07 April 2016
Week In Brief: BUSINESS AND THE CITY
NOT A BLAST: The fall-out from Tata’s announcement that it will close its steel business in the UK if it cannot find a buyer continues to have major political and economic ramifications. These include China’s announcement of increased tariffs on the type of steel which Port Talbot produces, criticism of the EC rules in relation to creating counter tariffs or cutting energy costs to heavy users such as steel, and the intra party politicking as to who should be held responsible for not picking up this particular red hot potato early enough.
Meanwhile the Trade and Industry Minister responsible for the industry, Sajid Javid, has met workers at the plant in Port Talbot and has sought buyers for the Welsh business (the Scunthorpe works which makes long products such as rails being much more specialist and of interest to several buyers), working across political boundaries with the Welsh Government.
The main front runner for the Welsh part of the business is the commodity trader Sanjeev Gupta, owner of the Liberty House commodities group, who is looking at a plan to convert the furnaces to use scrap metal rather than fresh ore. Mr Gupta knows a thing or two about steel – he has already bought Tata’s UK rolling mills in Scotland and last year acquired part of the Caparo Group’s failing steel business. He thinks the downstream parts of the Tata business (rolling, forming, etc.) can be saved if the furnaces can produce at lower cost, by using scrap metal – much of which is currently exported. This would entail large conversion costs which would require government support and funding; probably including continuing payments to the workforce during conversion. Mr Gupta also wants the government to ensure that energy costs would be significantly reduced to enable the business to compete with eastern producers. This of course will bring numerous issues with EC rules on competition and government support to business; and brings the whole problem into the Brexit related political arena, the Leave side saying this is a further example of undue EC restrictions, the Remain side that we are in a stronger position as part of a large trade group.
RENT RISES: The NHS will be getting higher rent bills from its landlords soon. Nothing new there you may think, rents go up all the time. However, this rent hike may be a bit of a surprise – the landlord with his hand out is NHS Property Services – the government agency that owns around 10% of the NHS estate and acts as an agent on lettings from some third party landlords. The rise, which it is estimated will cost the NHS operational areas about £60m a year, is because the Treasury wants government departments and agencies to operate on a strictly commercial basis, reflecting the true costs of their activities. The rent rise effectively just moves income (or costs) from one pocket to another, but could have some impacts on financially stressed NHS Trusts, and also on some local doctor’s surgeries. NHS Property Services has promised that it will spend the money on modernising the estate it owns and enhancing efficiencies – though if that increases properties’ rental value the occupiers of the improved property may find larger rental demands follow on close behind.
LACK OF INTEREST: Lloyds published its results last week and they were not cheerful reading. Not Lloyds Banking Group, this time; Lloyds of London, the insurance market. Lloyds is unusual in that it combines the results of the 97 syndicates that operate from its iconic Richard Rogers building in the City of London. Success in the insurance business lies in correctly pricing risk, avoiding disasters, and maximising income on the pools of resources held to pay claims. Lloyds has seen profits fall now for four successive years, 2015 seeing profits of £2.1bn (against £3.2bn in 2013). Given that premium income is going up (mostly from writing more business – downward pressure on premiums is still intense) and the market has avoided most recent disasters, the reason for the weak performance is obvious. In a low interest rate environment it is much more difficult to keep returns up on investment pools – in fact investment income was 60% down, so the business did well to achieve the profits it did. Although the chairman of the market, John Nelson, expressed his view that a vote for Brexit would be bad for his business, he also pointed out that the big growth markets for Lloyds are the USA and especially China, where business is forecast to double in 2016 as the Chinese attitude to risk becomes more sophisticated.
SPEAKING FRANKLY: In an unusual admission for any business, let alone the car industry which is more macho than most, Tesla Motors, the Californian car maker whose new range of electric cars is exciting the motoring world, said that “hubris” was to blame for its failure to meet delivery targets. The flagship of the proposed fleet of electric cars is the Model X which both looks, and is, futuristic and for which there is said to be an eighteen month waiting list. But the cars have being coming off the production line much more slowly than anticipated, and the company said it could only blame itself. It said some aspects of the technology were too complex, needing too many specialist parts and leading to hold ups on the line when the parts could not be sourced. “Too much new technology” the statement said; lacking sufficient internal capacity to build parts itself. In the first quarter of 2016 the company built nearly 15,000 cars, double the output of last year, but a long way off the 500,000 vehicles Tesla says it will be building in 2020.
Nonetheless, Elon Musk, founder and chief executive, unveiled the next model – the Model 3 – this week, the intended mass market midi sized car in the fleet. This, the company said, reflected what the company had learned from its problems with the Model X and would be simpler to build with less technology in inessential functions and ease of manufacturing a key driver. The company also said orders for its other top of the range model, the S, were 45% up on the comparable period last year.
CAREFULLY BALANCED: The driverless car is already on the road and approaching fast – well, not too fast, we hope. But technology continues to surprise – coming next, the driverless motorbike. Yamaha, the motorcycle manufacturer head quartered in Japan, has invested US$20m into driverless and balancing technology which might lead eventually lead to driverless robotic motorbikes. In fact they have already road trialled a self-driven bike, ridden by a robot called Motobot. But if you were thinking this seems a bit pointless – who would want to ride with their arms round the waist of a robot – there actually is a very serious angle to it all, which lies in the development of assistance to balancing and road adhesion. This can help conventional riders ride more safely and with greater control over their steed – and also faster, both for fun and for those who race their bikes on the circuit. Perhaps soon we will have a robot on the pillion learning to lean the right way into tricky corners…
KEY MARKET INDICES: (as at 5th April 2016; comments refer to changes on the week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.63% (falling); 5 year 0.84% (falling).
Euro€: 1 mth -0.38% (falling); 3 mth -0.24% (falling); 5 year -0.12% (steady)
US$: 1 mth 0.46% (steady); 3 mth 0.73% (steady); 5 year 1.13% (falling)
Currency and other Exchanges:
£/Euro: 1.25, £ weakening
£/$: 1.42, £ steady
Euro/$: 1.13, € steady
Gold, oz: $1,218 falling
Aluminium, tonne: $1,522, rising
Copper, tonne: $4,815, falling
Oil, Brent Crude barrel: $35.95, falling
Wheat, tonne: £106, rising
London Stock Exchange: FTSE 100: 6,165 (rising). FTSE Allshare: 3,387 (rising)
Briefly: Very little excitement this week – oil down, stock market up, copper down, sterling interest rates down. But none by much. This weak pattern may well continue until after the referendum…
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