21 January 2016
Week in Brief:BUSINESS AND THE CITY
STEEL DECLINES: Further bad news in the steel industry as Tata Steel announced a further 25%% permanent cut in its UK steel making capacity, taking its forecast production down to 3.5 million tonnes. The cuts this time are at its two major South Wales plants where job losses of over 1,000 have been announced, 750 of those at Port Talbot works, formerly one of the largest and most modern steel plants in the UK. Tata UK senior management said that these cuts were inevitable given the ferocious competition from the Far East, especially from Chinese firms which also have major problems of over capacity but much lower cost bases. Tata called for the British government to help the remaining steel industry in the UK, including cuts in business rates , and, implicitly, restrictions on imports. Although falling oil prices have helped lower costs the overall effect of that is very limited as it also benefits the eastern competition – though China is still dependent to some extent on domestic coal for electrical power, which is probably now more costly than oil. The UK government, whilst expressing concern, has so far not announced any measures to help the industry, though urging producers with surplus plant to sell or mothball them rather than demolishing the plant. As if to emphasise the problem, on Wednesday, Sheffield Forge Masters, one of Britain’s oldest firms of high quality steel forgers, announced that it was to reduce its workforce by 100 in the next few weeks.
NEW SOURCE OF OIL: That’s all we need, you may well think – though if you have a thirsty car or private jet – or even oil fired boiler – cheaper oil is something to be welcomed. But not so if you are a shale oil producer or a Middle Eastern country with a large social programme to support. But now Iran is once again able to trade in the international market after the lifting of American sanctions and immediately ordered an increase in production – by 500,000 barrels a day. That is to back up the 25 supertankers carrying 50 million barrels on the high seas heading for oil importing nations. The effect was not unexpected – a further drop in the international market oil price, to US$28 a barrel. But to Iran, a low cost producer, no doubt the new source of cash flow, even at these prices, was very welcome; and the deleterious effect on the state revenues of its rival state Saudi Arabia equally welcome. It is not just Saudi that is suffering – the United Arab Emirates, the collection of small Gulf states that also depend on oil revenues are all now starting to cut state expenditure. But one small victory for the Saudi’s and OPEC – the American shale oil producers, whose production costs are said to be around $50 a barrel, are now starting to close their fields. This, OPEC says, was one of its objectives in this extraordinary price war. But the problem may well be that it will be very easy for high cost producers to restart production if OPEC next succeeds in forcing prices upwards – and in any case any attempt to force prices up may well be met by Iran pumping even more.
CONTINUING INTEREST: Not only may your central heating and driving costs stay down for a while, it looks as though the interest rates on your mortgage will too. Gertjan Vlieghe, the latest recruit to the Bank of England’s Monetary Policy Committee, which assists the Governor of the Bank in setting rates at its monthly meetings, said at the weekend that all indications are that interest rates will stay low “for years, even decades”. He gave a thoughtful speech – which must have been nodded at by the Bank before he gave it – analysing future demographics, social inequality, and continuing high levels of debt all suggesting that we have moved into a world where low rates will be the norm. Sure enough, a couple of days later Mark Carney, the Governor of the Bank, publically reversed his previous advice that the next step for rates was up, and said that decisions were deferred on this until probably the end of the year. The market certainly has no doubt about the direction of rates – five year sterling interest rates are at record lows.
NEW BASE: One of the most rapid corporate sales of recent times was confirmed yesterday as Home Retail Group announced the sale of its Homebase chain to Australian group Wesfarmers. Wesfarmers, which although unknown in the UK, is one of the largest retail operators in Australia. Wesfarmers has a similar operation there to Homebase, operating under the name “Bunnings”, a former family owned DIY business which it took over twenty years ago. Homebase will be moved into the Bunnings group and over the next five years will be rebranded as Bunnings in the UK. This is likely to change the emphasis of the retail offer also, with it moving to a more value based offering – more ladders and barbecues, less flowery ironing-board covers. Homebase has 265 stores in the UK, almost all on out of town retail parks and has about 5% of the estimated DIY market of £38 billion, which Wesfarmers thinks gives lots of room for growth.
It is good news for Home Retail Group shareholders who may also be getting early correspondence from J Sainsbury, which made an indicative offer for their whole business last November but, at the time, were firmly rebuffed by HRG management. Although Sainsbury offered for the whole group, they were known not to be keen on the Homebase part of the package. Their real target was the other business, Argos, the catalogue retailer, which is struggling in competition with internet based retailers, whilst maintaining its extensive chain of high street shops. Sainsbury’s big idea is to cut costs dramatically by closing the high street shops (many of which are on short leases) and relocate the shops and collection points into the Sainsbury supermarkets – lots of which are bigger than required for modern food retailing patterns. The merger thus could, if the price is right, be a perfect marriage; also giving Sainsbury some diversity from ferocious competition in food retail.
TALKING OF WHICH: Further to the confounding of the expectations of food retail analysts – following the surprisingly robust Christmas period trading of WM Morrison – Tesco added to the confusion by showing a similar pattern, with sales up on like for like space. Tesco said this was not a sign that their difficult trading corner had been turned, but certainly that they were rounding it. So who is seeing sales slip away – or did we all just buy more food over Christmas? Some rumours are now that one of the losers may be ASDA, part of the American Walmart Stores operation, who have been suffering from the effect of the German discount chains Aldi and Lidl in the UK, and are now thought to have taken a further battering over the festive season. We will just have to wait and see if the rumours are true…
KEY MARKET INDICES: (at 19th January 2016; comments refer to changes on one week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.57% (falling); 5 year 1.15% (falling).
Euro€: 1 mth -0.15% (steady); 3 mth-0.09% (steady); 5 year 0.09% (falling)
US$: 1 mth 0.57% (falling); 3 mth 0.71% (falling); 5 year 1.38% (falling)
Currency Exchanges:
£/Euro: 1.31, £ falling
£/$: 1.43, £ falling
Euro/$: 1.08, steady
Gold, oz: $1,088, slight fall
Aluminium, tonne: $1,491, slight rise
Copper, tonne: $4,435, slight rise
Oil, Brent Crude barrel: $27.35, further heavy fall
Wheat, tonne: £110, slight fall
London Stock Exchange: FTSE 100: 5,877 (steady). FTSE Allshare: 3,279 (rising)
Briefly: Oil dominates, of course, but the rest of the market is relatively steady, with metals generally looking as they may have found a new trading range. USA dollar interest rates have given up some of their recent gains – even the long term rate. The spread on 3 month rates is now at 30bps, exceptionally high. On the LSE the all share is trading better than the 100, reflecting the number of oil and metal businesses in the 100.
