1 December 2016
Week in Brief:BUSINESS AND THE CITY
SMELL OF SUCCESS: It may be essential for the smooth running of our lives, but Pennon plc is one of those companies that is far from being a household name – even if what it does is household friendly. Pennon is a FTSE top 250 company which owns South West Water and Bournemouth Water, and also Viridor, a waste management business which is concentrating on turning waste into energy. Landfill tax and increasing energy costs have made converting waste to power a viable business, and Viridor has built eight conversion plants since 2011, with three more under construction. Now it has announced plans for a twelfth, the biggest yet, which will be built at Avonmouth, near Bristol, convenient for road, rail, and indeed sea access. The plant will produce 33 megawatts of power and will cost £250m to build. It and should be coming onstream in about 30 months. Pennon says that it expects Viridor will build yet more of these plants as local authorities struggle to find efficient – and cheap – ways to dispose of rubbish; Viridor is actively marketing its solution to those with a rubbish problem and will build on the back of further contracts.
Pennon is benefitting from this side of its business which shows continuing profitable growth, along with costs savings in its core but heavily regulated water business – where it is also expanding in a new joint venture deal with South Staffordshire Water. Operating profits in the first half of this financial year (to end September) were up 20% to £128m, though, after writing off a charge for financial derivatives and scrapping an IT system with associated writedown costs, they are expected to be slightly down at the statutory level.
GOOD NEWS FROM THE NORTH: Northern Ireland, that is:
First, Lamprell, a former FTSE 250 company and specialist builder of oil rigs mainly in Dubai has been suffering from the downturn in the oil price. The demand for rigs has suffered all over the world, and the slump has also affected maintenance and improvement works. But Lamprell has now found a new source of business – also in energy production – building wind turbines for offshore wind farms. That specialist knowledge of the complex business of constructing large works at sea has enabled it to win a £180m contract with Scottish Power who are building a new farm in the North Sea off East Anglia. The basic steelwork will be built in the company steel yards in Dubai, but much of the construction and assembly work will be done in a joint venture with Harland and Wolff who are a major employer in Belfast, where the work will be carried out before the structures are transported to the North Sea. Lamprell hopes that this order will be the first of many, showing what the joint application of specialist knowledge will be able to achieve.
Secondly Ulster Bank is bringing some good news (at last) to its parent, Royal Bank of Scotland, the partially state owned and troubled banking group which is still struggling to recover from its collapse in the 2008 crisis. Ulster Bank operates in both the Irish Republic and in the Province, and it has recovered more rapidly than its parent as the economy of the Republic has emerged strongly from the financial difficulties that beset it with the collapse of most of its banks. It is that southern element of Ulster Bank that has built up distributable reserves and has now got the regulator’s permission both in Dublin and in Europe to make a distribution of €1.5bn to RBS by way of a dividend. That of course does not alter the capital base of RBS, but it does mean that the money can be treated as free cash and reallocated elsewhere in the RBS group to help liquidity. Ulster Bank says that it is in very good heart, with its business showing good profits and strong reserves both north and south of the border – an example to its shareholder indeed.
PROBLEM NOT FIXED: After weeks of rumour, OPEC has confirmed that discussions have been going on between its 14 member states to try to agree production cuts to their oil output. OPEC represents a number of the world’s major oil producing nations, mainly in the Middle East, but also including Venezuela and Nigeria, and for many years had effective control over global oil production, and thus the price. But the economic problems of many members have forced their taps open wider and wider, and the rise of many other producers not in OPEC, such as Russia, has meant that the cartel has gradually lost its standing, culminating in its inability to resist the dramatic fall in the oil price over the last three years. Many members cannot withstand the economic pressures of even a short-term cut in production unless helped out by the richer nations, such as Saudi Arabia. But Saudi is unwilling to do this, and Iran, who said it would support a restriction, has now said it won’t. And Russia, which is rumoured to be in informal conversations to work with OPEC, probably could not afford even the short-term cash flow problem. The oil ministers meet in Vienna today (Wednesday). The market is nervous, yesterday discounting a deal with the price falling 4%; this morning there might be one, pushing the price up to a touch under the magic $50 as we went to press . If you are the nervous type who feels the cold, maybe better order your heating oil now.
WIRES NOT UNCROSSED: The Openreach saga continues. Openreach is the broadband installation and operating arm of BT. It has long been criticised for its slow role out of fibre and internet connections – which then have to be made available to other providers. BT, its competitors say, has a vested interest in doing things slowly to keep costs down and maintain a marketing advantage in connecting customers up – both to its existing landline based service and to the new fibre box points as they are installed. The Regulator had so far refrained from doing what other operators in the market want, which is to completely ring-fence Openreach from BT’s control, and has given BT several warnings but also extra time, most lately in July this year, to show how it is tackling the problems of poor service and slow roll out of the new technology. But Sharon White, the Regulator, has had enough. She has now told BT that Openreach must be split off and she will seek legislative support, in Westminster and Brussels, to achieve this is as soon as possible.
KEY MARKET INDICES:
(as at 29th November 2016; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.40% (steady); 5 year 0.84% (steady).
Euro€: 1 mth -0.37% (steady); 3 mth -0.31% (steady); 5 year -0.06% (falling)
US$: 1 mth 0.61% (rising); 3 mth 0.94% (rising); 5 year 1.76% (rising)
Currency Exchanges:
£/Euro: 1.17, £ steady
£/$: 1.24, £ slight fall
Euro/$: 1.06, € steady
Gold, oz: $1,185, falling
Aluminium, tonne: $1,721, slight fall
Copper, tonne: $5,777, rising
Oil, Brent Crude barrel: $49.85, rising
Wheat, tonne: £135, fall
London Stock Exchange: FTSE 100: 6,835 (slight fall). FTSE Allshare: 3,716 (slight fall)
Briefly: That autumn steadiness is slowly eroding – oil price all over the place – see our article above – and copper marching on up – China agree a deal with the main producer in Peru to take most of their output. Short term interest rates remain remarkable steady but long term rates are more volatile, the 5 year dollar rate moving up a little more.
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