05 October 2017
Week in Brief:BUSINESS AND THE CITY
BUMP ON THE ROAD: A little deflation to a British manufacturing success story. Brompton, makers of those so-elegant and useful folding bicycles, has had to initiate a recall of every bike it has made since April 2014. It has discovered a fault with an axle component which the pedals drive to, which can break, leading to loss of control. There have been a number of failures on the road, with one rider being injured. Brompton, which builds the bikes in West London in a new factory designed for it, said that the fault was within statutory safety standards, but nevertheless was not acceptable to it, so it will replace the piece on all 144,000 bikes that it has made fitted with them. The rogue part was made by a German partner company Schaeffler who presumably will be picking up the bill.
NOT FIT FOR PRINT: The long term decline in advertising in the print versions of newspapers appears, if anything, to be accelerating. Latest newspaper publisher to issue its annual results is the Daily Mail and General Trust, owner of the Daily Mail (and an assortment of other assets as the effectively controlling Harmsworth family diversify away from its newspaper business). Advertising revenue from print was down 11% in the first half of 2017, a drop of £15m; but the news was far from all bad – online advertising revenue was up £19m. The other sign of possible trouble ahead was a small decline in circulation of the online versions of the papers (and a bigger in print readership) but this was offset by price increases which pushed total revenue marginally up.
LOGIC OF LOGISTICS: The UK real estate market, as mentioned here last week, is starting to get nervous about what happens next. Except perhaps in the logistics market – sheds to you and I – where the growth in internet shopping means a need for ever larger quantities of storage and distribution facilities. Not only that, the logistics companies keep rethinking what might work best; at one time it was super sheds – between 400,000 and a million square feet; now the fashion has moved to smaller sheds, at least for deliveries, much closer to the customers, so that those twenty-four hour delivery promises can be fulfilled. One of the biggest providers of modern sheds, of all shapes and sizes, is Gazeley, a firm founded in the UK about 30 years ago and now considered a European market leader in the sector. Gazeley is currently owned by Brookfield Asset Management, a Canadian company and one of the world’s largest property fund managers, currently very active across western Europe in most sectors. It has now agreed terms to sell Gazeley to Global Logistics Properties (“GLP”), a major Far Eastern investor domiciled in Singapore, for a price said to be around £2.75bn; the transaction will complete shortly. GLP is one of the fastest growing logistics property owners in the world, but lacks a platform in Europe ; this deal fills that gap. It also give GLP useful links with many major space users – for instance on its Magna Park development in the English Midlands, next to the M1 and M6 motorways, Gazeley has lettings to many major retailers, including the John Lewis Group, Toyota, Argos, Tesco, and most recently, Amazon. Brookfield bought Gazeley four years ago as part of a European strategy for expansion in the sector and the sale is something of a surprise, but certainly the price reflects the fact that the sector is thought likely to see continuing growth.
STEELING THEMSELVES: At first sight, a merger of international giants in the steel making industry does not seem likely to bring much good cheer to steel plants in Britain, one of the most expensive places in the world to make non-specialist steels. That is because of the low productivity of UK’s mostly old fashioned old fashioned and under-invested plant, high wage and energy costs, and lack of any natural competitive advantage such as raw materials – other than a large local market in the car and construction industries. Late last week ThyssenKrupp and Tata Steel announced they were to merge their European steel businesses to take on the market leader in Europe, ArcelorMittal, and also to cut €600m a year of costs out of their operations. If the new merged business gets regulatory approval as expected, it will have 34 locations in Europe, making over 20 million tonnes of steel. Initially it will have about 48,000 employees, but up to 10% of that workforce is likely to go as the businesses are merged, a process which is expected to begin in 2018 and conclude in 2020, at which time there will be a further review as to how the business will go ahead in the longer term. That would seem to present a threat to Tata’s troubled operation in Port Talbot in South Wales, employing about 4,000 people, which almost closed nearly two years ago but was then reprieved. The merging companies have however confirmed that there is now no current intention to close it as an important part of the group’s operations. That of course may change after 2020. Tata employs another 2,000 workers on smaller sites in Wales, and also in specialist units elsewhere, but these are mostly makers of specialist steels and less under threat than general steel making plants.
MODEST IMPROVEMENTS: Kingfisher is the UK giant of the do-it-yourself retail business, owning in Britain B&Q and Screwfix, and also substantial similar operations in Europe, especially in France and Poland. This was long a growth business for most players in the sector but we seem to have lost the urge to do-it-ourselves and prefer that somebody-else-does-it-for-us. That meant a painful overhaul of Kingfisher’s operations, with stores closed, and much cost cutting. That produced some improvement last year but this year was predicted by observers to be more difficult. In the event Kingfisher proved them wrong – just – by showing profits up one percent on last year, at £440m for the first half of 2017. In fact, said the company, the UK performance was even better than those bare figures might suggest, but was held back by a weaker outturn in their French business. Although the company thinks the second half might be more difficult in both the UK and France, it notes that the Screwfix business continues to grow, although B&Q has seen declining turnover. It believes that it is more or less on track in its grand strategy to double profits over the next four years – but that will require Mr Macron to get to work on the French economy to stimulate spending growth there.
KEY MARKET INDICES:
(as at 3rd October 2017; comments refer to net changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, (unchanged): 3 month 0.34% (rise); 5 yr 1.04% (rise).
Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.16% (rising)
US$: 1 mth 1.23% (down); 3 mth 1.33% (steady); 5 year 2.00% (rise)
Currency Exchanges:
£/Euro: 1.13, £ falling
£/$: 1.33, £ falling
Euro/$: 1.17 € steady.
Commodities:
Gold, oz: $1,273, fall
Aluminium, tonne: $2,066, fall
Copper, tonne: $6,454, slight rise
Iron Ore, tonne: $62.86, steep fall
Oil, Brent Crude barrel: $56.18, fall
Wheat, tonne: £142, rise
London Stock Exchange: FTSE 100: 7,468 (rise). FTSE Allshare: 4,098 (rise)
Briefly:
The week’s loser is iron ore, which having come off its peak last week then fell$8 a tonne this week; oil too fell back but many observers of oil remain bullish and say this was due to some profit taking and nervous positions. Wheat continued a modest recovery, with western harvests now in. And the FTSE100 looks to be making for 7,500. Perhaps. Interest rates continue to edge up.
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