Analysis: After the explosion of costs, factories in Central Europe are passing on the pain

PRAGUE/BUDAPEST, Jan 25 (Reuters) – Czech foundry Benes a Lat has seen its energy bill double in the past year and its chief financial officer is rushing to have customer contracts rewritten so it can pass on some of the burden .

The family business challenge is reflected in thousands of businesses across Central Europe, large and small, who are grappling with soaring costs for everything from parts, materials and transport to energy and growing wage demands.

“We are an energy-consuming (company), so this has had a huge impact,” said Jan Lat, CFO of Benes a Lat.

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“We are in negotiations with customers to re-index (on energy prices) the contracts in order to follow market prices. Clearly, every buyer’s first reaction is: it’s your problem!

When companies manage to share the pain, it fuels consumer price inflation and adds to a price spike in Central Europe that has been stronger than elsewhere on the continent due to the region’s recoveries focused on consumption and ultra-tight labor markets. Read more

The extent to which companies are able to raise prices in early 2022 can help determine where inflation will peak and how much further central banks in the region need to tighten policy, analysts say. There is a growing risk that inflation will be stronger than some expected.

“Companies are trying to at least partially transfer higher costs to customers, which will fuel inflation,” said Michal Brozka, an economist at Komercni Banka in Prague.

Central European businesses ended 2021 on a bullish note as business sentiment surveys improved, while consumer demand remained strong. Read more

The region faces the same inflationary pressures as others, but also struggles with strong wage growth with some of the lowest unemployment rates in the EU.

The Czech National Bank signaled this month that inflation would be higher than expected, likely to top 9% in early 2022 with a chance to top 10%.

Policymakers have already hiked interest rates significantly, unlike the European Central Bank which has sought to look past soaring prices in the adjacent eurozone.

RISING COSTS

Driven by energy prices, soaring costs are being felt by goods producers across central Europe.

A survey by the Hungarian GKI Institute in December showed that small and medium-sized businesses on average expect a 15% increase in costs in 2022, partly due to a 20% hike in the minimum wage by the government before the April 3 elections.

A survey by the Czech Confederation of Industry found that one in five companies are expected to raise prices by at least 10%, and 38% will raise prices by 5-10%.

Czech dairy group Madeta raised prices for its products by 10% or more this month.

“We try to pass on the higher costs of energy, packaging materials and other inputs to product prices as much as possible. Unfortunately, there is no other way,” said the director of Madeta, Milan Teply.

In Hungary, carmaker Suzuki also passes on some of its higher costs to customers. “We are doing our best to optimize our costs but we will have to price some of this increase,” the company told Reuters.

IN SEARCH OF THE PEAK

Capital Economics said last week that inflation is likely to remain elevated or fall back towards targets more slowly than expected in the Czech Republic, Hungary and Poland.

Hungarian policymakers meet on Tuesday and analysts expect the base rate to rise another 30 basis points to a nearly eight-year high of 2.7% to tackle inflation at a peak of 14 years by 7.4%.

Analysts in a Reuters poll expect average inflation to climb this year to 5.5%, the highest since 2012 and 65 basis points above forecasts for the previous month.

The National Bank of Poland, struggling with inflation that is already at a more than two-decade high of 8.6%, has raised its main policy rate by 215 basis points to 2.25% since October.

Grzegorz Maliszewski, chief economist at Bank Millennium in Warsaw, said businesses can continue to pass on higher input prices as long as consumer demand remains strong.

He added that Poland’s main interest rate could rise to 4% this year.

In the Czech Republic, producer prices rose last year at their fastest pace since 1995.

Markets are betting that the country’s central bank will raise its key interest rate, now at 3.75%, another 50 basis points in February, following increases of 300 basis points between September and December. Some analysts think the rate could peak this year at nearly 5%.

“…input cost increases are so significant…the pass-through to consumer prices is inevitable,” said Jakub Seidler, chief economist at the Czech Banking Association.

“(The pass-through) will be much higher than what we’ve seen in previous years.”

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Reporting by Jason Hovet in Prague, Krisztina Than in Budapest and Alan Charlish in Warsaw; Editing by Toby Chopra

Our standards: The Thomson Reuters Trust Principles.

Mary I. Bruner