26 January 2017

Week In Brief: BUSINESS AND THE CITY

POOR CONNECTION:  BT’s share price dropped 16% in opening trading on Tuesday morning after the telecoms giant released updated guidance on trading in the current year.  BT had already indicated that it was expecting a slow year for profits, as the continuing competition in the telecoms sector and the political rumpus over Openreach, its broadband business, puts a brake on profit growth;  the telecoms regulator Ofcom wants to distance BT from Openreach.  Now BT has said that it expects 2017 performance to be flat at best, with no growth in 2018.  Part of this is due to problems in BT’s Italian unit which has been the subject of write downs and restructuring because of a long term accounting scandal.  The original cost of this was estimated at £145m, but latest investigations by independent accountant KPMG have suggested that the impact will be much greater and BT is proposing a writedown of £530m to cover the position.  Also a problem – though BT is not putting figures on it yet – seems to be a reduction in BT’s work in the public sector, where guidance is for a significant decline in both public sector and international business demand in the current quarter (to end March 2017).   But it is a reduction in the forward public sector order book that is driving the downbeat forecast for 2017 and 2018 (and impacting the share price).  It is not clear if this reduction in expected business is due to lower public spending per se, or to BT facing increasing competition in a public sector increasingly looking for private sector standards of service and back-up.

LENDER ADVICE:  Barclays refused to confirm that it is facing a write off of around £25m on its loan to the major law firm King  Wood Malleson, the UK arm of which (formerly SJ Berwin), went into administration last week.  Financial failures by law firms are unusual, but not unknown, but one on this scale is a pretty major event.  It is likely to affect the terms on which such professional firms can borrow in the future; they have previously been regarded as pretty much sure fire risks for their debt obligations by lending banks, but if this rumour is true bankers will be adjusting their lending policies – and their risk margins.

LET ‘EM ROT:  Last week we carried a story on the likely costs of clearing all the abandoned infrastructure standing in the North Sea which would swallow most of the likely profits from extracting remaining reserves.  Now two experts have come up with the solution – don’t.  Ed Davey, the former energy minister, and Jonathon Porritt, long standing green campaigner, wrote to The Times to suggest that there was no need to remove the platforms and well heads at all – they could just be left to fall onto the sea bed where they would do no harm and form artificial reefs which are attractive to fish and other sea creatures.  Indeed, they say, removing the giant structures may do more environmental harm than leaving them where they are, given the disruption to the sea bed, the costs and energy consumption involved, and the risks of future leaks from the sealed fields.  Instead of paying to removing the structures, say Porritt and Davey, the money saved could be contributed by the energy companies and invested into an environmental fund which could be used for marine or other conservation generally.  As the fund could eventually be in the region of £5bn, it could become a major force for conservation activity.  The oil and gas companies have so far said little on the idea, though they are known to be lobbying for a change in the law to enable them to leave at least part of the structures at sea.  However it is certainly proving controversial with environmentalists, some of whom are not keen on the idea at all, some of whom welcome the concept.  Presumably North Sea sailors may have something to say on the issue as well…

DRAG ‘EM OUT:  Able UK, a northern specialist dismantler is rather hoping that some of the North Sea structures will be dismantled though.  It has just created a new dockside facility at Hartlepool, County Durham, which will be used to dismantle the top section of the Delta rig from Shell’s Brent field, which is about to be removed in one piece and then towed in to Hartlepool for cutting up – a 24,000 tonne job, which Able UK hopes will be the first of many.  As there are said to be over 100 platforms weighing an estimated 652,000 tonnes of steel, the firm expects that it will get at least some work decommissioning them.

ANOTHER SALTY TALE:  North Sea drilling may be coming to an end but in Cornwall, long a centre of metal mining (copper, tin, and lead traditionally), a new era of drilling may be about to begin.  A new company called Cornish Lithium has obtained rights from several dormant mining companies which still owned mining rights in south Cornwall, and from Tregothnan Estates, owned by the Boscawen family who also grow tea on their land (making what must be a unique mix of production from the same land – tea and lithium) and will sink wells up to eight hundred metres deep to layers of hot brine which carry lithium.  The brine will be pumped to the surface and the lithium extracted.  It is a product whose value is rapidly growing because of its use in high power batteries for mobile phones and electric cars.   At the moment the technology for Cornwall is not yet proven and Cornish Lithium is seeking to raise £5m from bold investors to make detailed studies and trial drills.  It was the presence of hot brine that ironically caused the closure of some of the Cornish mines originally – it made deeper working impossible on safety and economic grounds.

POOR PETS:  We must have neglected our pets this Christmas.  Among a rather set of mixed Christmas trading results coming from a range of retailers, Pets at Home, the largely retail park based specialist retailer of pet food and essentials (and not so essentials) reported a weaker than expected performance  with a marginal uptick in total sales to £204m for the quarter ended January 5th.  Sales of merchandise were actually slightly down, but that was compensated for by a very good performance – turnover £26m was up 48% – in the company’s veterinary division and its grooming business (grooming pets, not owners).  Half of the group’s 440 outlets have grooming and veterinary services on site and the company intends to continue to add such services – including freestanding veterinary or other added valued businesses, and to grow by local acquisition.  It bought 6 formerly independent practices last year.  Analysts say that while the food and essentials business may be impacted by supermarkets wanting to sell to Fido and Fluffy, the special services end of the business shows continuing good growth prospects.

KEY MARKET INDICES:  (as at 24th January 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.36% (steady); 5 year 0.84% (rising).

Euro€: 1 mth -0.37% (steady); 3 mth -0.32% (steady); 5 year -0.0% (rising)

US$: 1 mth 0.77% (steady); 3 mth 1.04% (slight rise); 5 year 1.92% (rising)

Currency Exchanges:

£/Euro: 1.16 £ rising

£/$: 1.25, £ rising

Euro/$: 1.07, € rising

Gold, oz: $1,213, slight fall

Aluminium, tonne: $1,870, slight fall

Copper, tonne: $5,775, slight fall

Oil, Brent Crude barrel: $55.24, falling

Wheat, tonne: £147, slight fall

London Stock Exchange: FTSE 100: 7,280 (rise). FTSE Allshare: 3,941 (rise)

Briefly: The markets have had a long run of upward trending; this week that ended with slight movements down in all commodities we cover. That may be due to some profit taking; or some nervousness with recent political events, or simply responding to the upward movement in long term interest rates – which may be resuming its course of last autumn.

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