18 May 2017

Week In Brief: BUSINESS AND THE CITY

PENSIONED OFF:  How can you run a profitable business and still go bust?  Having an underfunded pension scheme is always a reliable way, as several British businesses have recently found out when trying to reorganise themselves.  Latest is Tata Steel, the UK arm of the Indian domiciled conglomerate which brought Corus (the company formerly known as British Steel) as long ago as 2006.  British Steel was in its day a major employer, its skilled workers well paid, a profile which lingers in its pension scheme which, with 130,000 members, is one of the largest in the UK.  Corus slowly shrank as it became less and less competitive against the lower cost base of many overseas producers, and closures and sales of parts of the business have recently accelerated.  So, a shrinking business has had to bear the increasing costs of the pension fund, an increasing headache for all concerned – the pensioners, the trustees of the pension scheme, the directors of Tata, and the Pensions Regulator.  This finally came to a head with Tata’s proposal to merge its UK operations with those of the German steelmaker Thyssenkrupp, also rolling in its European operations.  The new group refused to take on Corus unless the pension issue was sorted out on the grounds it was an uncapped and unsupportable liability.  Detailed discussions have been going on for some time and it looks as if an agreement has now been reached – one in which everybody will bear a share of the pain.  Tata will inject £550m into the scheme which will then be separated from the business into a freestanding scheme. Pension benefits will be reduced but still be not unreasonable – though those who don’t want to move can stay in the existing scheme and hope it will continue, with some compensation from the Pension Protection Fund for the risk of staying put.  Tata hopes and expects that most potential beneficiaries will move – the alternative it says, if they don’t, is that Tata Steel may go bust.  There is an extra benefit – at least it would appear to be a benefit – for those who move to the new scheme.  They will get ownership of 33% of the UK business, the main operation of which is the Port Talbot steel works, one of the biggest and most modern in the UK. The whole complex transaction needs to be signed off by the Pensions Regulator, but they are likely to agree – it solves a major headache and sets a model that might be used by other UK businesses with similar issues.

NATIONAL HOMES SERVICE?:  Sadiq Khan, the Mayor of London, is the latest in a long line of property developers to ponder on the property assets of the National Health Service.  Sadiq is not a commercial developer of course, but he does need to fulfil election promises – and government pressure – to create many more homes in London.  The NHS is believed to be sitting on some 420 acres of spare land – though that includes hospital grounds and car parks – which could provide upwards of 10,000 2 bedroomed homes. That makes the land worth getting on for £2bn, though the need to build some car parks and reorganise facilities and access might reduce that to around £1bn after costs.  But it is not the Mayor’s land.  It is mostly in the ownership of the various hospital trusts and they will, if they sell their spare assets, want full value to assist their stretched finances.  That means they might not want to sell to the mayor to build cheap housing but to private developers to build some swish luxury homes, though that market is admittedly weakening fast.  What the Mayor wants is cheap housing to ease the pressures on the young and poor who cannot afford to live in the capital anymore, a problem which is affecting essential services and forcing the young and aspirational out to regional cities.  The Mayor and the Greater London Authority have proposed some sort of joint ownership or administration of NHS land in the GLA area which would start to release land, subject to agreement as to how to deal with the proceeds.  This will follow on from the disposal of the GLA’s own surplus land and that of the Metropolitan Police, both now mostly dealt with, and that of TfL, a programme which is well underway.

BRENT, CROSS:  There is increasing discussion in the oil trading market as to whether Brent Crude – the benchmark for London pricing – is appropriate any more.  The problem is that oil is like fine wine, or more appropriately for oilmen perhaps, whisky.  It is not all the same and it is used for different purposes; Brent Crude, from the North Sea is sweet and light with low sulphur and suitable to be refined into petrol; West Texas Intermediate is lighter and better still, and easy to produce – all those nodding donkeys on the Texas plains; oil from the Arabian Gulf bordering countries (Dubai or Oman Crude) is more sulphurous and used for industrial purposes, but cheap to get out.  Brent Crude has been used as the reference point for many years and then other grades and types are priced off it, depending on quality, sulphur, and transportation costs to refining capacity.  So West Texas tends to trend and price as per Brent, but with discounts for Dubai, which is more costly to transport and refine.

Very little oil has come from the Brent field (named after the goose not the London suburb incidentally) for some time but oil from other parts of the North Sea is similar in quality and is thus priced the same way.  But even this is starting to run out and the reference market is becoming increasingly thin, which may be creating a rarity value and certainly could make the market easy to manipulate. Increasingly the market is pricing off West Texas (“WTI”) and, although they are similar products, there can be periods when local conditions can drive a significant price differential – indeed today WTI is $1.50 cheaper, reflecting the higher extraction, handling, and transportation costs of Brent.   We will continue to use Brent Crude in our index for now, but may switch in the future if market practice moves that way, as it seems to be doing.

ONE NOT FOR THE BIRDS:  Wind turbine builders and operators are relaxing again after a Court of Appeal hearing last week.  With increasing opposition to on-land windfarms – and their low levels of efficiency – the best prospect for future growth is seen to be  turbines in the seas around the UK coasts, which tend to have more reliable breezes and less vocal local residents, but do have lots of seabirds.  A Scottish court recently blocked four windfarms on the grounds that they would be very damaging to bird life, but the Court of Appeal overturned that last week.  The windfarms are not home and …er…dry yet – they need to get their subsidy contracts in place, which may or may not be easier after the election.

KEY MARKET INDICES:  (as at 16th May 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.32% (steady); 5 year 0.70% (falling).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.10% (falling)

US$: 1 mth 0.99% (steady); 3 mth 1.18% (steady); 5 year 1.88% (falling)

Currency Exchanges:

£/Euro: 1.17, £ weakening

£/$: 1.29, £ steady

Euro/$: 1.10, $ weakening

Commodities:

Gold, oz: $1,234, modest rise

Aluminium, tonne: $1,899, modest rise

Copper, tonne: $5,585, modest rise

Iron Ore, tonne: $67.56, rising (10% up)

Oil, Brent Crude barrel: $51.39 rising (WTI $49.90)

Wheat, tonne: £149 steady

London Stock Exchange: FTSE 100: 7,525 (rise). FTSE Allshare: 4,114 (rise)

Briefly:

Neat reversal of last week’s action in commodities – all up a little and iron ore up about 10%.  For oil, see our comment above.  The LSE continues to power up, reaching new heights.  Not so hot on the interest rate front which continue pretty static in the short ranges and off a little in the long, with a slight euro strengthening in foreign exchange.

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