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The Bank of Spain detects that oil refining triggers its margins | Economy

Facade of the Bank of Spain.
Facade of the Bank of Spain.

At a time when production costs are rising, knowing what is happening to business margins is key. Are companies being able to transfer these costs to buyers and customers? Are they taking advantage to skyrocket their profits and does that justify decisive regulatory action? The Bank of Spain attempts to answer this question with the data from its Quarterly Central Balance Sheet, which has a thousand companies, most of them large. In other words, there are no SMEs, which are logically in a worse state after the pandemic.

The conclusions of the study are that, in general, the profits of companies have increased considerably. But they are still far from the pre-covid period. In terms of gross added value (that is, sales minus the goods and services used to produce) they are 5% below 2019. And if the gross economic result (profitability) is taken, it is still 15% lower . Although they are only a thousand, these companies in the survey account for 10% of the gross added value of all Spanish companies. In other words, they are probably the ones that have had the most muscle to face the pandemic, bottlenecks and inflation.

The average of these companies in the sample would have experienced little change in their margins despite the strong increase in costs. It is conceivable, therefore, that in general they have been able to transfer them. In any case, it must be remembered that the strong increase in core inflation, that which does not include energy or food, already occurred during the second quarter that this study does not take into account.

The supervisor’s report only detects one sector in which margins are rising a lot: industry. And it is fundamentally due to refining, explains the Bank of Spain. Its profitability rises 45% due to the extraordinary growth registered in the oil refining subsector, “in a context of strong increases in the price of crude oil, which these companies would have transferred to a large extent to their sales prices,” says the agency. .

In contrast, the energy sector experienced a 21% drop in profitability. This fall is explained by the energy trading companies, which in many cases have not been able to pass on the increase in costs to their sales prices, since they have already agreed on prices with consumers who have contracted free rates. A different case is that of the electricity generating companies, which registered an increase in their costs due to the rise in gas prices and which passed it on to their prices.

heterogeneous situation

Although the average margin has not risen, the study shows that there is a very high degree of heterogeneity. The behavior is very uneven, depending even more on the characteristics of the companies than on the sector to which they belong.

Thus, those that already had a greater margin are the ones that have decreased it the most. They have also held up better, contracting their margin, those that export the most. On the contrary, those that suffered very strong rises in production costs, those that increased their activity and employment the most, or those with the most debt and with the most financial difficulties, have had to fatten it up. The latter are the ones that have had to do it the most, perhaps due to the need to improve cash flows with which to face financial payments.

In the average between one and the other, concludes the Bank of Spain, the margin has remained constant. About half of the companies have lowered it and the other half have raised it. Consequently, on average, sales prices have increased, which has increased the inputs (factors of the production process) and to a great extent they have transferred the cost increases to their clients.

Of course: the consumption of intermediate goods and services rose by almost 50%. Or what is the same: they have had some “notable increases in production costs.” “Those companies that have not been able to transfer this increase in costs to sales prices have been able to experience a contraction in their business margins, understood as the ratio between their surpluses and the net turnover,” the bank recalls. In addition to energy and oil, those that registered the highest growth in production costs were mineral and metal products, transport and other manufacturing industries. At the other extreme is the information and telecommunications sector due to its lower energy consumption.

In any case, the size of the sample forces us to take the data with caution, warns the report. And it underlines that the bias towards large companies also means that some sectors such as hospitality are underrepresented.

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