16 February 2017

Week In Brief: BUSINESS AND THE CITY

LOOKING ON THE BRIGHT SIDE – AGAIN:  Last week it was regional newspaper publisher Johnston Press who got the Shaw Sheet Business Pages prize for optimism.  We have a new contender this week for our award – Rolls-Royce Holdings plc, who announced a pretty startling £4.6bn loss for 2016.  The weaknesses in performance reached across every division of the specialist engineering giant whose lead product is aero engines, but the loss was primarily due to two things; first, a one-off write down in the group’s derivatives book – a core management tool for hedging Roll’s massive exposure to many currencies as a major exporter, and, second, the £671m which Rolls has had to pay in relation to bribery and corruption offences.  But Rolls’ management said that the underlying trend was good, with underlying profits of £813m (after adjusting for the above items) showing a stronger than forecast performance and with forward trading looking stronger also.  The profits are down on 2015’s £1.4bn, but each division is showing promise of growth this year and next, with cost cuts in many key areas, but especially in engine servicing, seen as a major success in improving productivity without reducing quality.  Also improving is cash generation, which has for some time being a problem because of the business’s large capital costs and flows.  By the end of 2016, free cash flow was £100m positive (Rolls merely expected to break even last year) and the company hopes that it will rise to around £1billion by 2020, giving a much better platform for new investment and cutting borrowing costs.

Rolls-Royce had a new chief executive last year, Warren East, and he has had a busy time bringing in new systems and new people; and making sure he has cleared out any lurking problems.  Now it looks as though all is ready to go with a return to long term profit performance.

GOING NUCLEAR:  More trouble for those who think the long-term answer to pollution and carbon depletion might be electricity from nuclear generation.  The UK’s much reduced nuclear generating capacity is mostly run by EDF, the French state controlled electricity company which operates much of France’s nuclear power station network and all of Britain’s.  EDF has been struggling to maintain profits as government intervention grows in the power industry, and with increased shutdowns for safety reasons in France, which has meant cuts in French generating capacity.  In the UK output has held up well, but prices charged to the customer are not keeping pace with increasing costs – much of that coming from government imposed green levies.  On top of that are the well-publicised problems with Britain’s Hinckley Point station in Somerset, which is many years behind its intended opening date – work has barely started yet.  But all that is minor compared with the problems of the company which is supposed to be assisting in the renewal of Britain’s nuclear power base.  Toshiba, the Japanese conglomerate which owns Westinghouse, a builder of nuclear reactors, is a key participant in the scheme to build a new plant at Moorside in Cumbria to take over from Sellafield (or Windscale, if your memory goes back that far).  Toshiba will not only  build the reactors but also owns a 60% stake in Nugen, the developer of the scheme.  But Toshiba has been hit by a whole host of problems in other areas, including, and crucially, by huge losses in its USA nuclear construction plant business.  These forced Toshiba’s chairman Satoshi Tsunakawa to resign earlier this week and have seriously weakened the financial power of the business.  Toshiba says it will seek, when it can, to sell its shareholding in Nugen, though it is fully committed to building the Westinghouse reactors.  Nugen is not yet fully funded – it needs a total of £15bn and expects to complete fund-raising next year.  Construction will then start with the aim of bringing Moorside into generation in 2025, a programme which looks unlikely on current form.  Back to coal and oil for a while yet.

KING COPPER FACES REVOLT:  As we have been noting for some time, the improvement in the copper price (improvement if you are a copper owner rather than a buyer) has been accelerating for some time, driven by a lack of supply after mine closures a couple of years ago, and also by the mining workforce seeking pay rises after a long period of restraint.  Failure to agree a way forward has resulted in a strike at the world’s largest copper mine, Escondida in Chile, which last week led to violence in the mine, with damage to services so that the strike breaking contractors brought in by the mine owners could not work.  At another large mine – Grasberg in Indonesia – workers have also gone on strike, with further complications caused by a dispute between the Indonesian government and the owners over government profit participation.  And more trouble is forecast in the Congo, also a major supplier but with both labour problems and political issues.  On top of all this, existing copper reserves are not of great quality and the industry has not been investing in new facilities – such as Rio Tinto’s possible new mine in Mongolia – because of the low prices prevailing in the market.

END OF THE COUNTER:  for the Co-op Bank, once a major player in the retail banking market in the north and Midlands and a great influence in introducing banking to working class savers and borrowers.  Owned by the Co-operative Society, once powerful in providing everything from food shops to funeral parlours by way of savings and health care, but now sadly diminished by fierce competition and a failure to find new loyalties (and costs it gradually lost control over), the bank has been the most visible and embarrassing sign of the Co-op’s troubles.  The added embarrassments of a drug addicted Methodist Minister chairman, a terribly mistimed foray into large scale commercial property lending which wiped the balance sheet of capital in the 2008 crash, and a final self-inflicted injury caused by acquiring a broke building society in 2009, did not help.  The bank has tried to tidy up and return to its roots but this week finally admitted defeat.  Now the it is on the market, and no reasonable suggestion or offer is likely to be refused.

CALL DISCONNECTED:  The fighting between rival mobile telephone groups continues.  The latest twist is a salvo from Vodafone directed at EE, which won the contract to build a wireless network for use by the UK’s security and emergency services.  Many of the new masts for this will be in rural areas where coverage is patchy so Vodafone (and, no doubt other telecoms companies) would like to have rights to use the masts – rural masts are expensive and tricky to get planning permission for.  But EE is not identifying where the masts are until they are built – giving a first mover advantage in marketing its own domestic service.   Cue call from Vodafone to the Home Office to complain – let’s hope they can get a connection…

KEY MARKET INDICES:  (as at 14th February 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.36% (slight rise); 5 year 0.80% (steady).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.05% (rising)

US$: 1 mth 0.77% (steady); 3 mth 1.04% (slight rise); 5 year 2.00% (falling)

Currency Exchanges:

£/Euro: 1.17, £ slight rise

£/$: 1.24, £ steady

Euro/$: 1.06, € slight fall

Gold, oz: $1,230, steady

Aluminium, tonne: $1,892, slight rise

Copper, tonne: $6,110, sharp rise

Oil, Brent Crude barrel: $55.95, slight rise

Wheat, tonne: £147, steady

London Stock Exchange: FTSE 100: 7,304 (rising). FTSE Allshare: 3,974 (rise)

Briefly: A more active week in the market, with great excitement in the copper price (see article above) which broke through the $6,000 mark and powered on; other London commodities and stocks also strengthened.  In currencies not so much to report – but the 5 year euro rate seems to have finally returned to positive territory, whilst the 5 year dollar rate reached the 2% level.

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