10 December 2015
Week in Brief: BUSINESS AND THE CITY
OILED UP: OPEC met for its regular discussion last Friday, but the meeting was far from normal. Saudi Arabia and Iran, the two largest producers, who are already in a proxy war as they back different sides in the various conflicts around the Arabian Gulf, are also now in disagreement over oil production. As a result both countries are refusing to curtail their oil output, and indeed look as if they may turn the oil taps still further open. On the Saudi side, this seems to be driven at least in part by economic problems at home. Saudi Arabia has a huge and increasingly radicalised population who are used to generous handouts from their government; so as the oil price falls, and given that Saudi already has high borrowings, the only way to maintain revenue is to increase output. But many major oil producers are in the same cleft stick – including Russia, Iran itself, Nigeria, and Venezuela. So the oil supply increases and the price drops. Cash flow is not the only consideration here. The low cost Gulf producers would also like to knock out the their Western shale and offshore rivals who have much higher costs, but of course once capital has been invested actual pumping costs are low so, until renewals are needed, the latter can compete with the desert rigs.
The downward price trend is likely to accelerate. Iran has not been permitted to sell oil directly on the international market, but, with the thawing of relations with the West, she will be permitted to do so from next year. There is now so much oil on the market that many storage facilities are full, and even tankers are moored up at ports, full of the black stuff and hoping for a hard winter.
The oil price has now fallen to just over US$40 a barrel, the lowest level since 2009. Oil company shares have also fallen in line. Experts are saying that by next spring the price could be US$20 a barrel. The political ramifications of that could be very far reaching.
MINING THE CASH FLOW: It’s not just the oil price that is heading down – so are many commodity prices. We have touched on the travails of Glencore in the last few months, as it fights to save itself from being crushed between a falling copper price and high debt levels; a battle that is not going well. But that is not the only mined commodity to be in steady decline – iron ore is in trouble as world demand drops, aluminium is also declining, and even diamonds seem to have lost their sparkle. So great has been the decline that Anglo American, one of the world’s greatest mining conglomerates, has suspended its dividend and announced that it intends to cut production in most of its businesses next year, that it will make asset sales from which it hopes to raise US$4bn, and that it will cut capital expenditure. Its great rival, Rio Tinto, which has already cut expenditure on new investment in 2015, says that it will do the same in 2016and 2017 with a view to saving £1bn. Rio Tinto has a particular exposure to the iron ore mining business – but iron ore has now dropped below US$40 per tonne, the lowest since 2008. Glencore, long a focus of investor concerns, says its own programme of debt reductions and cutting expenditure is going well, but with prices of its main products continuing to weaken, it is currently involved in an uphill struggle.
TOWERING ON: At least the demand for steel, glass, and concrete should be holding up. Following the announcement by the City of London Planning Division that the City had given approval to the construction of the Stuart Lipton led redesign of the proposed Pinnacle building (a new nickname for its squarer profile is anxiously awaited. It will provide one million square feet of offices, enough room for 10,000 City workers), a further one million square foot proposal was announced. This is on the site currently occupied by what older City hands will think of as the Commercial Union building, rebuilt after its IRA bombing in the early 1990’s as the Aviva Building. It is a good efficient modern building but does not make best use of its prime site. It is only 32 stories high; so it will come down and in its place will go a 73 story building, for yet another 10,000 workers. The developer is the Singapore group Aroland Holdings. It does not yet have planning permission but the City Corporation has already said that it is supportive of the proposal. The building will be the same height as the Shard, across the River Thames at London Bridge. On present projections the construction will be finished in late 2019, along with at least another nine million square feet of space in the Square Mile that year. It will be a brave developer who builds speculatively.
SURPLUS ENERGY: We have referred several times to the very tight electricity power supply situation which the UK faces this winter, and potentially for many more as power demands grow and our generating capacity shrinks. The government is looking to overcome this by setting up an auction for European suppliers to sell electricity into the UK National Grid, via North Sea and English Channel underwater cables. This was tried last year but did not attract much interest because the auction prices were too low. The government is hoping for more success this time by giving a longer period to enable foreign generators to produce the extra supply. But as it is only utilised if the government decides it needs it – and at time when there are presumably severe weather conditions creating demand in nearby countries – it is thought it may again not attract much interest. The auctions are not popular with domestic producers either – they erode the returns necessary for the huge capital costs involved in building new plants. Most European producers do not have our heavy carbon taxes and thus have a strong price advantage.
DAMNED STATISTICS: Two conflicting sets of statistics hit the markets this week. First, the industrial production output figures from the Office for National Statistics showed a very strong and encouraging performance with output up 1.7% for the year to the end of October. Most economists had been predicted a mere half percent for the whole year. As growth seems to be continuing, the figure could well hit 2% by the year end. However the core manufacturing figure – after stripping out mining. quarrying, power generation, and water supply – was very slightly down for the year, reflecting the struggles of the steel industry. Also published were the retail sales figures for November which showed a very marginal increase over last year, whilst economists had been expected a strong performance as the retail economy continues to recover from the recession and lack of consumer confidence. The figures puzzled most commentators but explain the pre-Christmas discounts currently available in many shops.
TOYING WITH FIGURES: An example of a retailer with disappointing sales figures is Hornby – who make Hornby and Triang train sets and also the Airfix kits loved by all generations, but maybe not so much nowadays. In the six months to the end of September, sales were down £2m and losses were £4.5m. However there is light at the end of the model tunnel as the company reported sales were up 10% in September and that trend seems to be continuing. Also the company has managed to reduce its debt from £11m to £5.7m, and hopes to reduce it more by the sale of their famous Rovex factory in Kent. Their new marketing strategies, especially that focussed on Airfix, seems to be producing strong consumer interest and sales, so the signals for growth seem to be green.
MARKET INDICES: (at 8th December 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.57% (steady); 5 year 1.28% (falling).
Euro€: 1 mth -0.16% (rising); 3 mth-0.08% (steady); 5 year 0.14% (rising)
US$: 1 mth 0.83% (rising); 3 mth 0.60% (rising); 5 year 1.59% (rising)
Currency Exchanges:
£/Euro: 1.38, £ falling
£/$: 1.50, £ steady
Euro/$: 1.08, € rising
Gold, oz: $1,083, rising
Aluminium, tonne: £998 rising
Copper, tonne: £3,061, falling
Oil, Brent Crude barrel: $40.45, falling
Wheat, tonne: £113, steady
London Stock Exchange: FTSE 100: 6,224 (falling). FTSE Allshare: 3,483 (falling)
Briefly: Very little movement in the markets this week, most trading is in recent bands, the exception been dollar interest rates which are creeping up as the Fed suggests it sees a prolonged trend that way; and of course oil, which fell by over 10% responding to the disarray within OPEC (see above).
