The Last Word on ESCs
by Frank Fulton
Originally published in Glass Canada Magazine, August 2019 Issue
In the last edition we found that starting benchmark values used by glass manufacturers to calculate energy surcharges were far lower than what the actual costs were at the beginning of the surcharge program in 2002, meaning that surcharges can be vastly overstated and will likely run into eternity.
Since the beginning of the year, as of the end of May, 2019, the cost of natural gas has plummeted 33 per cent to levels not seen since mid-2012. Referencing the realistic starting benchmark cost we determined in our last column using the information provided by the glass manufacturers that there should now realistically be an energy rebate of $200 per truckload on the natural gas portion of their total ESC. I haven’t seen any rebates from any of the manufacturers but there have been modest decreases in the amount charged.
Assessing the ESC freight component charges gets a bit complicated. Guardian’s first quarter 2019 diesel charge works out to $8.40 per ton and AGC’s, $21 per ton, however, based on production numbers from Pilkington and diesel usage as a percentage of total freight costs from the U.S. Department of Transportation, the total diesel cost per ton of glass is $5.85, considerably less than both surcharges. Per truckload, total freight charges by ACG are $1,267; by Guardian, $1,443; and by Cardinal, $238. One would expect these to be the same from company to company. These significant discrepancies raise suspicion about the validity of the charges.
As referenced above, according to a study presented by Pilkington Glass in 2010, the transportation component of the total cost of glass production is 11 per cent. The FRED Producer Price Index: General Freight Trucking shows that between December 2003 and December 2018 the cost of trucking increased 42 per cent, similar to general inflation over the same period. This calculates to only a 4.6 per cent escalation in the overall cost of producing glass due to freight costs over a 15-year period.
A 22-ton truckload of six millimeter clear glass selling for US$0.75 per square foot would be worth $11,000. Based on the realistic cost increase of 4.6 per cent of the total price of glass based on freight, one can calculate that the increase in the freight component since 2003 should be $508 per truckload or $23.10 per ton, significantly less than the $58 per ton being charged by AGC or the $65.50 being charged by Guardian.
In summary, when legitimately determined input costs provided by the U.S. government are evaluated during the period of 2002 to 2018, the true total of incremental energy expenses amounts to $23.10 per ton for freight minus $9.09 per ton of cost reductions for natural gas for what amounts to only $14.01 per ton of glass or about two cents per square foot. Over this period, the Producers Price Index shows that the base selling price of raw flat glass has increased by about 10 cents per square foot.
The nicest word I can come up with for what the glass fabricators are doing with the energy “sucker-charge” is “unconscionable.” As a buyer of glass products, you are all too aware that fabricators charge a straight percentage ESC add-on, not only on the glass portion of their sale but on every component that makes up the sale, such as hole-drilling and shower door hardware – an egregious cash grab. In my brief time as an employee of a large glass fabricator, coincidentally at the time the ESC was introduced to the glass buying market, the then-president was overheard saying that the ESC was the greatest thing to happen to the company in their history as every dime went straight to the bottom line. Fabricator acquaintances have confided, off the record, that the ESC they charge is a blatant scam but they get away with it. Sometimes I think we should have usury or anti-gouging laws in this country.
Going forward, all costs should be included in the product price and manufacturers, as they currently do, can continue to manage the risk of cost fluctuations through the futures market.
Frank Fulton is president of Fultech Fenestration Consulting. He has been in the industry for 30 years and can be reached via email at firstname.lastname@example.org.