19 January 2017
Week In Brief: BUSINESS AND THE CITY
PAID OFF: Good news from Rolls-Royce, whose business and share price has long been dogged by allegations of bribery in the procuring of contracts. Earlier this week Rolls announced that it had finally agreed a settlement with UK, Brazilian, and USA regulators to settle cases which mainly relate to behaviour in China and other Far Eastern markets, but also involve some of its business in Brazil. The terms of the settlements involve payment of fines and costs, likely to total nearly £700m, and impose future rules of conduct (and an admission of past wrongdoing), but in return free Rolls from any danger of prosecution. Most of the financial settlement goes to the UK Serious Fraud Office, the largest single penalty ever charged in the UK. Most of the misconduct involved agents through whom Rolls acted in obtaining business for its engine and energy businesses, and Rolls has said that it is cutting significantly the amount of business which it conducts through agencies and intermediaries. The company also had more good news for shareholders – early indications are that last year was a good one with costs under control and profits up. Also up were cash resources showing the business to be improving its cash generation. Much of this improvement is believed to relate to the second half of 2016, where the export led business benefitted greatly from the fall in the value of sterling after the June Referendum.
TROUBLE WITH COMBINATIONS: The complex and long heralded merger of the London Stock Exchange, based in the City, and Deutsche Borse, based in Frankfurt, continues to make very slow and uncertain progress. The latest troubles are making some observers wonder whether the merger will happen at all. Firstly, the European Commission has raised various objections on competition grounds, saying that combining the two largest stock and bond exchanges in Europe will have an adverse effect on competition in this area. Although the merger parties have offered to sell off businesses where this might be a particular problem, especially the European clearing house LCH SA, where the sales process is already underway, the EU is still concerned about the anti-competitive effects of the merger.
But since the New Year a serious row has broken out between the two combining parties. The Deutsche Borse had commissioned, unknown apparently to the LSE, a report from a distinguished German academic specialising in financial and business matters, Dirk Schiereck of Darmstadt University, which recommends that the headquarters of the combined business be located in Frankfurt, contrary to the terms of the original merger agreement. This report has been seen by the City of Frankfurt government and apparently has played a major role in procuring political support in the city, in the State of Hesse, and in Germany generally. If the functions described in the report are moved to Frankfurt the LSE reckons this could result in the eventual loss of over 80,000 jobs in the London area, and has said that it could not accept such a move, or that the combined exchanges be moved outside the City of London. Currently more than 75% of the prospective merged business goes though London. The report also expresses doubts as to whether the merger should happen before the terms of Brexit are concluded, so that the future shape of the business engagement between the UK and the EU will be clear.
CONTRARY THINKING: As the oil price settles into what appears to be a new trading range of US$52 to 57, increasing debate about what happens next, from a range of commentators and participants:
The Saudi View: Khalid al Falih, the Saudi Arabian oil minister and the most powerful man in OPEC, said in a speech in Abu Dhabi that the actions taken by OPEC to restrict supply of oil to world markets were working well and that the move had already succeeded in creating a new equilibrium in the market, which he expected to hold after the six month restriction ends in June this year. The standstill could be extended further, he said, but he felt that increasing demand for oil over the summer would ensure a continuing balance between supply and demand which would stabilise prices at current levels for the foreseeable future. He also commentated that at the current level there was no incentive for high cost producers – such as shale oil or deep offshore – to re-enter the market. He revealed that the Saudi output is now below 10m barrels a day – below the level agreed with OPEC in the restraint agreement. Presumably the Kingdom’s oil revenue is significantly up on what it was at this time last year. Industry commentators wonder though to what extent some of the Kingdom’s smaller competitors are in fact holding to the terms of the production restraints.
The Shale Field View: In spite of Mr al Falih’s views, shale oil producers, particularly in the USA, see the current trading price as an opportunity to increase production. Kenneth Hersh, who leads a major American producer, said that although production had been declining in the first half of last year, the improvement in the oil price had reversed that trend with production now up about 500,000 barrels a day, and that even many high cost fields are now economic. He also pointed out that the rapid growth in sustainable energy sources, and in particular the faster than expected growth in the sale of electric, or part electric cars was cutting demand for oil.
The Offshore Producer View: Cairn Energy, a specialist oil and gas producer, based in Edinburgh, has announced that it is opening a third oil exploration zone in Senegal, West Africa. It has already opened two successful fields offshore to Senegal which have six wells which are now in production, and it expects to see further growth in the area. Surprisingly to many, it is also opening two new fields in the North Sea, which, whilst not huge, should produce reasonable amounts over the next few years and are comfortably viable at current oil price levels. Modern technology is enabling the costs of offshore extraction and exploration to be cut, enabling speculative spending to be more carefully targeted and increasing viability.
BRICKS AND DISCOUNTS: The London housing market continues to see price cutting and falling numbers of new housing completions. The trend started at the top of the market where there was overproduction of very large and lavish houses and apartments, leading to wide spread, if discreet, price cutting, but the resistance to prices now seems to be all the way across the market with widespread, if anecdotal, evidence of developers being willing to accept offers on new homes well below the asking level – it is estimated that volume of sales could have halved over the last two years. Barratt Developments, Britain’s largest volume housebuilder, now have confirmed the trend in its comments on its performance in the second half of last year; homes completed in London dropped by 6% and Barratt has sold two developments to investors to get rid of stock that won’t shift. The company is not expecting any improvement in London this year, though it says that the rest of its business across the UK is doing well.
KEY MARKET INDICES: (as at 17th January 2017; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.36% (slight fall); 5 year 0.74% (falling).
Euro€: 1 mth -0.37% (steady); 3 mth -0.32% (steady); 5 year -0.06% (fall)
US$: 1 mth 0.77% (steady); 3 mth 1.02% (slight rise); 5 year 1.85% (falling)
Currency Exchanges:
£/Euro: 1.14 £ steady
£/$: 1.21, £ steady
Euro/$: 1.06, € steady
Gold, oz: $1,218, rising
Aluminium, tonne: $1,812, slight rise
Copper, tonne: $5,857, rising
Oil, Brent Crude barrel: $56.65, rising
Wheat, tonne: £148, rise
London Stock Exchange: FTSE 100: 7,280 (rise). FTSE Allshare: 3,941 (rise)
Briefly: A strong week on the markets with all commodities and the stock indices showing an upward trend; long term interest rates are edging down. A remarkable picture, considering the number of political uncertainties with economic connotations in the winds at the moment.
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