14 July 2016
Week in Brief: Business and the City
TATA REVIEWS DATA: In an abrupt and unexpected reversal of intent, Tata Steel have announced that they now do not intend to sell the Port Talbot steelworks in South Wales, which they announced earlier this year. The sale of the Scunthorpe plant which makes rail and long products, announced at the same time, has already completed (to Greybull, a private equity group). Three other small plants are also on the market and it is understood that the sales of those will continue and are in advanced discussions. However, it is believed that the future of Port Talbot – and the cost of the British Steel pension scheme, a heavy burden on the Port Talbot plant – has continued to be discussed with various parties, including the government, and Business Secretary Sajid David recently met in Mumbai with Tata’s senior management. Tata said that after the referendum result that they were terminating the auction sale process and could see a potential role for the Port Talbot plant in strip steel, if the problems of the pension burden and energy costs could be dealt with. Now, discussions are underway with the German heavy industries group ThyssenKrupp, as to a joint venture to keep Port Talbot operating. The talks are said to be in the early stages, but are said to be not affected by Britain’s recent referendum vote to quit the European Union. Indeed, it is possible that with the UK likely to be outside the EC’s supervision of the steel industry, Tata may feel it potentially useful to have a major plant in the UK, especially with their ownership of Jaguar Land Rover in Britain. About 4,000 people are employed at Port Talbot, and the unions there gave a very cautious welcome to the announcement, pointing out that it gave rise to continuing uncertainty, and that the seven parties who were said to be interested in possible bids for the business had been stood down – though several had said that after the referendum that they were unlikely to remai involved in the process.
LACK OF ENERGY: The referendum result means that the Hinckley Point nuclear power station, which was to be built by French state controlled company EDF Energy, may not proceed; talks are said to be on-going but the prospects of the plant being built were poor even before the vote in June, with EDF’s well publicised financial difficulties and the growing opposition in France to the risks involved in the project. Another issue has been the falling price of electricity at the consumer socket. Although Hinckley Point has a guaranteed price per unit for its output for 35 years (now around double market prices) that has increased UK political pressures on the project, and changes in Downing Street may be the final kibosh. In another sign of the times, and of the pressures on EDF, the company has announced that it will not be upgrading two UK coal powered plants which it owns in Nottinghamshire – and will thus forego guaranteed winter subsidy contracts from the British government to keep the power stations operating. EDF said that the price of electricity is now too low to keep the plants viable.
HOT AND COLD: The National Grid, which operates Britain’s powerlines and keeps the network up and running said that this winter its projections show that power supply almost exactly equals forecast power usage. This means, for the benefit of the layman, that if there are unexpected peaks in demand – for example, because of unusually cold periods – the network will not be able to meet demand. National Grid is thus extending a scheme which it has with Britain’s electricity generators (such as EDF referred to above) to pay extra to keep some power plants ready to be fired up at short notice if required, increasing supply to 105.5% of forecast demand. It has run the scheme for the last two years but was hoping low input fuel prices would mean that the generators would not require such payments. But it turns out they do. Last year the stand-by stations were only fired up once.
SETBACK FOR DRIVERLESS MOTORING: As readers will know, trials of driverless cars, mainly confined at the moment to the USA, but coming to the UK soon when the Department of Transport are persuaded that it is safe to let them onto public roads, have suffered several setbacks. Unfortunately the programme suffered its first fatality in May when a Tesla Model S collided with a truck in Florida, killing the Tesla’s (non-driving) driver, Joshua Brown, one of Tesla’s leading advocates for automated cars. The National Highway Traffic Safety Administration report on the accident has now been released and it shows that the scanning technology on the car failed to recognise the truck, probably thinking it to be a billboard. Brown was not able to react in time to take control. Although a setback for the programme, experts have pointed out that given the large mileages which driverless cars have run on USA highways, the accident and casualty rate is below the average for driven vehicles, so proving the case for the technology. In the UK, the DoT is moving towards the creation of a legal and insurance regime which will allow driverless vehicles onto British roads in the next couple of years; the UK motor insurance industry, having had some doubts, now welcomes the advent of driverless vehicles; though liability for fault still remains an area of law needing clarity.
NO EXCHANGE OF STOCK YET: We discussed last week the effect of the Brexit vote on the merger of the London Stock Exchange and Deutsche Borse. At that time it looked as though it were proceeding, albeit with some muttering about the domicile of the main office (UK) and the nationality of most of the initial senior management (UK). However, there have now been two setbacks – firstly, the exchanges, which have complex ownership structures, have announced a fortnight’s extension to the time allowed to vote – confirming perhaps the rumours that the votes in favour were not coming in as anticipated; and, secondly, a strong warning from the Belgian and French finance ministers that the merger was creating a quasi- monopoly, given the amount of stock that will be traded in the combined business, assuming present patterns continue. They are especially concerned about the effect on smaller local exchanges, who are often key in raising equity for smaller businesses and more risky ventures.
SHANK’S HORSE?: Lloyds Banking Group, at the sign of the black horse, has announced it is stepping up attempts to cut £1bn of annual costs out of the branch network by the end of 2017. This is likely to mean the closure of around 40 extra branches – on top of the 200 already announced – with possibly an extra 1,800 jobs lost. The bank is anxious to get back into long-term profitability more quickly, so that the government can in turn dispose of its remaining stake (9%) in the bank’s shares, but also reflects the march of consumer use of technology – the branch network is dying of its own accord. If you want to do business at the bank counter, you may soon need a horse to ride around to find one.
KEY MARKET INDICES:
(as at 12th July 2016; comments refer to changes on the week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.55% (rising); 5 year 0.46% (rising).
Euro€: 1 mth -0.41% (steady); 3 mth -0.28% (steady); 5 year -0.32% (steady)
US$: 1 mth 0.50% (rising); 3 mth 0.60% (falling); 5 year 1.01% (rising)
Currency Exchanges:
£/Euro: 1.18, £ steady
£/$: 1.32, £ slightly rising
Euro/$: 1.11, € steady
Gold, oz: $1,370, rising
Aluminium, tonne: $1,652, steady
Copper, tonne: $4,745, falling
Oil, Brent Crude barrel: $44.40, falling
Wheat, tonne: £110, steady
London Stock Exchange: FTSE 100: 6,682 (rising). FTSE Allshare: 3,611 (rising)
Briefly: Steady as they go, seems to be pretty much the word for the markets now; after the excitements of the Brexit result, currencies and interest margins fell to sterling’s detriment, but now have stabilised, as have commodity markets. The LSE markets continue up though; are we near a new peak?
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