by Frank Fulton
Originally published in Glass Canada Magazine, June 2019 Issue
Energy surcharges – the smoking gun
In the last edition we took an overview look at the business ethics of adding service fees and the energy surcharge (ESC) on glass products. We questioned why there is such a wide ranging discrepancy between the fees added by the glass producers and the fabricators and why the amount of the charges don’t appear to align with the input costs. In this edition we’re going to try to present enough information for you to determine if the ESC is justified, or otherwise.
The ESC was first introduced in the U.S. in 2002 as a temporary measure by the float glass manufacturers to offset the then-increasing cost of natural gas. Energy makes up 21 per cent of the cost of glass production. Shortly thereafter, the ESC was increased by including transportation costs, in part to offset rising diesel fuel costs. Freight makes up 11 per cent of the cost of glass production. Therefore, for the purpose of our assessment, 2000 to 2002, the three years leading up to the introduction of surcharges will be our starting benchmark point with costs compared to the end of 2018.
First, we note the discrepancy in the amount of the ESC between companies. A review of the 2019 first-quarter charges per manufacturer and how these translate to the selling price of six-millimeter clear annealed glass is revealing. AGC charges $72 U.S. per ton equal to $0.108 per square foot. Cardinal charges $538 U.S. per 44,000-pound truckload equal to $0.0367 per square foot. Guardian charges $0.0398 U.S. per pound equal to $0.1194 per square foot.
Each supplier provides a different set of calculations to support their ESCs using values from a number of legitimate sources such as the New York Mercantile Exchange (NYMEX L3D) for natural gas costs; the U.S. Department of Energy Diesel Fuel Index; the Federal Reserve Economic Data (FRED) Producer Price Index: General Freight Trucking (PPI:GFT); and the Cass Truckload Linehaul Index. They put a combination of these values into formulas to arrive at a charge per pound, per ton, or per truckload of glass. It would take an actuarial scientist to make sense of the correlation between these index values and the ESC charges and to assess them for their validity. What I have found, though, is that the starting points or benchmarks of the costs are significantly less than what the actual costs were leading up to the introduction of energy surcharges. That suggests the surcharges are overstated and will, in all likelihood, continue to eternity.
Looking at the components that make up the total energy charge, the average cost of natural gas on the NYMEX L3D for the three-year period between 2000 and 2002 was $3.91 per million BTUs (MBTU). In 2018 it was $3.09, a drop of almost 21 per cent. In spite of this, all three suppliers we looked at are charging about $14 per ton on glass based on changes in natural gas costs. Guardian provides a chart to calculate the natural gas component charge per truckload based on a range of NYMEX values. Using a realistic starting benchmark value of $3.91 instead of the $2.50 starting point Guardian references, there should be an energy rebate of $100 per truckload!
Again, referring to charts provided by Guardian, the diesel component surcharge on glass kicks in when the cost of diesel fuel is more than $1.21 per gallon. The last time diesel was this low was in February, 2002. The three-year average prior to the introduction of surcharges was $1.40 so I believe this should be the starting point and would argue that the benchmark is set too low. Objectively, the average cost of diesel in 2018 increased to $3.18 which represents an increase of 127 per cent over 2000 to 2002 levels. This sounds like a lot until you consider a report from the U.S. Department of Transport stating that fuel costs comprise only 10.6 per cent of the cost of trucking. Furthermore, diesel costs make up only 1.2 per cent of the cost of glass production. I propose that the weight of diesel costs in ESC calculations is exaggerated, inflates the surcharge unrealistically, and is such a minor part of the mix it should be ignored.
I think we’ve found the smoking guns folks. It’s the starting benchmarks upon which all the surcharges are based. In the next edition we’ll complete the comparison of energy surcharges by the manufacturers and present what we calculate the surcharge should be.
Frank Fulton is president of Fultech Fenestration Consulting. He has been in the industry for 30 years and can be reached via email at email@example.com.
Categories: You Bet Your Glass