1 October 2015
Week in Brief:BUSINESS AND THE CITY
MINING THE DEPTHS: Glencore, once many investor’s favourite mining and commodity share stock, but recently much bruised by volatile commodity markets and an even more wobbly share price, suffered a 30% fall in its market value on Monday after weekend commentary by analysts about grim prospects for the business. On Tuesday there was a partial recovery as some investors agreed with CitiBank (Glencore’s principal investment bank advisor) that the share price plummet was overdone. However, the market remains very nervous and large volumes of stock continue to change hands.
The Glencore business has very wide ranging interests, ranging from agricultural commodities to copper and coal. It listed at 530p on the London Stock Exchange in 2011, the LSE’s biggest ever introduction, and is also quoted on the HongKong exchange, but the share price has really only gone one way since then – the share price now is a sixth of the floatation price, at 75p. The problem is the worldwide slump in most commodity prices, coupled with a large level of debt taken on by Glencore whilst building up its business, in particular the acquisition of its rival Xstrata in 2012.
That problem is being dealt with – debt should be down by over 30% by the end of this year – partially by virtue of a rights issue of US$2.5bn only a couple of weeks ago. But that still will leave external debt of US$20bn in 2016. The company has large holdings of metals, especially copper, and has indicated that it could sell some of that to reduce debt – but this has merely caused further volatility in metal prices, and made investors more nervous that the asset base of the company could go into a downward spiral.
ELECTRIC ALTERNATIVE: Whilst chaos continues in the Volkswagen boardroom, and no doubt extreme nervousness in the boardrooms of other manufacturers of diesel engine vehicles, one car maker is riding high and fast. This is Tesla, the California based specialist maker of electric powered high performance cars founded and controlled by Elon Musk. The Model S is already in production, and for some time the company has been taking orders for the larger and swifter (estimated at top speed of 155 mph) Model X, but delivery is running late. The Model X prototype was first shown in 2012 and initial orders taken for delivery at the end of 2013. Now Tesla has finally put the first production vehicles on display – but their customers still have a wait before they can drive speedily and cleanly away in them, now forecast as in February 2016. This is so that the cars can complete their product and safety tests and Tesla can make sure it has the servicing and spares capability it needs. They should be pretty impressive vehicles – not only fast but with a range much longer than most electric cars, 240 miles Tesla says, though presumably not if driven at 155mpgh for too long. But they will cost a bit more than the top of the range VW Golf – USS80,000 for a Model X, with a long waiting list.
LEAKY PLUMBING: Another drop in its share price for Wolseley, the UK’s leading manufacturer of plumbing and central heating products which, after many years of continuous profit growth, has faltered through (and after) the recession. The company saw market value drop by over 10% to 3,731p per share after announcing that it was revising its sales forecast downwards for the second half of 2015, mainly because of continuing intense competition in the USA market. It also reported UK markets as flat and competitive (further evidence that the Brits seem to have lost interest in home improvements) but reasonable in its third main market, Scandinavia. The news is not totally bad – Wolseley is still forecasting growth of 4% – but it is a reduction from the 6% it was hoping for in June this year.
SCRAP VALUE: The sad story of the Redcar Steel works reached what was perhaps its inevitable conclusion as its Thai owners, Sahaviriya Steel Industries (“SSI”) who had already ceased production on site earlier this month, announced they would close the plant fully, and issued redundancy notices to 1,700 of its staff. SSI has been bearing heavy losses from operating the plant and said that its review of the business and of the future for steel – where prices continue to fall, mainly due to surplus capacity and Chinese companies “dumping” steel wherever it can find buyers – saw no immediate prospect of improvement. The only slight ray of hope is that SSI have said that they will keep operating the coking ovens on site, which also serve other makers, and its power station, which can feed into the National Grid, and mothball the plant, promising at the moment not to do anything which might hinder a future reopening.
FROZEN OUT: Further evidence of how difficult the oil market is at the moment is confirmed by Shell’s announcement that it is to abandon its attempts to establish a viable drilling capability in the Artic. This has been one of the most expensive speculative explorations ever undertaken in the oil world, costing Shell, experts believe, over US$8bn. Shell committed to the programme ten years ago, building two rigs and almost 30 specialist vessels designed for work in the cold and wild marine environment north of Alaska. It is not that the oil is not there – there are believed to be very large reserves – but the technological barriers to getting the black stuff up and onto shore, coupled with the hostile USA regulatory regime for sea based drilling, and the current oil price, mean that it is not likely to be viable for many years to come. That reflects the great surge in oil reserves in easier to extract locations over the last ten years which has brought the oil price right down. The other factor is that the USA has become effectively self-sufficient in oil because of her huge shale oil discoveries so the political will to support drilling around Alaska has gone. Indeed, it seems quite likely that President Obama will not grant further exploratory drilling licenses in the area – pleasing the environmental lobby, but also creating a long term strategic oil reserve for the US.
DON’T GO PRIVATE: Bain, the management consultants have been looking at the number and nature of private sector contracts awarded by the National Health Service, as part of an investigation for the Financial Times. Outsourcing is becoming an increasingly contentious issue among NHS Trusts, who have been under government pressure to get as much work out to the private sector as they can, and also to help their stretched cash flows. But outsourcing on a larger scale has not gone well. Towel supply and catering is one thing, but private sector ambitions have become much greater, with complete hospitals handed over for external management. The most visible failure has perhaps been Circle Healthcare’s takeover of Hinchingbrooke Hospital in Cambridgeshire which Circle gave up after only three years with severe cost and quality issues, and much local anger as to the problems there. Other problems have arisen in running local GP services and local community care, and, reports Bain, many other contracts are struggling to perform and make profits. One of the biggest providers, Serco, have said they will pull out altogether as contracts run off. Bain says that the problem is “too much, too fast” and that there is no reason that the private sector model cannot be made to work – pointing to the success of it in the USA – but that both sides need to take things with thought and care to more thoroughly specify, design, contract, and price services.
KEY MARKET INDICES: (at 29th Sept 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.60% (steady); 5 year 1.30% (falling).
Euro€: 1 mth -0.14% (falling); 3 mth -0.6% (steady); 5 year 0.23% (falling)
US$: 1 mth 0.34% (falling); 3 mth 0.43% (steady); 5 year 1.40% (falling)
Currency Exchanges:
£/Euro: 1.35, £ falling
£/$: 1.52, £ falling
Euro/$: 1.12, € rising
Gold, oz: $1131, steady
Aluminium, tonne: £1,013 falling
Copper, tonne: £3271, falling
Oil, Brent Crude barrel: $47.31, slight fall
Wheat, tonne: £115, rising
London Stock Exchange: FTSE 100: 5,946. FTSE 350: 3,327
Briefly: The markets continue steady and there is very little movement in most key market prices, which can be best characterised as slowly drifting down, especially in staple materials. One of the exceptions is wheat, normally a very steady market, but at this time of year still reacting to harvest reports and also quality analysis.
