13 August 2015
Week in Brief:BUSINESS AND THE CITY
SLOWING DOWN THE PUMPS: Has Saudi Arabia’s nerve finally cracked? The oil price has been heading down for months, but the Saudis, unlike in previous price slumps, have kept their production up, with much speculation as to what their strategy was – the most popular theory being that they hoped to burn off their rival higher cost producers. Now, they have reported that production in July was down from the previous month. It was only 2% down, and as usual no explanation was given, but oil industry observers are now forecasting the Saudis may continue to slow their output. Recently the oil price has dropped below US$50 a barrel, and OPEC, the mainly Middle Eastern producers association, has released figures that show their production as running at 31.5m barrels a day, against demand some 2m barrels a day less. But OPEC, and several forecasters, believe that global demand is responding to lower prices and starting to grow, as economies recover, and in the context of ever growing summer power usage for cooling. If they are right, the oil price may soon start to recover – but, if they are wrong, it may drop significantly further.
EASY ON THE BANK: The Prudential Regulation Authority, which regulates and inspects banks on behalf of the Bank of England, has severely censured the Co-operative Bank for major flaws in its control and risk management activities. The bank came near to collapse in 2012/13 with major problems emerging in its lending businesses. Its chairman, Paul Flowers, a Methodist minister, was forced to resign after much publicity about his private life, and new directors were brought in from major commercial banks, and new capital from a raft of investors, to restart the business. Further, the PRA commented that the Co-op had initially attempted to conceal significant matters from regulators. The PRA said that they had considered fining Co-op £125m in relation to these matters, but in the end decided not to, so as not to hinder the bank’s recovery programme and to husband its capital resources. Whilst no doubt a thoughtful and supportive gesture towards getting the bank back on its feet, this approach must be raising eyebrows at many of the major UK banks who have in the past being hit with swingeing fines which have eroded their capital bases and reduced their ability to make loans.
EASY ON THE BANKERS: If, after reading the above story you are feeling sympathetic towards bankers, maybe don’t read this one. Top bankers pay is recovering from the troughs of recent years; top earner in 2014 was Jamie Dimon of JPMorgan who grossed US$27.6m last year, good news for him and the US taxman. James Gorman of Morgan Stanley was runner up, but UK bankers put up a disappointing performance with Stuart Gulliver at HSBC top of the UK list making US$15.6m, up 34%, doing rather better than his shareholders who saw the share price drop 8%, and his staff, many of whom were stuck with cost of living rises only. Ross McEwan at mainly UK Government owned Royal Bank of Scotland was on US$7.4m, which must be a further incentive to get his bank back fully into the private sector.
TROUBLE ON THE TUBE: Repeating yet again our regular headline, as the transport unions announce a further round of strikes, two of 24 hours each later in August this time. The strike action is in relation to Transport for London’s intentions to run parts of the tube round the clock from September, and the unions’ wish for special payments for this. There is no resolution in sight at the moment. The strikes may not be bothering commuters too much at the height of the holiday season, but if the matter is not settled by the return to work in early September, the stakes will get higher.
MILKING IT: Unfortunately for farmers, the supermarkets sell milk as a loss leader to get shoppers to go through their doors rather than those of local shops or small operators – once the shopper has gone in to buy a litre, they will often purchase much else as well. And even more unfortunately for the farmers, this is a battle of a few Goliaths fighting many uncoordinated regiments of Davids The supermarkets are so powerful and the farmers so weak that the farmers are helpless to prevent the buyers from passing on the low price they are charging on the supermarket shelf. Many farmers are losing significant money on every litre they produce and the UK milk industry is contracting fast – which is not helping them as milk can easily be tankered in from Europe where production costs are generally lower. Now, the farmers are getting more militant. ASDA found two cows in a northern supermarket branch last week, in the dairy section unsurprisingly, and Morrisons has been particularly attacked by farmers for their harshness towards their suppliers. Morrisons has now announced a new scheme to help dairy farmers which will be a premium brand selling at a higher price than their regular offer (which will be in the same chiller cabinet) so shoppers can help the farmers directly. Seems a bit unlikely to be a major success for the farmers, but at least one dairy farmer will be hoping it works – Sir Ken Morrison, former boss of Morrisons, who is a major North Yorkshire dairy farmer.
BUFFET BUFFETS: Berkshire Hathaway, the huge investment vehicle run by investment sages Warren Buffet, aged 84, and 91 year old Charlie Munger, and an inspiration to private investors everywhere, has made a US$ 37bn offer to buy Precision Castparts, based in Oregon, USA. This is a very typical Buffet purchase, a long established business, relatively straightforward, a leader in its core markets, and with a record of continuing investment in its operations. The deal is likely to go through. It is an all cash offer and still leaves Berkshire Hathaway with another US$30bn in cash.
UNDERPINNING NEW BUSINESS: The government has appointed Scottish entrepreneur Michelle Mone, one of the UK’s most successful and well known business women, to advise how to improve entrepreneurialism and business formation in the more deprived areas of the United Kingdom. Ms Mone was the founder of the major underwear and lingerie brand Ultimo, and after many years as a Labour Party supporter, switched her support to the Conservatives a couple of years ago. She began her own business in Glasgow and the government wants her to act as an inspiration to others like her, and to produce a programme of suggestions and concepts that will encourage young business minded types to get going on their own account.
KEY MARKET INDICES: (at 11 August 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.56% (steady); 5 year 1.57% (rising).
Europe€: 1 mth -0.6% (steady); 3 mth -0.2% (steady); 5 year 0.29% (steady)
US$: 1 mth 0.21% (steady); 3 mth 0.47% (significant rise); 5 year 1.68% (rising)
Currency Exchanges:
£/Euro: 1.41, £ steady
£/$: 1.56, £ steady
Euro/$: 1.1, € steady
Gold, oz: $1097, steadying in new band
Oil, Brent Crude barrel: $50.41, steady in new range.
Wheat, tonne: £120.15, steady
London Stock Exchange: FTSE 100: 6,664. FTSE 350: 3,697
Briefly: It is common in August for volumes to drop and prices in all sectors to be relatively steady. That seems to be happening in 2015; though US$ interest rates are slowly rising. Gold seems to have settled into its new price range, as has the oil price, and UK stock markets are quiet and steady.
