← Business Metric: Financial (all topics)
Spread (realisation less key input cost)
What it is
Where one raw material dominates cost and both the input and the output are priced by markets the producer does not control, the entire economics reduce to the gap between them. Revenue then says little about performance, because it moves with the input price
The spread appears under different names by industry - crack spread in refining, conversion charge in metals, ECU realisation in chlor-alkali, feed spread in poultry - but the mechanics are identical
Impact on industries
- Removes directional commodity risk over a full cycle, since the producer earns a conversion margin rather than betting on the input price
- No pricing power on either side - a widening spread is usually a market gift and a narrowing one cannot be negotiated away
- Inventory timing creates gains and losses that swing reported profit without any change in operating performance, because material is bought before it is sold
- Backward integration is the standard defence, and volume must be read with spread - tonnage growth at a compressed spread destroys value