15 october 2015
Week in Brief: Business and the City
TAKE MORE ZINC: Or rather, less. Glencore, the struggling mining and commodity trading giant which has seen its share price slump over the past few months, has taken vigorous but brave action to begin to deal with its problems. Following on its announcement that it was selling two small copper mines and cutting copper output from the rest until prices recovered from their present 5 year low, it has also announced that it was cutting its production of zinc, one of its main product streams, by a third. The vigour of the action is undoubted – though to some extent forced on Glencore, as its main customers for zinc are Chines industrial users who are slowing production rapidly. So is the bravery – Glencore is the single largest zinc miner in the world, but in fact has only 12% of the market. Cutting output leaves it very open to its competitors to fill the gap. And zinc accounts for 14% of Glencore’s projected profits this year. But the immediate effect was certainly what the conglomerate was hoping for – the zinc price went up 10% and Glencore’s shares on the LSE and HongKong exchanges almost doubled in price, to 134p, though they drifted down later. The reason for this is the ratchet effect on highly leveraged Glencore’s performance from the rise in asset values. The move will cost 1,600 jobs around the world.
After concerns from analysts and brokers that the company was drifting without a strategy to tackle its leverage and falling prices in most of its main market, there has been positive comment on the recent actions of the chief executive Ivan Glassenberg. He has completed a rights issue to replace some debt with equity, suspended the company’s dividend to conserve cash, and is now working his way through a series of strategies in its core markets. He also commented that cutting output of metal mines made much sense in conserving the company’s resources for when the markets improve. Now he has to hope that the market will go along with his new course and that commodity prices – and the Glencore share price – will begin to rise.
TOUGH AT THE TOP: At least, it is for managers at Standard Chartered Bank. The bank currently has its headquarters in London (though it has trailed that that is under review) although its business focus is in the Far East and Africa. Like all banks, it is finding that making money in a time of increased regulation and declining margins is tough, especially in its speciality emerging markets, which led to the appointment of a new chief executive, Bill Winters, three months ago. Now Mr Winters is starting to spread a chill through the bank, announcing that he has completed his initial review of the bank’s business and structure, which he intends to streamline. The first casualties of this will be about one thousand of the bank’s senior managers who will be dismissed in the next few months, most of whom work in the London head office. Standard Chartered has 80,000 staff and is thought further redundancies will follow soon.
OLD TECH DELIVERY: The government has announced, and by the time you read this should have completed, the placement into the market via a panel of institutions of its remaining stake in Royal Mail. When the government privatised the business in late 2013, it kept back a stake of 30% of the shares, but it has since sold 15%, in June this year. That raised £500m. Now the remaining 14% (1% was placed in the share incentive plan) is being sold. The share price has been drifting down recently (470p last night) but is still well above the IPO price of 330p. The Chancellor, like any prudent householder with much debt, thinks he is better off selling the shares and repaying around £660m of borrowings. Less, of course, the no doubt modest fees of the panel of City houses who will have advised on and placed the stake.
The underlying business is not finding conditions that easy – although the parcel business continues to grow on the back of e-trading, letter volumes continue to fall.
NEW TECH COLLECTION: Dell, the IT company which most of us till think of as the PC and laptop manufacturer you could not avoid – remember all those leaflet inserts and advertisements? – is now repositioning itself quietly and quickly as a general IT company. Now it has announced the largest ever takeover in the technology sector, acquiring for around US$67bn the USA based publicly quoted data storage specialist EMC. EMC is the largest seller of data storage with many associated businesses, including specialist security, cloud storage capability, and related storage handling, a very fast growing sector. The new business will be the largest of its type in the world. It is a remarkable turnaround for Dell, which Michael Dell, its founder, took private with a private equity company, Silver Lake Partners, in a US$24bn deal two years ago as he struggled to reposition the then struggling PC specialist in the full glare and regulation of a public vehicle. The takeover also involves large amounts of debt, though nobody involved is saying how much. The transaction is a major success for Mr Dell, in diversifying the business as he intended. However computer manufacturing is still important to the business, accounting for half the profits of the company.
DOWN AGAIN: The latest inflation figures showed that Britain continues to walk a fine line between inflation and deflation, a very good position to be, so long as we stay on that tightrope. The September figures showed minus 0.1% growth year on year, with wage inflation at 2.9%. Whoopee, you might think, and so it is if you are in employment and your employer is doing well, but not so good if you are a pensioner or in receipt of benefits – there will be no increase at the next review unless Mr Osborne is feeling unusually generous, and he almost certainly isn’t. But overall, low or no inflation is good for the long term performance of the economy, so the outlook continues fair.
BANKING ON JOBS: Barclays Bank which saw the ejection of its chief executive Antony Jenkins earlier this year with the arrival of reforming and energetic chairman John McFarlane, has been looking for a new CEO, whilst Mr McFarlane combined both jobs. Now the rumour is that the job may go to Jes Staley, an American investment banker who was a long serving executive of JP Morgan, though he left there in 2013 to join the hedge fund Blue Mountain Capital. The move, if it is true and happens, wii cause some surprise in the City – Jenkins was promoted to the CEO job not least to get Barclays out of investment banking, in which it had it emerged as a major, and controversial, but not unsuccessful, player in the early 2000’s under the leadership of Bob Diamond. If Barclays intends to move back to investment banking in a big way that will be a major change of direction, though, given that many of its UK rivals are out of that business, possibly one full of opportunity.
PRIZE WINNER: Congratulations to Professor Angus Deaton, now of Princeton, USA, but Cambridge educated and Edinburgh born, who has won the 2015 Nobel Prize for Economics. His great work has been in the field of poverty, especially in the Third World, where he has developed sophisticated ways of measuring the effects both at the macro and micro levels of various ways of alleviation of poverty. He has called for help for the poor to be directed at long term trading and investment based solutions, and not on short term giving which he says usually do more harm than good and represents a continuing cultural imperialism.
KEY MARKET INDICES: (at 13th October 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.57% (slight rise); 5 year 1.30% (falling).
Euro€: 1 mth -0.13% (falling); 3 mth -0.5% (steady); 5 year 0.22% (falling)
US$: 1 mth 0.34% (falling); 3 mth 0.43% (steady); 5 year 1.39% (falling)
Currency Exchanges:
£/Euro: 1.35, £ falling
£/$: 1.54, £ steady
Euro/$: 1.14, € falling
Gold, oz: $1155, rising
Oil, Brent Crude barrel: $49.86, slight rise
Wheat, tonne: £116.50, rising
London Stock Exchange: FTSE 100: 6,326. FTSE 350: 3,515
Briefly: The London Stock Exchange has had a good run in the last week, up about 6%, though giving some of that up on Monday. This is partly perhaps sentiment about the UK and USA economic performance and also some good corporate results. Other than that, and some rising commodity prices, the markets continue steady. Although economists continue to talk about rising interest rates, the longer dated rates show that the market does not (yet) believe them.
