry used to consume around two-thirds of the country’s energy needs in the 1970s but that has since dropped to around a fifth.

Natural gas is used across many industries from steel and fertiliser production to ceramics, glass and food and beverages. Gas is an important ingredient for manufacturing certain types of fertilisers, and the closure of capacity has resulted in a shortage of carbon dioxide, which is a byproduct of making ammonia.

While fertiliser plants can be switched off when the cost of gas becomes prohibitive, that’s not the same for glass furnaces which operate non-stop all year round until the end of their useful lives, usually around 20 years.

Carbon dioxide is essential to the meat and poultry trade, fizzy drinks and beer manufacturers and is even used as a coolant for the nuclear industry.

Housebuilders have flagged inflationary pressures with building materials for some time and they now face energy cost pressures as well. The problem could get worse if energy-intensive suppliers such as brick manufacturers pass on extra costs that they’ve had to endure from higher power prices.

Across multiple industries, companies will no doubt try to pass on increased costs which, with a lag, will deliver a double whammy shock to consumers already bracing themselves for higher energy bills.

We’ve recently seen several retailers including ASOS (ASC:AIM) and Boohoo (BOO:AIM) reporting a slowdown in sales growth, and now we face further pressure on consumer spending as higher energy prices leave less money in the public’s pocket.

A more comforting piece of news for consumer prices was offered up by columnist John Dizzard who argues in the Financial Times that the global supply chain crisis is past its peak.

He flags data which shows that traffic through global ports is finally starting to ease as backlogs clear. If true, that should lead to lower price pressures on many companies, but how quickly that feeds into lower end selling prices is another question. On a downbeat note, Dizzard’s prediction of a resulting inventory recession is less            soothing.

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