17 November 2016
Week In Brief: BUSINESS AND THE CITY
THERE IS A TIDE …: In an island such as Britain, surrounded by a restless sea, the urge to harness that power to create energy has long captivated entrepreneurs and inventors. The obvious place to begin is with tidal barrages, and a number have been proposed, especially in south west Britain, where tidal movement is greatest. Most advanced is a proposed barrage across Swansea Bay in South Wales, which will have 16 generators (to be built in Rugby by General Electric) and produce 320 megawatts, enough to power 150,000 homes in South Wales, so transmission efficiency will be maximised. The problem is that all this technology is cutting edge and has to be newly designed – not complex, but the first of its type – and the costs of this scheme reflect that. The promoters, Swansea Tidal Lagoon, reckons the total cost will be around £1.3bn (which it has funding indications for), but that implies a contract price of £120 per megawatt hour for the power produced. Offshore windfarms are being paid about that amount, but it is more than double the current rate for power in the UK, and significantly more than £92.50 which is controversially being guaranteed to the Hinckley Point nuclear scheme. The Welsh government is keen for the barrage to be built, and planners are backing it, although the effect on silting and birdlife in the area is still being debated. The Department for Energy now have to review it and approve it, and, although they have signed off on offshore wind projects, there is growing political resistance to generating too much power at this level of pricing, especially with the government approving shale gas fracking which will produce much cheaper electricity. However the Swansea promoters are not to be deterred; they say this is a pathfinder for the technology and that once up and running it will be the precursor to many more, in the UK and overseas – Canada and France are both showing interest in the concept. They say that should bring plant production costs down to a level competitive with current production prices.
SHOPS DROP: 2016 has been a bad year on the high streets of Britain. Not so much in the prime pitches or the big regional shopping malls where, even though traders are looking closely at the bottom line of each of their stores, demand remains strong and rents in prime locations in London and some regional malls continue to rise. But overall trading is increasingly moving to on-line and, although that can help some well located stores – especially out of town or by railway stations – if they can operate “click and collect”, it generally means that turnover in businesses with strong internet presences are trending downwards. Not all retailers can take the heat – which in the South East includes the effects of the new rating review, pushing rates bills up.
BHS: British Home Stores was a highly visible casualty in 2016, along with My Local and Austin Reed, but many more retailers are quietly, or not so quietly, reducing their trading estates. Last week it was Marks and Spencer, this week Sky, closing a quarter of their UK outlets. American Apparel and Banana Republic (fashion brands) have both pulled out of the UK. This may actually be good for the bottom lines of retailers – after all, they are simply moving to formats where they can trade better – but it is very bad news for landlords. The ones feeling the pain are those who own shops in weaker locations, or who have malls in competition with stronger ones in the same town. Or indeed, BHS landlords – the majority of those shops have failed to find new occupiers so far. Tenants, needless to say, will gradually drift to the strongest location with the greater number of shoppers (and hopefully, bigger spending shoppers); the lower quality pitches then spiral downward – already, vacancy levels in some areas are at 25 year highs. This behaviour was first seen in the early 1980’s recession, when swathes of secondary shops became vacant; that was reversed in the 1990’s with the rise of many new traders and offerings (especially electronic goods) and occupancy levels reached historic highs. What could reverse the weakness in the secondary sector this time is yet to be seen – maybe we have too many shops and need to find another use for them. Indeed analysts see another looming problem – the competition among supermarkets for smaller outlets may well have peaked. The market has seen one casualty already in My Local, Tesco and Sainsbury are trimming their estates, and there are likely to be reductions in the number of mini-markets as winners and losers emerge, and the losers fold their freezer cabinets and depart.
FASTER, FURTHER: Although the departure of Messrs Cameron and Osborne led some to hope that there might be a rethink on HS2, the high-speed rail-link, first stop Birmingham, the new government confirmed that it would be pressing on with the first stage to the Midlands, and now has confirmed it will also build the second and third stages as part of the same operation. That will take fast trains to Manchester and Leeds, with connections into Sheffield and towards York in the east, and Wigan in the west for Scotland. The cost of this is estimated at £56bn and it should be operational by 2033. Some of the detail is yet to be worked out – especially that link into Sheffield which now looks likely to run into central Sheffield, as the city council wanted, but against the wishes of many other towns in the area, who wanted an out of town interchange on the outskirts linking to local lines, and more importantly, to the motorway network. Although controversial because of the environmental intrusions it may create locally, and the deleterious effect on some towns remote from the new network, the new lines should enable more freight traffic to be moved onto the “slow speed network” and help relieve congestion on the motorway system, now the most congested in Europe.
HIGH SPEED REGULATOR?: Having tackled the HS2 Gordonian knot, the government is being asked to consider another – in the financial services industry. The CBI recently published a report which has been welcomed by some MP’s and even financial services businesses which suggests that regulation needs to be integrated. The Financial Conduct Authority, which does supervision, and the Prudential Regulation Authority, which looks at risks in the system, emerged separately from the wreck of the Financial Services Authority three years ago, but the CBI says that neither of them are properly focussed on what they should be doing to make financial services prudent, well behaved, and, most of all, competitive. They suggest the two regulators should work together closely with each other and those they regulate, with maybe even a single board to run them and see across the tasks.
KEY MARKET INDICES: (as at 8th November 2016; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.40% (steady); 5 year 0.82% (rising).
Euro€: 1 mth -0.37% (steady); 3 mth -0.31% (steady); 5 year -0.00% (rising)
US$: 1 mth 0.53% (steady); 3 mth 0.91% (rising); 5 year 1.64% (significant rise)
Currency Exchanges:
£/Euro: 1.15, £ rising
£/$: 1.25, £ slight rise
Euro/$: 1.08, € falling
Gold, oz: $1,224 falling
Aluminium, tonne: $1,764, rising
Copper, tonne: $5,619, very significant rise
Oil, Brent Crude barrel: $46.20, steady
Wheat, tonne: £135 falling
London Stock Exchange: FTSE 100: 6,788 (slight fall). FTSE Allshare: 3,694 (slight fall)
Briefly: Although there was a nervous flurry after the USA elections, the markets have settled down once again. Copper prices rose by over 10% on fears of production shortages. Gold was down but then recovered (more to do with rumours about demand in the Indian jewellery market than Mr Trump). US interest rates in the longer term are well up though, and the pound is strengthening.
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