Applying the Industrial Gas Pass-Through Formula

A) What the “Industrial Gas Pass-Through Formula” is
It’s a way to translate input-cost changes (mainly energy, feedstock, CO₂ costs, logistics) into required selling-price adjustments so you protect unit margin / EBITDA.

In industrial gases, “pass-through” is rarely 1:1 because of:

• contract lags (monthly/quarterly), caps/floors, index baskets
• partial coverage (some costs excluded)
• fixed-price periods, rebates, and volume mix effects

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B) The core formula you can apply (operator-grade)

1) Unit economics pass-through (most practical)

Required price increase per unit to hold margin:$$\Delta P_{\text{req}} = \frac{\Delta C_{\text{covered}}}{\alpha} + \Delta C_{\text{uncovered}}$$ΔPreq​=αΔCcovered​​+ΔCuncovered​

Where:

• $\Delta C_{\text{covered}}$ΔCcovered​ = change in costs that are contractually covered by pass-through (€/unit)
• $\alpha$α = pass-through effectiveness (0–1). This captures leakage: caps, delays, imperfect indices, disputes
• $\Delta C_{\text{uncovered}}$ΔCuncovered​ = cost change not covered by contract (€/unit)

Then:$$P_{\text{new}} = P_{\text{old}} + \Delta P_{\text{req}}$$Pnew​=Pold​+ΔPreq​

2) Contribution margin protection (when you track CM/unit explicitly)

$$CM_{\text{target}} = P_{\text{new}} – C_{\text{new}} \Rightarrow P_{\text{new}} = CM_{\text{target}} + C_{\text{new}}$$CMtarget​=Pnew​−Cnew​⇒Pnew​=CMtarget​+Cnew​

If you want to keep $CM_{\text{target}} = CM_{\text{old}}$CMtarget​=CMold​, then:$$\Delta P_{\text{req}} = \Delta C_{\text{total}}$$ΔPreq​=ΔCtotal​

…and then apply $\alpha$α + contract lags to see what you’ll actually recover.

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C) Step-by-step application (RapidKnowHow operator workflow)

Step 1 — Build the pass-through “cost basket” per product line

For each product (e.g., bulk O₂/N₂/Ar, liquid, cylinders), define cost shares:

• Electricity (ASU): €/unit and %
• Natural gas (H₂/steam): €/unit and %
• CO₂ cost: €/unit and %
• Distribution (diesel, labor): €/unit and %
• Other variable costs: €/unit and %

Step 2 — Split costs into covered vs uncovered

For each contract type/customer segment:

• Covered: indexed energy surcharge, fuel clause, CO₂ clause
• Uncovered: fixed service fees, labor, maintenance inflation, compliance costs, “ignored” indices

Step 3 — Set pass-through effectiveness $\alpha$α

Typical drivers lowering $\alpha$α:

• monthly/quarterly lag
• caps/floors
• index mismatch vs real cost
• negotiation friction / disputes
• delayed invoice implementation

Practical: start with α = 0.7–0.9 for “good” clauses, 0.4–0.7 for messy contracts.

Step 4 — Calculate required price move

Use the formula:$$\Delta P_{\text{req}} = \frac{\Delta C_{\text{covered}}}{\alpha} + \Delta C_{\text{uncovered}}$$ΔPreq​=αΔCcovered​​+ΔCuncovered​

Step 5 — Add lag impact (cash-flow reality)

If pass-through is implemented with delay $L$L (months), then the temporary margin gap is:$$\text{Gap €} \approx \Delta C_{\text{total}} \times \text{Units in lag period}$$Gap €≈ΔCtotal​×Units in lag period

This is what hits free cash-flow before surcharges catch up.

Step 6 — Convert to “surcharge” language

Operators often implement pass-through via surcharge rather than base price:$$\text{Surcharge}_{t} = w_e \cdot \Delta I_{e,t} + w_g \cdot \Delta I_{g,t} + w_{co2}\cdot \Delta I_{co2,t}$$Surcharget​=we​⋅ΔIe,t​+wg​⋅ΔIg,t​+wco2​⋅ΔIco2,t​

Where weights $w$w translate index changes into €/unit.

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D) Quick worked example (simple, realistic)

Assume bulk O₂ contract, per ton:

• Electricity cost increases by €6/ton (covered by clause)
• Distribution increases by €1/ton (uncovered)
• Pass-through effectiveness $\alpha = 0.8$α=0.8

Then:$$\Delta P_{\text{req}} = \frac{6}{0.8} + 1 = 7.5 + 1 = \mathbf{€8.5/ton}$$ΔPreq​=0.86​+1=7.5+1=€8.5/ton

Meaning: to keep margin, you need +€8.5/ton (via surcharge + price move).
If the clause applies with a 2-month lag and you ship 10,000 tons/month:
Temporary cost gap ≈ $(6+1)\times 20,000 = €140,000$(6+1)×20,000=€140,000.

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E) The Orchestrator angle (how to use it as a leadership instrument)

• Turn the above into a Pass-Through Discipline Dashboard:
  • % volume with energy clause
  • average lag (months)
  • α by segment
  • uncovered cost €/unit trend
  • expected cash-flow gap next 90 days
• Your goal isn’t “100% pass-through.”
  Your goal is “minimize amplification”: reduce lag, raise α, shrink uncovered basket.