Energy-intensive companies are directly exposed to higher prices for oil and coal used in operations, while consumer-facing companies are also exposed to energy costs passed through supply chains. Trucost applied World Bank commodity prices to data on estimated coal and oil use in the operations and supply chains of companies in the FTSE 350 Index in 2009/10. Findings show that costs for the carbon-intensive fossil fuels could amount to almost US$350 billion across the Index.
Energy costs are highest relative to revenue for Oil & Gas and Basic Materials companies. While upstream companies that extract fossil fuels might gain from price hikes, higher energy costs passed on by suppliers are driving up input costs for companies downstream in sectors such as Industrial Metals & Mining. Higher prices for goods such as electricity, packaging, chemicals and transportation could hit profits hard at Consumer Goods and Consumer Services firms already under pressure from falling High Street sales and rising prices for other commodities such as cotton and grains.
A wide range in exposure to energy costs in sectors including Food & Beverage and Travel & Leisure suggests that some companies could face significant financial risk from further increases in energy costs, as shown in the chart below.
Chart 1: Average and range in revenue at risk from oil and coal prices
In contrast, companies that are more energy-efficient than sector averages stand to gain as they face less upward pricing pressure. Variations in financial exposure to energy costs is even more significant when measured against earnings before interest, taxation, depreciation and amortisation (EBITDA).
Although economic concerns have lowered expectations of energy demand, the dip in prices in September is likely to be temporary and futures prices for oil and coal show markets expect prices to continue rising in the medium-term. FTSE 350 companies could measure and manage direct and indirect financial exposure to volatile coal and oil prices to strengthen risk management.