31 March 2016
Week in Brief: Business and the City
GRIM NEWS FOR THE VALLEYS: 2015 was a terrible year for the British steel manufacturing industry. Battered by cheap Chinese and Indian imported steel, many UK plants making non-speciality steel gave up the struggle and closed down, with thousands of job losses. Now one of the few remaining major steel making businesses in the UK has been put up for sale by its owner, Tata Steel, part of the Indian domiciled Tata Group. Tata Steel’s main plant is at Port Talbot in South Wales, once one of the most modern and productive plants in the UK, and still one of the main employers in South Wales (Tata ia also a big steel user through its LandRover Jaguar business). The plant is said to be losing £1m a day and Tata cannot sustain the losses for much longer, but hopes it might be able to source a buyer who could save at least some of the activities (and jobs) on site.
Tata has given early notice that this is its intent in the hope of giving any potential buyers time to consider a purchase, but also to see if a political solution can be evolved. That seems unlikely to produce much of an answer to what is, after all, a worldwide structural issue of too much capacity in the industry, which has produced rapidly falling prices as global demand contracts. Recently, steel prices have slightly increased, reflecting some rise in demand and also gradual shrinkage of steel making round the world, but the industry insider view is that this is temporary and that the core problems continue to lie in China, which has the classic squeeze of shrinking demand and vast steel producing over capacity.
Tata have also a major specialist plant at Scunthorpe which looks as though will be sold to an investment fund, with government support for a loan for the purchase. However, Port Talbot is a much more difficult challenge; although the various unions involved have called for the government to intervene, it seems most likely that any intervention will be to target soft investment into the area and to cushion the blow of job losses, maybe together with transitional assistance to any buyers who might emerge for parts of the business, which might, early rumours suggest, include a worker/management buy-out if working capital sourcing can be procured.
AND A LITTLE GOOD NEWS: TVR, long the sports car of choice for many discerning petrol heads, has announced that it will resume production, after a “pause” of eleven years, at a new car plant to be built at Ebbw Vale, south Wales. It is hoped that it will be producing new cars by the end of 2017 and that sales will be over 2,000 a year within five years. Following the car manufacturer’s closure in 2005 it has taken a decade to sort out name and patent rights, but the business is now in the hands of Les Edgar, the digital games maker, and a group of wealthy car enthusiasts , who have also sorted out financing with a little help from the Welsh government. Nor are TVR to be the only south Wales built sports cars – the Welsh government has also helped Aston Martin to build a new manufacturing plant in Glamorgan.
BANK VIEWS: The Bank of England, or at least its Governor, Mark Carney, have been getting some stick after the Governor expressed some pro “Remain” views in relation to the European referendum. The Governor is never wrong of course, though some signals appeared in Threadneedle Street that he might have been misunderstood. Now the Bank has once again put its foot in the muddy puddle, but carefully this time, by indicating that it will increase liquidity availability for UK banks during the referendum period, and after, if needed. When it was put to the bank that it was again being political, it retorted that it was merely engaging in prudent management of the banking system, one of the tasks it is charged with. This week it further amplified its concerns about currency and banking stability during the next few months by indicating that it was raising the standard of stress tests for the banks for which it is regulator, to ensure that the banks themselves had taken measures to meet any credit crunch. This, the Bank said was because the referendum is “the most significant near-term domestic risk to financial stability.” Although the Bank said that it had no concerns about the stability of the UK banking system, it had to be recognised that a Brexit vote would create uncertainty in the market and a possible rise in sterling borrowing costs. The Bank also indicated that it expected the big four UK banks to pass the new stress tests without any changes to their current practices.
SOUR TASTE: AG Barr has made a fortune on the back of the well known Scottish love of something sweet. Most famous for that legendary drink, Irn-Bru, which was reputed to be made of iron girders dissolved in Glasgow water (but actually owing its sweet fizziness more to sugar), AG Barr has warned that the proposed sugar tax outlined in the recent budget will likely hit its business in the UK. Roger White, who is chief executive of the business said however that in recent years public demand has increasingly been for low sugar or no-sugar soft drinks and that Barr is increasingly diversifying its portfolio in that direction – even sales of the fabled Irn-Bru are now a third the sugar free variety. Irn-Bru makes up a about 40% of the company portfolio, other big sellers being Snapple and Rubicon. Barr has also increasingly targeted overseas sales which grew by 40% last year. White said that the role of the business was to respond to what the public wanted and that is what Barr would continue to do. He said that though volumes for 2015 were down slightly to £259m, profits were up to £41.3m, reflecting continuing attention to cost control.
LEGAL WINNERS: The Law Society, which represents solicitors in England, has been doing some research on the contribution lawyers make to the economy. The legal services market employs 370,000 people, it says, two thirds of them directly as lawyers, spread across about 10,000 firms, generating over £25bn annually to the UK economy, with significant and growing earnings from overseas. The growth rate of the sector is 3.3% per annum for the last ten years, which may be good news, depending which end of the litigation you happen to be on…
NEXT FOR NEXT: Continuing difficult trading, says Lord Wolfson, chairman. Although last year’s profits were a little up, to £821m, the fashion chain continues to see weak trading conditions and thinks next year’s profits will be the same as this year’s. However, Next has now sorted the stock control problems in its on-line business and sees good prospects for that.
KEY MARKET INDICES:
(as at 29th March 2016; comments refer to changes on the week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.65% (steady); 5 year 0.91% (steady).
Euro€: 1 mth -0.36% (falling); 3 mth -0.22% (falling); 5 year -0.11% (steady)
US$: 1 mth 0.46% (falling); 3 mth 0.73% (steady); 5 year 1.30% (rising)
Currency and other Exchanges:
£/Euro: 1.28, £ steady
£/$: 1.43, £ steady
Euro/$: 1.12, € steady
Gold, oz: $1,222 falling
Aluminium, tonne: $1,472, falling
Copper, tonne: $4,939, falling
Oil, Brent Crude barrel: $37.95, falling
Wheat, tonne: £105, rising
London Stock Exchange: FTSE 100: 6,106 (falling). FTSE Allshare: 3,358 (falling)
Briefly: Major public holidays often produce weakening markets and this Easter may be fitting that pattern, with most key indices easing off; or it may be a new pattern of nervousness emerging amongst traders. One big mover down was oil, where the view is that recent attempts by big producers to push the market up have now ceased with consequent weakening. Borrowing rates in Euro and US$ fell, with sterling steady.
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