AFG Venture Group Dispatches

Corporate advisory and consultancy in Australia, South East Asia and India.

The New World Order of Carbon Pricing: Seven Reasons Why Companies in Australia Should Take Action – James Lau, Principal, Frogtree & Jeremy Barker, Partner, A.T. Kearney

There is a view in the public arena that the impact of the carbon legislation will be negligible, and that businesses would be well advised not to feel compelled to take action.

Our assertion is that there is a lot companies can do and taking action now translates as bottom line results. Here are seven reasons to consider:

1.       To take advantage of significant Government funding to support businesses lowering their emissions profile. Apart from well publicised $9.2 billion assistance to emissions-intensive trade exposed industries, the Government is making a range of funding available to businesses including a $1.2 billion Clean Technology Program to help directly improve energy efficiency in manufacturing industries and support research and development in low pollution technologies.  Funding will be provided on a co-investment basis, with industry contributing on average three dollars for every dollar from the Government. The funding applies to improvements related to capital infrastructure as well as processes and products.

Directors might ask: would we be eligible for any of this funding? Should we reconsider components of our capital program (or our supplier’s capital program)?

 2.     To keep costs under control. Although increases in unit costs will be minor, small coins can add up to build a case for change. Some of the small coins include:

  • Electricity:  the price of electricity is expected to increase by approximately 5%. Food & grocery manufacturers with extensive processing, warehousing and refrigeration will be most impacted;
  • Fuel: fuel used in the logistics and other operations can expect to see price rises of 6 cents per litre (note that personal vehicles and light commercial trucks are excluded);
  • Waste: Waste disposal charges could go up as waste operators are required to pay a Carbon Price to reflect the emissions released when disposing of waste;
  • Processed inputs: even with the exclusion of agriculture emissions from the Carbon Price scheme, the significant electricity consumption in industries such as meat processing and dairy will lead to considerable price rises in input prices;
  • Construction: key building materials, such as bricks, cement, paint (and other chemicals) and plaster, are typically highly emissions intensive in their manufacturing process. Where they are produced locally, there will be large price rises associated with these materials. This might affect the business cases of capital projects in the pipeline.

Would it be important to understand how the total cost base might change, where the increases might come from?

The estimates above are based on a carbon price of $23 per litre. What happens if the price of carbon increases from $23 to $50 per tonne?

Are there specific parts of the business or specific suppliers where attention is necessary to mitigate the risk exposure?

 3.      To justify price increases to channel partners and customers, and therefore protect margins. For example, we anticipate that retailers might exert pressure on food and grocery manufacturers to absorb cost increases. For Dairy and Meat producers for example this could amount to ~10-15% margin dilution. Our view is that a strong fact-base that details the cost increases along the supply chain from paddock-to-shelf would help these manufacturers at the negotiating table. Note further that the proportion of businesses who would be willing to deselect suppliers for failure to meet carbon management criteria has increased from 6% in 2009 to more than 50% today.

Are we ready for negotiations with retailers? What is our counter-sourcing strategy?

4.       To capitalise on opportunities – in two ways:

  • The first is obvious, to look for improvements in energy efficiency and reduce carbon pollution. Our experience is that this enthusiasm should be matched with business savvy – the list of well-meaning projects that have been scrapped late in its development cycle is unfortunately too many.
  • The second opportunity is less obvious, they involve deeper knowledge of shifts in industry and economics. For example, companies might investigate the opportunity to sell waste products (such as packaging and waste oil) to the burgeoning biofuel industry.  More broadly, the legislation is significant in terms of its fiscal effects: the Government will be injecting an extra $15.3B over the next 3.5 years into the pockets of low and middle income families in the form of pension and family assistance increases and tax cuts. Although it is intended that this money be used to compensate for higher prices, ultimately consumers get to choose how they spend it. To put into context, this is about a third in size of the Federal Government’s GFC stimulation package.

What opportunities exist for our company given the shifts in energy economics and economics more broadly?

5.      To better inform pricing, business mix and product mix decisions. The margin impact on specific products will range from negligible to considerable. This will have a bearing on pricing and business mix decisions. For example

  • Manufacturers of trade-exposed products (particularly non-perishables) might be disadvantaged because competition from offshore suppliers won’t face the same cost increases in their supply chain;
  • Manufacturers who source inputs from here and overseas might adjust volume mix to take advantage of price differentials;
  • Companies with products with price levels that are anchored to a certain level (e.g. the McDonald’s sundae at 50 cents as an example) might need to absorb cost increases;
  • Even if net cost increases are small, products with very tight margins might become uneconomical; and
  • Companies might shift marketing attention to products targeted at low to middle income families.

Would it be useful to revisit our supply base, our input portfolio, our product portfolio and where we make our future investments?

6.       It’s law. With the legislation passing through the Senate, the Government’s new Carbon Price legislation will come into effect in less than three months (1 July 2012). Businesses now have sufficient certainty on the timing and scope of the proposed scheme that they can evaluate the impact on their business. Even if the Federal Opposition comes into power in the next year, and decides to remove the scheme, our view is that legislation that attempts to dismantle the scheme will find it difficult to pass through the current Senate.

7.       Good governance. According to an EIU survey, less than 1 in 3 companies have modelled the impact of carbon prices on their business. Only 1 in 5 companies have a holistic strategy in place encompassing their supply chain and external parties. This is alarming when you consider how the knock-on effects of the carbon legislation might affect budgets, forecasts and major capital decisions. Our view is that it will be important for companies to be ready to respond to questions relating to how their business will be impacted in the new carbon world and what they are doing about it.

About the Authors

James Lau has worked in strategy helping leaders solve their most important challenges: how to increase returns, how to make teams even more effective and how to innovate.

James has worked for leading strategy consulting firms (Booz, A.T. Kearney and Capgemini), held executive positions (BlueScope Steel) and brings a wealth of international experience having worked extensively across Europe and Asia. He is currently working at the cutting edge of business innovation, developing an iPhone app designed to help leaders improve decision making and to lift sales frontline productivity. Contact: james@frogtree.com.au

Jeremy Barker is a Partner and Board Member of global consulting firm, A.T. Kearney. With over 20 years professional experience, Jeremy specialises in the development of actionable strategies with particular depth in Consumer, Retail, Private Equity, Health and Transport. Jeremy is a leader of A.T. Kearney’s global sustainability practice, he has advised some of the leading corporates in Australia including an airline, a major food retailer and the Australian Food & Grocery Council. Contact: jeremy.barker@atkearney.com

James Lau & Jeremy Barker, March 2012