Thursday, October 29, 2015

There is no case for keeping steel production open in Redcar

Steel is a commodity. This means that producers must mainly compete on price. As with all commodities there are opportunities to add value on the margin with enhanced products or services for special applications. But the vast majority of steel use is of materials that meet a common specification and are undifferentiated. So any buyer of steel issues tenders and chooses a supplier who offers delivered materials meeting an agreed specification at the lowest price.

In the modern world the trading of commodities is international and even bulky items like steel can be transported over large distances economically. This means that the global market will be dominated by the suppliers with the lowest production costs who can as a result offer the lowest prices. 'Twas ever thus. The decline in textile manufacturing in the UK (for example) was because others in lower labour cost countries could offer lower costs. And with free trade and the removal of tariff barriers there is nothing we could do about it, and didn't.

So is steel production in Redcar (etc.) a lost cause? Almost certainly. Should the British government subsidise British steel to keep plants open? The only instance where this might be justifiable would be if the present steel market conditions were temporary and some sort of bridging arrangement was necessary. The does not appear to be the case.

The closure of the mines in the 1980s was crassly and insensitively handled, but the strategy was right. The UK could not compete with lower cost coal producers and the energy sector was moving away from coal anyway. There is a parallel with the current state of affairs in steel. The U.K. can be a niche producer of added value steel products, but not a competitive producer of commodity steel. So Government's task is not to shore up unviable plants but to find a way of softening the blow for those thrown out of work. It's a tough conclusion but there is no other one.

Tuesday, October 13, 2015

Drinking in Saudi Arabia


I was sitting in an expat residential compound in Riyadh on one of my many trips to Saudi Arabia some fifteen years ago. My host was the ex-pat head of Shell in that country and he was hospitably ensuring that I and the other guests had what we wanted to drink. Beer, spirits, wine were available without any restrictions. Inside the compound! The details of how it all got there I can’t remember but any ex-pat would know the sources and how to ensure that thirsts were always quenched.

I got quite close to one of the more urbane Saudis who worked with us in Riyadh. He invited me to his home and there I met his wife – a beautiful young woman who behind the walls of their house wore high fashion clothes and acted just as any woman in the West would act. The two of them were generous hosts and insisted that I tried a particular Malt Whisky – a Macallan as I recall. There was a seemingly unlimited choice of other spirits as well. This friend told me how it worked. “Did you know”, he said,  “that the Kingdom is the world’s largest consumer of Johnnie Walker Black Label?”. I’ve no idea if this was actually true but maybe it was. The supply route was explained to me. One of the members of the House of Saud, the ruling family, (there are a lot of them), had the Johnnie Walker “concession” and arranged both the (illegal) import and the (equally illegal) distribution to customers. This was matched for all of the rest of the high quantities of alcoholic drinks that the country consumed.

The home manufacture of alcohol by ex-pats in their compound homes was also common. They would brew beer, make wine from kits and some even had a still to make hooch. This was partly because the imported real thing, though available, was expensive. Mr Andree was apparently arrested for transporting a quantity of homemade alcohol. He was caught by the “religious police” – perhaps there was a particularly tough officer on the case. In general the Saudis turned a blind eye to what was going on so long as it was not “in-your-face” - and they rarely if ever went into an ex-pat compound.

Nothing is ever quite what it seems in this corrupt and bribery-ridden country. Maybe the arrest and imprisonment of Mr Andree has more to it than it seems? He has apparently lived in Saudi Arabia for the last 25 years, “developing and managing a number of locally owned oil companies” and that will have at times, no doubt, have  placed him in difficult personal positions in a sector where there are many rivalries. Has he fallen foul of somebody who wanted revenge – or at least for him to be out of the way? Who knows, but a man who has lived in the Kingdom for so long is unlikely not to know the rules and to have found subtle ways around them.    

Thursday, August 13, 2015

It is a black and white matter - the hideous use of reverse type.

This is the front page of today's "Jewish Chronicle". I'm not asking you to read it, or try to, because of its content. I'm showing it to comment on the still insidious and hideous practice of the use of "reverse type". "Reverse Type" is when a publication (including online) decides to print in white on black rather than black on white. The great AdMan David Ogilvy wisely said "If the New York Times could be made more readable by printing in reverse type they'd do it" - or words to that effect.

So why do some publications still do this decades after Ogilvy settled the matter? Ignorance mainly. A new generation of designers is around who think that they need to grab attention by being smart. Of course the "Jewish Chronicle" is not all white on black. But here they think they have a big story and big questions for Labour leadership candidate Jeremy Corbyn. Perhaps they do. How especially odd that they do this not by making the text more readable (by increasing the font size for example) but by making it less!

Another common use of reverse type is in theatre programmes. It's trendy - I assume. Even more bizarre! In a theatre you are often reading your programme in dim light. Combine that with trying to decifer text in reverse type! 

For once this is a black and white matter!

Saturday, April 11, 2015

BG acquisition offers Shell opportunity for major strategy change

As a Shell "lifer" - more than forty years if you include my time as a Director of the Pension  Fund - I cannot recall a bigger strategic shift than the acquisition of BG. It offers the Corporarion a unique opportunity to do what Tom Peters called "stick to its knitting" - to concentrate on what it's really good at.

BG is an "Upstream" company. It only does exploration and production of oil and gas. And that is what Royal Dutch Shell (RDS) is good at too. To the man or woman in the street it is the Shell emblem standing over a Shell petrol station for which it is best known. But over the years this part of the business - never, in truth, that important to the heavies at the top - has declined in importance. The "Downstream" - the refining and marketing of oil, gas and chemicals - is pretty much cast adrift from the Upstream. The engineers, geologists and accountants in the highest echelons of Shell never really understood it anyway! There are no longer any economies of scale from being involved in oil from wellhead to petrol pump, if there ever were. 

In the last period of my Shell career the start of a major centralisation of business occurred. The power of the national "Operating companies" (OpCos) was severely curtailed. Most of these were marketing companies and there was a presumption, based on profound ignorance, that they could be managed centrally in the way that the Upstream increasingly was.  Those arguing the indisputable truism that "All Markets Are Local" we're not listened to and numbers on the ground in the OpCos were drastically reduced and their autonomy was destroyed.

The Downstream was an uncomfortable mix of Refining - an asset rich highly technical business - and Marketing which if done well has to be customer driven. Once, perhaps, to market oil oil products you did need to refine them. That hasn't applied for a long time. Shell no longer has any refineries in the UK but still has a significant marketing business. The same applies to many Shell operations around the world.

Over the last decade or more Shell has pulled out of the Downstream in many countries - in some cases franchising the brand to a separate business Independently managed and neither Shell owned nor controlled. This reduces assets employed, whilst maintaining a visible brand presence. There is nothing wrong in principle with this model - MacDonalds and other fast food businesses do it - but it has to be tightly controlled. Especially the brand. I very much doubt that the Board of RDS spends any time on these matters - the huge Upstrean business occupies most of their time. And when it comes to investment the priorities are also overwhelmingly Upstream.

The purchase of BG merges a significant Upstream operation into RDS's already huge one. All of top management's attention in the next few years will be on making this work. In these circumstances the Downstream would be an uneccesarily distraction. There is an overwhelmingly strong case for splitting the Downstram away as a totally separate stand-alone company which would focus entirely on marketing the brand to customers around the world. Oil Trading and Chemicals would also be part of this new Shell company. It would be separately traded as a FTSE company and entirely disconnected from the Upstream of RDS. The new company would take the "Shell" brand while the Upstream would be renamed "Royal Dutch". Easy !

I would guess that there are a few people in BG who know all about demerger. Remember the old British Gas was a vertically integrated company, like Shell, doing everything from exploration to selling Gas to the end consumer. It was split into two back in 1997 when the brand name "British Gas" went to the UK marketing company (owned by Centrica) with the Upstream business being renamed BG. Shell has the opportunity to do the same now and there are sound reasons for doing so. 

Tuesday, February 03, 2015

You may not like it but tax avoidance is good business.

The tax Division in Shell was pretty big when I worked there. I suspect it's much bigger now. Multinationals by definition operate globally - in Shell's case in just about every country in the world. I have two Shell pensions. One relates to my UK service, the other to my years of service overseas. That latter pension is from a Pension Fund based in Bermuda - this location, which is perfectly legal of course, is purely for tax reasons. The Fund benefits from an advantageous tax regime in the British Overseas territory, and so indirectly do I. I pay tax on my overseas pension of course, but I get a small tax exemption to reflect the fact that the pension is in effect deferred salary from a time when my employment was not UK tax liable.

The Pension example is one of thousands illustrating that big Corporations have to be tax efficient, and have the ability to be so. That ability comes from that big Tax Division whose brief is, of course, to minimise Shell's tax obligations. Some profits are deliberately made in low tax locations rather than high tax. Some businesses are deliberately located in low tax countries rather than high tax. And so on. Sometimes it's much cheaper to do business in one place rather than another and Shell, and the rest, have an obligation to respond to this. Who is the obligation to? Well the owners of the Corporation of course - including institutional investors. Why pay tax if you don't have to?

Those that levy tax certainly have their work cut out to apply the law when in the big Companies there are top tax lawyers trying to beat the system! The search for tax loopholes which lead to the avoidance of tax liability is part art and part science. It's clever stuff, but there is nothing illegal about it. It's up to the authorities to close the loopholes not to businesses to pay taxes when they are not obliged to. Labour leader Ed Millibsnd said this about the Boos of Boots:

"I don't think people in Britain are going to take kindly to being lectured by someone who is avoiding his taxes..."

Aside from the personalisation (it's the Company not the individual) I'm afraid Ed just doesn't get it. Ever day thousands of British businesses and their advisers and lawyers are working hard to avoid paying taxes. They are not evading them (which would be unlawful) but avoiding them (which is good business). It is utterly naive to imply that companies should voluntarily pay taxes when they don't have to.