02 February 2017

Week In Brief: BUSINESS AND THE CITY

COPPER BOTTOMED:  Copper is one of those fascinating metals which whilst beautiful in colour and easily wrought for jewellery is principally used industrially, and on an increasingly large scale.  Indeed, it is a metal without which we would struggle to make the modern world work, a key electrical connector with many high tech applications, quite apart from its more traditional uses in water pipes and on elegant roofs.  Much, though far from all, of the world’s copper comes from South America and its fluctuating price on world markets has had serious effects on the economies of producers, especially Chile which is by far the largest producer of copper (third is Peru; second is China; though Chile is almost twice their combined output).

In 2009, with the global recession badly affecting industrial use, and the producers’ initial reaction being to increase production in an effort to keep income up, the price slumped to US$3,000 per tonne; the consequential shutdowns of mines meant that three years later the price was touching $10,000.  Since then there has been a steady retreat and then stabilisation in a trading range around $5,000/5,500.  Then last week a sudden rally forced the price up to close to $6,000; many experts expect this barrier to be breached soon with continuing pressures for upward movement. The immediate reason for this is the increasing likelihood of a mine workers strike in the world’s largest mine, Escondida in Chile, which last year produced 450,000 tonnes from the labour of 10,000 workers.  Copper miners are traditionally the top paid elite of Chile’s manual workers, reflecting the profitability of the mining industry and its importance to the Chilean economy.  The current three year wage agreement expires this week, but no new agreement has been reached and the miner’s union say that what they have been offered is a reduction in real earnings – at a time when the price of what they produce has risen.  Now the union has called for a strike which would close the mine, majority owned by the Australian domiciled BHP Billiton, most of the rest of the shares being owned by Rio Tinto, the FTSE 100 quoted mining conglomerate.  The miners are not on a wholly favourable wicket; the quality of the production is slowly declining as the mine approaches the end of its reserves, and they are paid significantly more than most Chilean workers.

There are other factors affecting the copper price which may mean that the mine management is prepared to slug it out with its workforce.  Both shareholder companies have reserves elsewhere in the world, some of higher quality, from mines which have been mothballed or run down and where production could be easily stepped up.  Part of the reason for the present hike in the price is uncertainty over President Trump’s intentions over the dollar, affecting forward traded copper imports; and also growth in demand from the technology industry.  In response, mining production is rising fast and any uncertainty on the demand side might cause weakness in the price at the mine gate.  So although the movement is up now – it could be downwards soon, along with the expectations of Escondida’s workers.

STEEL STRONG:  Amidst some cynicism from seasoned operators in the steel industry, investment fund Greybull bought a good part of Tata’s special steel business, principally based in Scunthorpe, Lincolnshire, naming it “British Steel” and focussing on producing what are known as long products – beams, girders, and in particular rails for supply to the railway industry.  Now Greybull has proved that it knew what it was doing, reporting that business is well up, including a significant increase in its export business – the Italian railway business has become a major customer, and the company is now supplying rails to Algerian railways.  On the home front there is a preliminary order for the Hinckley Point nuclear power station.  Greybull has invested getting on for £400m in the main plant at Scunthorpe and has taken on an extra 350 employees to add to the 4,000 or so it had when it took the business over – they all took a pay cut then but British Steel says it hopes to reverse that shortly.   It says that annual turnover is heading toward £1.2bn, an increase of 20% on the year, which momentum it intends to keep up, with margins moving towards 10%.  It is a remarkable result, and whilst the weakness of sterling has helped in export markets, the company says the true reason for its success has been its focus on what the customer wants – a custom-made rather than standard product approach – and also looking at every element of its cost base to cut out all unnecessary expenditure and focus on what really adds to productivity.

UNAPPETISING FARE:  We reported on struggling dining company the Restaurant Group last year, when it had jettisoned its chief executive and finance director as profits slumped and costs rose.  The group, which owns nearly 500 themed restaurants in the UK, the best known being American Italian style Frankie and Benny’s, says that its previous move to go upmarket met with price resistance from customers, and although it has now revamped its offering to try to pull them back – with some success, turnover was up 3.5% last year to £710m – that is not showing in the bottom line where it is loss making. More concerning, when the results are adjusted for the 24 new restaurants opened in the year, like for like turnover is actually down, and that trend seemed to be accelerating in the last quarter.  Meanwhile the cost of closing 35 outlets were also a direct hit on margins.  The company still believes things will get better in 2017 – but the market was not convinced; the shares fell 13% on the performance and outlook statement.

STEADY ON THE BUTTER:  Greencore, a company not to be confused with Glencore, also in the news, is not a miner.  It is Britain’s largest sandwich maker and it has been on the expansion trail recently.   Not making three deck sandwiches, but acquiring UK rival The Sandwich Factory and also pushing into the US market.  Revenues were, it said, up to £417m for the last quarter of 2016, a 17% increase – but up over 30% in the USA, mainly through new acquisitions there.  It did warn however that it sees cost pressures in 2017, from wage inflation and exchange rate related costs.

FOOD WARS – NEW TACTICS:  It looks as though there could soon be corporate struggles between Britain’s big food retailers as opposed to just price wars.  Tesco has announced a bid for Booker Group, the major wholesaler which also controls Budgen and Londis, and there are now rumours that Sainsbury and Morrisons could be looking at combining.  Whether any of this could happen remains to be seen – the competition authorities are likely to get severe indigestion at the thought of such dominant groupings in food retailing.

KEY MARKET INDICES:  (as at 31st 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 0.92% (rising).

Euro€: 1 mth -0.37% (steady); 3 mth -0.32% (steady); 5 year -0.09% (rising)

US$: 1 mth 0.77% (steady); 3 mth 1.04% (steady); 5 year 1.98% (rising)

Currency Exchanges:

£/Euro: 1.17 £ rising

£/$: 1.25, £ steady

Euro/$: 1.07, € steady

Gold, oz: $1,199, slight fall

Aluminium, tonne: $1,806, slight fall

Copper, tonne: $5,856, rising

Oil, Brent Crude barrel: $55.08, slight fall

Wheat, tonne: £147, steady

London Stock Exchange: FTSE 100: 7,099 (falling). FTSE Allshare: 3,858 (fall)

Briefly: One of the remarkable features of current interest rates is not the slow creep up of long rates, but that the short rates have been pretty much steady for weeks. That will not last if long term rates continue up. Everything else (apart from copper, see our feature above) eased down a bit after some good gains earlier in the month, with some concerns over US politics and, probably, profit taking.

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