As wages barely budge and workers struggle with rising prices and the ongoing impact of the pandemic, corporates are posting record profits
Consumers are feeling the squeeze from inflation, from the supermarket and the petrol pump to escalating bills for electricity and heating. Indeed, household budgets – especially among lower-to-middle income earners – are taking a hit as consumer prices run at a 22-year high of 7pc.
But inflation has been proving a very different story for a fortunate few in the economy: large Irish corporates in sectors ranging from food manufacturing and energy to mining.
All of these are benefiting from soaring but volatile commodity prices on global markets and passing on higher supply-chain costs to customers via price increases, thereby protecting their margins.
Research published by Oxfam on Monday found that companies in the energy, food and pharmaceutical sectors are posting record-high profits around the world, even as wages barely budge and workers struggle with inflation and the impact of the pandemic.
The fortunes of food and energy billionaires have risen by $453bn (€423bn) in the last two years.
In Ireland, the combined annual profits at the five biggest energy utilities doubled to €560m in a year, while profits at the five largest Irish food companies increased by €174m, according to Oxfam.
Richard Marwood, a senior fund manager at Royal London Asset Management, says one commonality among the sectors with the ability to pass on rising costs to customers is that they provide products and services with few substitutes.
“They are in areas of the market where people’s earnings are spent on unavoidable purchases, like heating your house or driving your car – there’s often not a good substitute that saves money,” he says.
“Whereas buying that new pair of shoes or buying a nice wine might get pushed to one side – however, I don’t think that trend has quite happened yet.
“I would characterise the recent sectoral results from loads of companies in general as having strong demand and higher costs, but some companies have been able to pass on costs in their entirety.”
Irish companies are far from the only ones passing on at least some of their inflationary costs to customers – even before Russia’s war in Ukraine sent energy and commodity prices shooting up further.
In the US, data from the Commerce Department showed in December that corporate profit margins were at their highest in 70 years, prompting progressive senators such as Bernie Sanders and Elizabeth Warren to complain that some companies were using the pandemic as a cover to raise prices unjustifiably high.
In April, analysis of Securities and Exchange Commission filings for 100 US corporations carried out by The Guardian found that net profits were up by a median of 49pc, with executives outlining in earnings calls how higher demand enabled them to pass on rising costs and with margins improving for most companies.
Jim Clarken, chief executive of Oxfam Ireland and an adjunct professor of business and law at University College Cork who worked in senior management and at board level in industry for 15 years, says some companies in Ireland and the rest of the world are exacerbating inflation by passing on their higher supply costs to consumers.
“Companies are contributing dramatically to overall inflation, which is then putting pressure on other prices and on wages,” he says.
“This means that if you’re standing still [in terms of wages], you’re really going backwards in terms of pay, pushing many people into poverty.
“Or it leads to continual wage pressure if you’re seeking higher pay, which creates a wage-price spiral that is difficult to control.”
Even as the world experiences the biggest oil shock since the 1970s, the world’s largest oil and gas companies have been posting bumper revenue and earnings.
This month Shell and BP reported their highest profits in more than a decade on the back of surging hydrocarbon prices. Shell reported a record first-quarter profit of $9.13bn while London-based BP, which is led by Kerryman Bernard Looney, said its underlying profit on a replacement cost basis more than doubled to $6.2bn in the first quarter.
On top of a potential windfall tax for North Sea oil and gas producers, UK Chancellor of the Exchequer Rishi Sunak is drawing up plans for a tax on more than £10bn (€11.8bn) worth of excess profits by electricity generators – including wind farm operators – in order to fund financial support for households struggling with surging energy costs, the Financial Times reported this week.
While the debate about windfall taxes in Ireland hasn’t yet taken off in earnest, Oxfam is calling for a 10pc one-off tax on the excess profits of Irish energy companies, which Clarken says could generate €60m in revenue.
Finance Minister Paschal Donohoe, in response to a parliamentary question last month, said he is considering a windfall tax on energy utilities, following similar proposals by the European Commission and a windfall tax in Italy.
In Ireland, where the price of electricity was 155.5pc higher last month than it was a year earlier, there were more than 35 price hike announcements in 2021 and so far this year all of the big suppliers – Bord Gáis Energy, ESB’s Electric Ireland, SSE Airtricity and Energia – have unveiled yet more price increases. Energy prices in Ireland are already among the most expensive in Europe, according to Daragh Cassidy from Bonkers.ie.
Operating profit at renewable power company SSE Airtricity in Ireland and Northern Ireland jumped 37pc to £60.4m in the year to March, British power company SSE Plc reported on Wednesday, citing £51m of higher generation receipts on wind assets contracted through Airtricity.
SSE said that higher energy prices at SSE Airtricity led to a drop in customer margins but that it managed rising commodity costs “through our approach to hedging and where necessary through tariff increases”.
More than a million Electric Ireland customers were hit with further electricity and gas price hikes earlier this month.
Yet ESB Group in March reported a 10.2pc increase in operating profit before exceptional items, to €679m, for 2021, citing higher margins at its British generation business, increased demand for electricity and the timing of tariff changes at its network division. So healthy were its earnings that ESB recommended a €126m dividend to the State, up from €81m a year earlier.
The energy crisis, combined with rising prices and shortages of wheat and fertiliser as a result of the Ukraine war, is – in turn – helping to drive up food prices.
Indeed, global food supplies have been dented further recently because Russia slapped a ban on wheat exports, started blockading Ukrainian ports – which has left some 22 million tonnes of grain stuck in silos – and began plundering Ukraine’s grain reserves. The two countries account for about one-third of global wheat exports. Higher natural gas prices, meanwhile, are leading to a surge in prices for fertiliser.
This means “food companies have a choice – either put up prices or see profitability collapse”, Marwood says.
“Usually it’s about how much you can put up the price to cover costs without making it such that no one can afford your products. There isn’t an easy answer to this,” he said.
Last month, food technology and ingredients giant Kerry Group reported that the margin on its earnings before interest, tax, depreciation and amortisation was up 10 basis points in the first quarter. Volume growth stood at 5.6pc, organic growth was at 11.4pc, and revenue rose 8.1pc.
“While our industry is experiencing a period of heightened inflation, we remain confident in our ability to manage through this current cycle with our well-established pricing model and cost initiatives,” Kerry Group said.
Meanwhile, convenience food manufacturer Greencore last week said it would return as much as £50m to shareholders over the next two years – thanks to a boost in half-year revenue and profits. It said it had “substantially recovered the significant input cost and other inflation” incurred since Russia’s invasion began on February 24 “through explicit price recovery mechanisms, constructive dialogue with customers, and operational efficiencies”.