14 April 2016

Week In Brief: BUSINESS AND THE CITY

SCUNTHORPE REVISITED:  Whilst Mr Cameron continues to struggle with the fascinating subject (to some) of his wealth and how he acquired it, the heat has been off his Trade and Industry Minister, Sajid David, who has used the opportunity to quietly regroup.  He has confirmed that he did know in advance of Tata’s intention to announce the sale of its UK steel business, which knowledge enabled the government to marshal its thoughts as to how it might assist the disposal of Port Talbot and in particular to deal with the sale of the Scunthorpe business, which makes “long products” – specialist steel girders and rails.  He announced the sale of that unit to Greybull, an investment fund.  Greybull will pay £1 for the business and then procure investment of around £400m in the business.  “Procure” means that Greybull will invest £200m in the business and source a further £200m of debt; the government have indicated if they have difficulty with this latter, it could contribute up to £100m itself, either as loans or guarantees to bank lenders.  That should save about 4,500 jobs in that business.  Greybull believe that the long products business is profitable at the operating level and that the demand for its relatively specialist products is reviving (Network Rail should be expecting calls from the Government any minute about replacing worn out railway lines).  The business will be renamed “British Steel”, maybe a bit of a hostage to the memories of those of us who remember the troubles of that business last time it traded thus, but underlining a good local marketing point.

Now Mr David will be hoping for a similar result in South Wales.  His department says it has had significant numbers of enquiries as to taking the business on, and that the Government will be open to considering approaches which may involve part Government ownership. The EC Competition Commissioner may have a thing or two to say about that though.

FOUR INTO THREE MAY NOT GO:  Another trouble for the EC Competition Commissioner; the proposed merger of O2 and Three, two of the main mobile telecoms companies in the UK.   And also in Europe of course.  Three, long a “challenger” entrant to the UK market (i.e. a good thing as it keeps the other operators on their toes), is owned by C K Hutchison, the Hong Kong based conglomerate.  It has grown aggressively in Europe and now wants to take over O2 which has been hit by competition from Three.  The UK regulatory authorities want Britain to maintain at least four mobile operators to keep competition strong and effective.  If the deal is permitted to proceed, then, says Alex Chisholm, who heads the UK Competition and Markets Authority, it should only be if a sufficiently well-resourced new operator enters the market.   Given that, in the short term that is very unlikely in practice, it means his authority would veto the merger.  But they can’t; the decision lies with Margrethe Vestager, who is the EC’s head honcho on such matters.  She is thought to share Mr Chisholm’s views, but it is not that simple either.  Different European countries have different rules which establish different precedents, and indeed Ms Vestager’s predecessor approved three (not Three) operator regimes in Germany, Austria, and Ireland.  Italy is also heading that way.  If Hutchinson does not get the consent it wants it will almost certainly sue.  And to top it all, there is the UK referendum coming up.  With the decision been taken outside the UK, that is politically tricky enough; but one that goes against the recommendations of UK regulators…that is a real trunk call.

THE ONLY WAY IS UP:  So hopes the oil industry anyway.  Not so long ago the oil price was plumbing record lows, but recently it has had something of a recovery, faltering it is true, but certainly it seems to be in recovery.  Speculation has been that this is because of attempts by major producers to restrict supply (though there has been little sign of that).  Oil traders meeting in Switzerland this week had a more feasible explanation.  Demand is going up, they reported, two years of falling prices and then record lows have done as one might expect and caused users to switch back to oil.   So the price has gone up.  They expect this trend to strengthen in the second half of this year, as demand starts to overtake supply.   Don’t mothball those oil rigs yet.

THE ONLY WAY IS DOWN:  So fears the steel industry.  China has failed to grapple with its over production problems but its domestic demand for steel continues to fall.  And in the rest of the world demand continues to be weak (for example, car makers use less and less of the stuff to try to get vehicle weight down and achieve their green targets)  whilst steel producers are been saved, if only temporarily, by politicians concerned about employment in their rustbelts.  The result has to be that steel prices will drop for a while yet.

PET SOUNDS:  Troubles round at Pets at Home, the outer of town retailer which runs department stores for pets.  It appointed a new finance director, Graeme Jenkins, who was formerly in a similar job at Target Australia, a department store group owned by Wesfarmers (who are in the process of acquiring Homebase as it is ejected from the Argos Group on the Sainsbury takeover).  Mr Jenkins was packing to come to his new role when Wesfarmers announced that it is investigating some unusual accounting practices in Target which has overstated profits.  Whilst Mr Jenkins had worked out his notice, and is not, so far, specifically fingered in the enquiry, Wesfarmers robustly said “if he wasn’t aware, he should have been aware” and that what was done was “mind-blowingly stupid” (tell it like it is, cobbers).   So no move to the UK for Mr Jenkins, and a further search for a finance chief for Pets at Home; whilst also in Herefordshire:

TESCO PRUNES:  Tesco is setting about disposing of many of the acquisitions it made in the five years or so before Dave Lewis was appointed chief executive.  The idea was to build diversity on Tesco’s major trading sites, bringing more customers and increasing the time and money they spent on Tesco related shopping.  It has not worked, even ones that seemed an obvious fit, such as Dobbies, the garden centre chain, which is first on the block for disposal.   Dobbies has 35 garden centres; they are thought to be profitable at the operating level and likely to attract a good level of interest.  Also to go are the eating establishments Giraffe, and Harris And Hole, and likely to be closed down are the upmarket bakery business Euphorium and health food business Nutricentre.  Returning Tesco to its roots you might say.

KEY MARKET INDICES:  (as at 12th April 2016; comments refer to changes on the week; $ is US$)

Interest Rates:

UK£ Base rate: 0.5%, unchanged: 3 month 0.62% (steady); 5 year 0.87% (rising).

Euro€: 1 mth -0.30% (rising); 3 mth -0.22% (rising); 5 year -0.14% (rising)

US$: 1 mth 0.46% (steady); 3 mth 0.50% (falling); 5 year 1.15% (rising)

Currency and other Exchanges:

£/Euro: 1.25, £ steady

£/$: 1.42, £ steady

Euro/$: 1.14, € steady

Gold, oz: $1,244 falling

Aluminium, tonne: $1,493, falling

Copper, tonne: $4,642, falling

Oil, Brent Crude barrel: $41.55, sharp rise

Wheat, tonne: £105, steady

London Stock Exchange: FTSE 100: 6,200 (rising). FTSE Allshare: 3,402 (rising)

Briefly: Some return to action this week after three weeks of fairly low volumes and subdued movements. Top of the excitement list is oil, up about 16%, metals fell, the UK stock market rose. And Euro interest rates were up too, not much and still negative, even as far out as 5 years, but at least a little hope for depositors.

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