Chief Exec’s report Q3 2022
6 minute read
In asking if there could possibly be a worse time to have a lack of direction from our UK Government, for our Engineering sector I am afraid I struggle to see a worse scenario than the timing of the absence of leadership we are experiencing right now. The beginning of next week brings confirmation of change that can address that, and it honestly can’t come soon enough.
Let’s start with a real example: an engineering company of less than fifty employees which has been told their energy bill will rise from £15,000 per month to £80,000 per month. As an energy-intensive business, manufacturing high tensile steel components, energy is already a significant proportion of their costs, but this impact is unsustainable, leading the directors to discharge their duty by engaging with their accountant to understand the mechanism of a potential voluntary liquidation. Meanwhile their workshop remains flat out, with a full order book until the middle of 2023, manufacturing export orders for critical connectors for Ukrainian tanks resisting the Russian invasion, plus parts for oil, gas and renewable energy markets.
The size and scale of these cost impacts is difficult to grasp, but as always, the old cliches are the best, and so ‘revenue is vanity, profit is sanity, and cash is king’ hits the nail exactly on the head. Cash is the concern; it has immediate impact and so it’s the factor that puts business sustainability at risk – and more than one third of our survey responses have stated that this is their worry. But when we take those responses as a ratio of companies who have actually changed or have been quoted for their change, that rises to over 70% of companies concerned at their ability to sustain their business in the face of these confirmed increases.
We just cannot assume that businesses can simply pass on these extra costs – indeed responses from industry underline that only 15% of companies believe they could fully or substantially pass on increases. These are companies in highly competitive global supply chains, with competition placed in countries mitigating this crisis either through existing radically different approaches to industrial energy strategy, or measures which will alleviate or mitigate rises.
When we consider the impact to UK manufacturing on the world stage, it’s worth remembering that just before the energy crisis began, the UK was already at the back of the pack. The UK Government Department for Business, Energy and Industrial Strategy released their quarterly energy prices for January to March 2022 showing that for average industrial energy prices including taxes, the UK was second highest in the EU14 group, and 48% above the EU14 median. That’s a picture that unfortunately will only have deteriorated given the UK’s higher than average dependence on gas, whose price predominantly sets our overall energy pricing.
Until now the public discussion has understandably centred on the impact on consumers, justifiably concerned with the societal impact that an amplified fuel poverty scenario would have. It’s a discussion that the incoming Prime Minister and their new cabinet urgently have to extend to include industrial energy costs, as faced with these impacts, those manufacturing companies that don’t survive will instantly remove well paid employment from society, and those that do survive will do so by doing what they know will work: cutting costs, unfortunately including well paid employment – currently the best defence against the societal impact of this crisis.
Where to start for next week’s new cabinet? Well, there are a plethora of potential remedies being proposed by energy industry participants, politicians, and industry commentators, but they will be of no consequence to the scenario outlined above unless they bring direct support for industrial energy costs.
From a manufacturing/engineering perspective, when you are faced with a potentially existential threat to business in terms of input costs, your first course of action is to explore your supply chain forensically, asking serious questions about what you can manage, what you can influence, what you can internalise, what your options are, and the associated risk profiles, and what is simply outside your circle of control.
Applying that thinking from a UK perspective and recognising that in a crisis situation serious problems seek radical responses; this may reveal at least part of the solution even on a temporary basis to support us through the worst of the crisis. If we consider that beneath the commercial complexities of our interconnected energy markets, well over 40% of the gas we consume is derived from the UK’s territorial waters (with potential to grow in short order we are told), and that the vast bulk of the power we consume is generated by plants here in the UK, perhaps this can yield some answers.
In amongst this frightening situation, it’s easy to lose sight of the fact that our sector continues to be generally busy with strong order books, and this summer of yet more record-breaking temperatures, and wildfires outside of London reminds us that engineering and manufacturing have big tasks arriving to implement the changes that are urgently needed to address another emergency: our climate. To do that we need to preserve and grow our industrial capacity – as others will certainly fill the gap if we don’t – and that is currently desperately at risk without help on industrial energy costs.