28 September 2017
Week in Brief:BUSINESS AND THE CITY
COPPER TOPPED: Over the past few months those who followour summary commodities index at the end of this section will have noted the steady rise in the price of copper. Although this is in a reality a return to the trading band of 30 or so months ago, after which King C took a spectacular dive, many commentators are saying that this is a likely to be a permanent change. Copper is a metal which has many and increasing industrial uses, and because of its electrical conductivity and resistance to corrosion, it is for many applications the ideal raw material. It is hard wearing, easy to manipulate, not prone to splitting or fracturing, and also, as many interior designers are currently espousing, very attractive – bare pipework is the theme du jour. The previous boom was caused by a shortage of copper – quite an expensive metal to mine and process – so higher prices can suddenly make many previously unviable mines profitable again. But that of course brings its own demise – the supply goes up, the price comes down, and all those marginally profitably mines shut down again. Back up goes the price and that is what we are seeing to some extent now, but perhaps, if we believe the pundits, with a new factor. That is a rising force which is going to change so many industrial businesses and processes – the rapid rise of the electric car, whether all electric or assisting a conventional based motor. Not good for oil, though the oil powered power station may yet stage a recovery to produce all that extra electricity, but very good for all that goes into electric engines. Such as copper, which is pretty much essential, for many wires and connections and most of all, for the tightly wound coils inside the electric motor. There are no substitutes for that which begin to approach copper’s conductivity and resilience. Most forecasters agree that within 20 years or so we will have well over 100 million electric vehicles on the roads, 500 million say Bloomberg, (providing that we can find the way of connecting them to the power sources that we have yet to build) and that will mean we need less iron and much more copper.
As it happens there have not been any significant new discoveries of copper over the last ten years. Most production is from giant mines in Chile, Australia, and Russia, with smaller operations more widely scattered, but the common feature is that many mines are approaching the point where they are digging out the less accessible and more difficult to mine sources, so we are moving towards the speculators dream – less supply and long term significant increases in demand. Not just the speculators – the two big mining companies with interests in copper are BHP and Rio Tinto, both of whom have been through some pretty tricky times recently, but are now feeling much better about future business prospects. Unlike gold, you cannot really go out and buy an ounce or even a pound of copper, and buying a tonne might present storage difficulties to most of us, so many speculators will have to content themselves with buying shares in one of the two mining giants – which is no doubt why the share price of both of them is up around 40% over the last year.
SUMMER’S LEASE: The commercial property market has had a long run of recovery since its near collapse in 2008 and 2009; now the market is starting to think about when the next downturn will come. Property is a cyclical business so this is not unjustified gloom, but the questions are when the downturn will come and how severe it might be. Certainly a lot of new office and retail space has become available to the market, and in the office sector there is quite a lot still in the delivery process, though much of that is thought to be pre-let to tenants. But it is the letting side that is starting to worry landlords. Retailers are looking very closely at their costs and as so much of that relates to property costs – rent and rates – many are looking to downsize or give up less viable units, and on-line shopping is likely to accelerate this trend. On offices, the uncertainties of Brexit are putting some occupational plans on hold, especially in the City of London, though in the regional markets things look slightly different with good economic performance and less new space availability (and big cost advantages against central London) keeping the market steady and moving rents upwards. Shaftsbury are a quoted property company whose main business is owning retail property in central London, mostly in Covent Garden and Soho. Their recent results started with the good news – more shoppers in the area where its property holdings are concentrated and small shops been eagerly taken up by new tenants when they become vacant, but the bad news followed; the demand for larger spaces, in retail units but especially in offices is noticeably slowing, as tenants put expansion plans on hold or delay making decisions as to renewals. In particular, their Thomas Neal’s Warehouse, formerly a mall of small shops but expensively converted to one huge shop of 22,000 square feet, has been available for leasing for over a year – and still no takers. Expect much scrutiny of other property company’s first half results as they come through.
NOT SO SUPER: Aldi reflects what seems to be the general trend in food retail for last year – sales up, margins and profits down. Aldi is privately owned, by a German family, but issues detailed results for its UK business – which to end December 2016 show turnover up 13.5% to £8.7bn but net profits down 17% to £211m, a slender 2% margin, in line with market but a long way from the 5/6% margins which were considered normal ten years ago. It was those that lured Aldi and its rival Lidl into the UK market in the first place – and is still better than in the cut throat German home market where food margins are around 1%.
CARDS, SHARPED: It’s not just in fashion retailing where conditions are difficult. The Card Factory, the quoted specialist retailer which does what it says on the card, saw profits down 14% in the first half of the year (to 31st July) which it says was due to increased costs (much stock is imported from overseas) and rising wage costs across its chain of nearly 990 shops (it opened another 30 in the review period). The chain says there are also less shoppers on some high streets, but that overall takings were up (by 6%) and that the public are still sending more and more greetings cards to each other. It maintained its dividend and also is paying a special – it does not need all the cash it is generating.
KEY MARKET INDICES:
(as at 19th September 2017; comments refer to net changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, (unchanged): 3 month 0.33% (steady); 5 yr 1.03% (rise).
Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.13% (steady)
US$: 1 mth 1.24% (steady); 3 mth 1.33% (slight rise); 5 year 1.94% (rise)
Currency Exchanges:
£/Euro: 1.14, £ rising
£/$: 1.35, £ steady
Euro/$: 1.17 € weakening
Commodities:
Gold, oz: $1,292, fall
Aluminium, tonne: $2,115, slight rise
Copper, tonne: $6,422, fall
Iron Ore, tonne: $70.05, fall
Oil, Brent Crude barrel: $58.22, rise
Wheat, tonne: £140, fall
London Stock Exchange: FTSE 100: 7,299 (steady). FTSE Allshare: 4,004 (steady)
Briefly:
The general pattern this week is of markets coming off their peak; perhaps influenced by the recovery of the oil price, often a contrarian driver. But gold too eased, and this suggests that the market increasingly does expect longer dated international interest rates to make a move upwards – and stay there. That is certainly what the dollar is doing and the Fed is making clear that, so far as it is concerned, the days of QE are over.
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