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Consequences of rising energy prices for credit management

What are the consequences of rising energy prices in our industry? What are the consequences for value chains and for individual companies? And how should credit management respond?
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09.08.2022, Prof. Dr. Matthias Schumann

Consequences of rising energy prices for credit management

Affected industries and the impact

In the private sector, one effect of rising energy prices can be seen directly: Consumption is slowing down - it is hitting retailers and consumer goods manufacturers - all the things you don't necessarily have to afford are being put on the back burner for the time being. So it will hit the clothing stores, but also, for example, the hospitality industry, which is already shaken by Corona.

The main sufferer from energy prices, however, is first and foremost energy-intensive industry. Here, costs are rising massively. Many sectors are being hit hard across the board.

Building materials, chemicals, glass, metals, paper and steel are at the beginning of the value chain, making a wide range of secondary products more expensive. Energy-intensive industries occupy a key position in our economy. A lot of energy is needed to produce basic chemicals, aluminum, various metals, insulation and plastics as well as, paper and cardboard, glass, glass fibers, steel, cement, lime, gypsum and ceramics. This directly or indirectly affects the entire manufacturing industry.

For the construction industry, this means further subdued demand, after first tight capacities and then requirements due to sustainability led to price increases. We will see a further meltdown in construction activity here. Construction prices are rising much faster than rents, making building unattractive. In the long term, this will lead to overcapacity in all areas of the construction industry with corresponding liquidity consequences and the need for adjustments

All packaging is becoming more expensive, including consumer goods.

Basic chemicals are contained in many products or are necessary for product manufacture, which further drives up prices across the board and weakens demand. In the automotive industry, we are already seeing massive price increases, albeit currently more due to shortages of certain precursors (semiconductors).

Consequences for companies

The overall consequence is that many value chains are affected. It is not without reason that inflation is already running at almost eight percent.

Companies that cannot pass on the rising costs caused by energy prices have problems. Likewise, companies that do not succeed in absorbing declines in demand by reducing their own costs, including personnel.

One example is energy suppliers who have to buy at high prices but have fixed prices in their contracts. Losses are inevitable.

In addition, in countries with a more favorable electricity mix (e.g. France with its large share of nuclear power), other price developments are taking place. As a consequence, this also weakens the international competitive position of the German economy. The currently favorable euro may help with sales worldwide. However, without exchange rate hedging, there will be further financial disadvantages in non-euro countries.

It can also be assumed that this price level will hold in the long term. The question is therefore how the higher costs can be passed on via the company's own prices and what consequences this will have for sales, both nationally and internationally.

Here, it is important to pay close attention to the economic position of the companies. How resilient were they positioned before these effects? How long can they compensate for these effects? Is it possible to adjust capacities and thus also costs? In the case of late payments, deferrals and payment plans are of little help because the triggering effects are long-term. This must be assessed in credit management, because only solvent customers are good customers.

About the Author
Prof. Dr. Matthias Schumann

Since 1991, Prof. Dr. Matthias Schumann has held a professorship in Business Administration and Information Systems (Chair of Application Systems and E-Business) at the University of Göttingen. He also heads the joint computing center of the Faculty of Economics and the Faculty of Social Sciences. He is a shareholder of Prof. Schumann GmbH.

Prof. Schumann's research interests include information systems at financial service providers and systems for credit management, as well as issues related to knowledge and education management. Prof. Schumann has a wide range of experience in consulting companies, extensive lecturing activities and more than 350 publications.

University of Göttingen

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