Jonathan Moules finds that companies are drowning under a tide of rising prices – but more worrying than cyclical increases is the constant threat posed by red tape arising from the working Time Directive.
Copyright 2004 The Financial Times Limited
Financial Times (London, England)
May 15, 2004 Saturday
London Edition 2
SECTION: COMPANIES UK; Pg. 3
LENGTH: 1231 words
HEADLINE: Dearer Oil, steel and Money turn the screw on UK businesses
BYLINE: By JONATHAN MOULES
BODY: Jonathan Moules finds that companies are drowning under a tide of rising prices – but more worrying than cyclical increases is the constant threat posed by red tape arising from the working Time Directive.
It is not often that a manufacturing boss turns to Charles Dickens to capture his mood. But for Steve Jones, man aging director of DBK, which makes advanced technology heating systems in south Wales, it is the best of times, it is the worst of times.
The Llantrisant-based company, which will this year turn over Pounds 7.5m, is on a roll after winning two big contracts this year. It has already increased its workforce by a fifth to 120 people and hopes to be 150 strong by the end of the year, lifted by strong demand from its customers in the white goods market. But pressures elsewhere are beginning to take their toll on the Welsh company and on others across Britain. The rise in oil and interest rates are a concern, according to Mr Jones. And the rise in steel prices is eroding DBK’s profit margins. For some products, the company could be facing a loss. “We are being squeezed from the top end by our customers in the white goods markets, who are seeing falling retail prices, and by the costs of components from our suppliers,” Mr Jones explains.
He has already seen a 20 per cent increase in costs this year and has been told by his key supplier, Corus, the Anglo-Dutch steel group, to expect further rises before the end of December. “It is difficult to get that price increase on to the customer,” Mr Jones admits. “We are stuck in the middle.” Mr Jones is positively chipper compared with some of his peers. Steve Brittan, managing director of BSA Machine Tools, which sells much of its product to China, complains that his company is still in recession. The interest rate rises, the jump in oil prices and increasing cost of commodities like steel are compounding his troubles. “The traditional end of engineering, in our case sophisticated machine tools, has never started to recover since 1998,” he says. “Putting interest rates up is killing the golden goose of British manufacturing.” Mr Brittan describes a world where even his best prospect, the Chinese market, is undermining his competitive advantage by demanding more fuel and therefore driving up his transportation costs.
The rise in commodity prices has had one benefit with the rise in scrap metal from Pounds 30 to Pounds 130 a tonne, Mr Brittan notes, but this is small comfort given the parallel rise in steel prices. Mr Brittan has tried to roll with the changes, cutting staff at his Birmingham plant from 150 in 1998 to 32 today and signing a joint venture in central China, which gives him access to 800 employees. However, price increases are undermining his sales opportunities, particularly when compared with his rivals in Germany, where interest rates are lower. “In relation to these other countries, we are expensive,” he says.
Doug Godden, CBI head of economic analysis, says the triple price rises of oil, interest rates and commodities will squeeze British corporate profits but it could be worse. “Although the headline level of oil and commodity price increases are high in dollar terms, the impact has not been as bad because of the strength of sterling,” he says. “This may hold back the recovery in profits and the tightness of the labour market means there is much less scope for profits to recover than in previous comparable stages of the recovery. However, we are not talking about a reduction in profits.” Mr Godden adds that the rise in oil and commodity prices and the upward pres sure on interest rates are in part a reflection of increasing global demand, particularly in China and the US. “The supply shortages are something we could certainly do without but I do not think we can complain about the trends in demand,” he says. The burden falls most heavily on those in transport and manufacturing, he adds.
“I suppose you could say the impact on the economy now could be a bit smaller than it was in earlier decades because there is less importance placed on goods rather than services.” Chris Kelly is chairman of Keltruck, the Scania truck distributor covering a large slice of middle England. His company is one of the best indicators of a British business facing the instant effects of these multiple cost increases. Since Keltruck’s customers will only hire trucks at the moment they need them, it provides an instant snap shot of the business climate in the West Midlands, south Staffordshire, Worcestershire and Gloucestershire.
Unlike Mr Brittan at BSA, Mr Kelly is enjoying profitable times. “(But) we are not silly enough to ignore that signal of things coming over the horizon,” he says. In the used vehicle business, Keltruck is selling about 800 trucks a year, which is “as many as any”, according to Mr Kelly. “We are having a record year.” For Mr Kelly, more damage is being wrought by interfering government red tape and corporate taxation. “Legislation and taxation have been a serious hindrance,” he notes.
But Peter Mathews, managing director and chairman of Black Country Metals, which trades scrap recycled metals, believes manufacturers are being unfairly hit by high interest rates and the strength of the pound. “Last year in commodities, everyone made substantial profits,” he says. “We do not see this financial year being as good.” Mr Mathews also considers himself lucky to be operating in the market for secondhand steel, where demand is good. “We keep moving our metal back to back, whereas before we would keep stock and trade the market a little bit tomorrow,” he says. “If I had to keep what I bought today, I would make a loss.” Sandy Bone, managing director of Edinburgh-based Bone Steel, one of the UK’s largest steel fabricators, is less optimistic, playing “piggy in the middle” between Corus and the construction industry.
“The cost Corus puts on to us is a direct cost because we cannot pass that on,” he says. “There is no end date to all this. It is not as if Corus is saying that they will stop raising prices at the end of the year.” He complains that he and his rivals are “knocking the hell out of each other” because they supply more metal than the UK construction industry demands by a ratio of 1.5m tonnes to 1.2m tonnes. His only consolation is that steel and oil price rises are global phenomena. “We are all in the same boat.” Unsurprisingly, the road haulage industry is most animated by the global oil price rises, exacerbated by the 1.92p per litre duty charges being added by Gordon Brown this September.
Interest rates and commodity prices are not such a concern to these companies. Not as much as the European Commission’s planned changes under the Working Time Directive. Roger King, chief executive of the Road Haulage Association, the industry’s trade body, says oil prices create an expensive cashflow problem given that they amount to 30 to 40 per cent of a haulier’s costs. “But the Working Time Directive is a big, big issue,” says Mr King. “We are talking about increases of 25 to 35 per cent to compensate employees who will presently work for up to 60 hours a week and would be forced to cut down to 40 hours a week.” There is a reason why red tape is of more concern to companies. Prices ultimately rise and fall but laws and regulations have a habit of sticking around forever.