The Pilkington Building Products Energy Surcharge
Why Pilkington introduced an Energy Surcharge in 2004
In 2004 it was clear that our cost base was being significantly inflated by unusually high energy costs which seemed likely to continue to rise for some time. We wanted to introduce a system, distinct from normal pricing, where we could pass on some of our cost increases to our customers in a clear & documented fashion. By highlighting that this element of pricing is directly related to fuel/energy prices using the published IPE Brent Oil Price Index, we signalled to our customers that we wished to be transparent about this major cost driver.
Why Pilkington continues to apply an Energy Surcharge
Nobody can deny that the high energy cost environment is still with us. In fact, it is visibly worse than when our energy surcharge was introduced. In our personal lives, we see this with high prices at the petrol pumps & big bills for domestic heating. In the same way, Pilkington’s energy costs have risen significantly in each successive year from 2003. All the reasons for the initial introduction of our energy surcharge are now even more valid. Of course, we continue to hope that energy costs revert to historic levels, but we realise that this is unlikely in the short to medium term. We firmly believe that our energy surcharge remains the best way to pass on some of our increased costs. It allows us to remain profitable, so that we can invest in the products & services that we need to delight our customers. It also gives our customers a strong, clear & public argument to pass their cost increases both for raw materials and due to their own operations on to their customers.
Why Pilkington introduced a currency exchange rate factor to the Energy Surcharge
Most customers accept, understand & support the reasons for the Energy Surcharge but the oil price is quoted in $US and in recent times this currency has shown volatility against European currencies. As a result and following the quarterly review in July 2008, from 1st August 2008 we introduced a currency exchange rate factor to reflect the movement of the US$ against European currencies, including £Sterling. This exchange rate factor was introduced because it had become apparent that a part of the oil price was being determined by currency exchange rates. According to the relative strength or weakness of the US$, the currency exchange rate factor revises the IPE Brent Crude Oil futures price forecast up or down. For instance, at the time it was introduced (July 2008 for the quarter August to October 2008) and because the US$ was then relatively weak vesus the £sterling, the exchange rate factor served to suppress the energy surcharge that would otherwise have been applicable as a simple consequence of the IPE Brent Crude Index.
Full & consistent application of our Energy Surcharge
In order to ensure that the message behind our energy surcharge is understood across the European glass markets, we charge our energy surcharge in full to all our own Downstream branches. Our branches pass energy surcharge on to their customers.
Exactly how do we calculate our Energy Surcharge?
On a quarterly basis, we take the take the IPE Brent Oil forward price (middle month of next quarter) for the defined day, apply an exchange rate factor and relate the revised IPE Brent Oil price to the Energy Surcharge band based on the table we published in October 2004. For full details of the calculation methodology please contact your normal representative. We have introduced a spot tracker to show you what the actual rate at a given date against the current prevailing rate. Please click here to see the tracker.
What would happen if our Energy Surcharge disappeared tomorrow?
What is clear is that Pilkington will have to pass on our cost increases to our customer base. So our overall gross price would not change. Our pricing would not, however, be accompanied by a clear, transparent & published mechanism. Of course, how customers or competitors choose to pass on their own cost increases is, as always, a matter for them. However, the general market picture would become more confused & customers would lose a powerful argument & a structure for passing on their own cost increases. This is why we do not intend to withdraw our energy surcharge.
In Summary
The Pilkington Energy Surcharge is a visible, fair & transparent way to pass on some of our increased energy-related costs to our customers. It is applied consistently across Europe & is controlled, not by Pilkington but, by the international energy & currency markets. It is accompanied by a clear onward communication of this message by Pilkington which is understood by customers. We believe that our Energy Surcharge is the best way to manage the difficult operating conditions associated with very high energy prices
For further information, please contact your local Pilkington contact.