International
Friday Newspaper Review - Irish Business News and International Stories
By Finfacts Team
Oct 27, 2006, 08:11

The Irish Independent also reports that the Government made a dramatic move yesterday towards tackling the blight of urban sprawl.

The Irish Times reports that the ESB plans to sell three former power station sites and is considering disposing of its former peat burning plant in Bellacorrick, Co Mayo, previously confidential sections of the Deloitte report on the company reveal. 

The report, published on October 1st, included several sections that were withheld due to their commercial sensitivity. These show that the ESB is planning to off-load sites in Gweedore, Co Donegal, Screeb in Co Galway and Cahirciveen in Co Kerry. The report says these disposals will occur in 2006.

The sites are relatively small and their sale is unlikely to assuage the ESB's commercial rivals, who want the company to offload major stations to them so the market can be opened up further. While the sites in Gweedore, Screeb and Cahirciveen may not prove very attractive to rivals, the power plant at Bellacorrick, which closed two years ago, may be more attractive, as it comes with a grid connection and is close to the Corrib gas field off the Mayo coast.

Most new power stations in Ireland are gas-fired and the proximity of such a large gas reserve would be attractive to some utility companies. However, the objections from the Shell to Sea campaign have so far prevented Corrib gas being brought ashore.

The ESB is keen to build a new modern power station at Aghada in Co Cork, but the Government is likely to give approval for this only if the ESB sells off or leases out other stations in exchange. "A fair degree of horse trading will have to be done," said a senior Government source.

The Deloitte document also reveals that it would be possible for a new entrant to the electricity market to run a profitable business even with the strong presence of the ESB.

The Deloitte report says the ESB conducted its own analysis and found that even a company with only a limited presence in the market could reach viable levels of profitability (€20 million) with just 175,000 domestic customers within a three-year period.

The Deloitte report suggests that any new entrant would need to outsource "to the greatest extent possible" to make this a reality. So far, energy companies have steered clear of getting involved in the domestic market because of its low margins and need for large back office resources.

Meanwhile, Bord na Móna has agreed terms with German company E.ON to buy the Edenderry power station in Co Offaly for a consideration of about €80 million. It is anticipated the transaction will be completed by year end.

The station, which produces 120 megawatts of power, is currently fuelled by peat, but this could be changed to bio-mass, said Bord na Móna yesterday.

The Irish Times also reports that Ireland remains a cost-competitive location in which to do business, although high property and utility costs are a cause for concern, according to the National Competitiveness Council.

In its Statement on the Costs of Doing Business in Ireland study which was published yesterday, the council reported that Irish cities were cost-competitive when compared to high-income cities in the US and Europe.

This was attributed to "Ireland's broadly competitive labour costs, international transportation costs and taxes on labour and profits".

However, middle-income cities such as Bangalore, Singapore and Budapest were found to be considerably more competitive in terms of business input costs.

Moreover, the study confirmed that utilities and property costs, as well as services in areas such as IT, accountancy and legal fees are "relatively high" here, as are mobile telephone call rates.

The council found that insurance and freight costs are relatively competitive. In compiling the report, it looked at Dublin, Cork, Limerick and Galway and found that the regional locations have "strong cost advantages" over the capital. Unsurprisingly Dublin was shown to be the most expensive location, particularly for services sector firms.

The study emphasised that labour costs were competitive when compared to other benchmarked locations in Europe and the US. As labour costs constitute the majority of most company's input costs, the council said the State's competitive wage level is a strong contributing factor to the "overall cost competitiveness of firms".

However, "with trade and investment increasingly flowing east, there is a greater need than ever for productivity gains to sustain further wage increases".

At the launch of the report Dr Don Thornhill said: "While higher costs are to be expected in wealthier countries, it is essential that the cost base supports the competitiveness of our exporting sectors. Despite general perceptions, Ireland remains competitive compared with other locations in Europe and the US.

"We are concerned however, that the costs of property, especially in Dublin, utilities, in particular electricity, waste and water, and key services are damaging the competitiveness of some Irish firms," Dr Thornhill added.

The Irish Examiner reports that Anglo Irish Bank has spent $151 million (€119m) on two US hotels on behalf of Irish investors.

These are located in Manhattan and geared to bank clients interested in getting involved in commercial real estate, said the bank.

In a statement the bank said it bought the Beekman Tower Hotel and Eastgate Tower Hotel on behalf of the Peninsula Real Estate Fund, an equity fund created by Anglo Irish Bank Private Banking and Timothy Haskin.

Anglo has put up $100m in acquisition financing while its Dublin based Private Bank provided a further $49m in equity to fund the acquisitions.

The hotels were purchased from the Denihan Hospitality Group.

Tony Campbell, president and chief executive of Anglo’s Us operations said New York City continues to provide strong growth prospects and good long term value in real estate.

In his experience as a banker it was clear that a lot of international capital has been making its way into New York as night net worth individuals and big funds chase the potential they believe the Big Apple still offers investors, he said.

Commenting in Dublin, Peter Butler, managing director, Anglo Irish Bank Private Banking said “this fund provides our Irish investors with an attractive investment opportunity to participate in the value created by renovating and repositioning these major hotel assets in Manhattan.”

In the US Anglo has representative offices in Boston, New York and Chicago, where it offers a variety of financing options to its developing client base in the world’s largest economy.

The Financial Times reports that the drive to tackle climate change gathered pace on Thursday as Morgan Stanley, the investment bank, announced a $3bn plan to invest in the carbon trading market amid mounting evidence that some US states are growing more sympathetic to international action.

The moves come just days before a UK government report is expected to propose a huge expansion of the global market in trading permits for carbon dioxide emissions. It will also propose extending existing mechanisms for western companies to benefit from promoting cleaner energy in poor countries.

A bigger market could offer substantial business opportunities. One recent calculation suggests that global expenditure on curbing the effects of climate change could be worth about $1,000bn (£529bn) within five years of action being agreed.

On Thursday, the commercial opportunities were underlined as Morgan Stanley announced its big bet on the green energy market. It plans not only to invest most of the $3bn in buying carbon credits around the world but also to set up its own low-emission energy projects.

The prospect of building an international consensus on the back of the findings of the Stern review appeared to strengthen as Citigroup, the world’s largest bank by market value, said in a research note that carbon trading was almost certainly going to become the most important weapon in combating global warming, including in the US.

Certain US states have recently taken steps to establish carbon markets. Seven states in the north-east have agreed a regional move to cap emissions from 2009, while California has set emissions limits.

The UK government-commissioned review, led by Sir Nicholas Stern, former World Bank chief economist, will say that the cost of rising concentrations of carbon in the atmosphere far outweighs the cost of acting now to slow global warming.

It reflects the UK’s efforts to lead the world towards fresh initiatives on climate change before efforts under the Kyoto protocol run out in 2012.

According to the review, big polluters would be able to cut emissions to the level of credits held, buy new credits in the market or earn new credits by making investments in carbon-efficient technologies in developing countries.

The review team has not been discouraged by the slump in carbon prices in the fledgling European carbon-trading market in April when most European countries said they had not used up allocations. One person close to the review told the Financial Times: “We have learnt a lot from Europe’s experience.”

A recent International Energy Agency paper suggested that the most important and available technology for reducing emissions would be carbon capture, in which carbon dioxide from burning fossil fuels is pumped underground.

The FT reports that Lufthansa, the German flag carrier, is adding 2,500 new employees this year, as it expands its operations to take advantage of the rising demand for air travel.

The group increased its operating profits strongly in the first nine months and raised its forecast for the full year, as it benefited in particular from increased volumes of lucrative premium passengers on its long-haul routes and from higher yields or average fares.

Wolfgang Mayrhuber, Lufthansa chief executive, said the group was also on track to achieve its target of cutting annual costs by €1.2bn ($1.5bn) over the three years to the end of 2006. It biggest success has been in driving down procurement costs from external suppliers, while it has missed its target for reducing labour costs.

The group has also ended several years of losses in its catering and package tour businesses, and is benefiting from improved financial results at both Swiss and BMI British Midland, where it holds stakes of 49 and 30 per cent respectively.

Operating profits in the first nine months rose by 46.7 per cent from €471m to €691m. Turnover rose by 12.8 per cent from €13.3bn to €15bn.

Lufthansa raised its forecast for the full year and said that operating profits would increase by about 30 per cent from €577m to approximately €750m for the 12 months to December.

Results in the third quarter were hit by the group’s agreement last month to pay $85m to settle class action lawsuits brought against it in the US. Lufthansa along with several other airlines in Europe, Asia and North America are being investigated by the competition authorities for alleged price-fixing in their air cargo businesses.

It is co-operating with the US and European authorities and as a result has received conditional immunity from prosecution after applying for leniency to the US justice department, the European Commission and other cartel authorities.

The leading European network airlines have all increased profits significantly this year supported by strong demand and improving yields or average fares, that have more than offset the surge in fuel prices in the first half of the year.

Airlines have also benefited in the last couple of months from the weakening in the oil price, which has reduced costs.

Most carriers, including Lufthansa, have started to reduce the fuel surcharges levied on both passenger fares and air cargo fees, which had been rising since early 2004, as the airlines sought to claw back some of the higher fuel prices from customers.

In the first nine months of the year the German aviation group carried a record volume of passengers with numbers rising by 3.6 per cent to 40.2m.

Its passenger traffic measured by revenue passenger kilometres rose by 0.7 per cent in the nine months, more slowly than capacity which increased by 1.2 per cent. As a result it filled a slightly lower share of available seats with its passenger load factor falling marginally to 75.4 per cent.

Lufthansa has lost market share this year against Air France-KLM, the largest European carrier. It has concentrated its growth on short-haul routes in Europe and on its services to the Asia-Pacific region.

The New York Times reports that home builders, struggling to keep ahead in a weakening market, cut prices and offered a variety of other discounts in September to help sell their newly constructed houses, the latest government and industry statistics show.

The Commerce Department reported yesterday that the median price of a new home plunged 9.7 percent last month, compared with September 2005, falling to $217,100, the biggest such drop since December 1970.

Statistics from the National Association of Home Builders showed a similar slide. Builders reported cutting prices in September by 5 percent, according to the association’s most recent data.

Just two months ago, prices of new homes were still on the rise.

At least to some extent, the lower prices achieved the developers’ goal: the backlog of unsold new homes on the market fell in September for the second consecutive month, while the number sold, adjusted for normal seasonal variations, rose by 5.3 percent from the previous month.

But economists and industry experts noted that the reported numbers provide a somewhat distorted picture of market reality. While they seemed to suggest a rebound in sales and a precipitous drop in prices, the data was skewed by a higher number of sales in the South, where homes are cheaper, and fewer in the more expensive Northeast.

Last month, sales in the South accounted for 56 percent of all new homes sold in the country, compared with 52 percent a year earlier. The average square footage of a house sold in September declined as well, pulling down the median price.

While new-home prices across the country may not be falling quite as sharply as the reported numbers suggest, builders are also offering a variety of hidden price cuts in response to the much harsher housing climate that they now face.

“We’re going to run our business as if it’s going to stay tough for a while,” said Richard J. Dugas Jr., chief executive of Pulte Homes, one of the nation’s largest residential builders. On Wednesday, Pulte said its profit in the third quarter fell by more than half, compared with the same period a year earlier.

Indeed, profits are falling fast in many parts of the country for builders, who are rapidly scaling back on their future construction plans.

The home builders’ association reported that 45 percent of builders and developers said they cut prices in September to maintain sales volume. That was up from only 19 percent a year earlier. Similarly, the association reported that 55 percent offered amenities like granite counters or upgraded kitchen cabinets for no additional cost. Only 19 percent did so a year earlier.

The cost of those incentives was not reflected in the new-home price data, which suggested that builders were making even less money from each sale than the shrinking official prices would indicate.

“Builders do not like to lower prices because it sends the wrong signal to potential buyers,” Patrick Newport, an economist with Global Insight, said in a research note. “How much incentives matter today is difficult to gauge — but in markets in which power is quickly shifting from sellers to buyers, they probably matter quite a bit.”

Cancellations were also left out of the new-home statistics. The Commerce Department records a new home as sold when the buyer and builder sign a contract. The home builders association said that cancellations had jumped by 50 percent in the last year.

“The cancellation rate is really big,” said Dave Seiders, chief economist of the association. “It’s exploded over the last year.”

The new-home sales report followed a report that showed softness in the market for previously owned homes, which account for about 85 percent of all home sales.

The pace of existing-home sales in September slowed 14 percent from a year earlier to a seasonally adjusted annual rate of 6.2 million. That was the lowest rate reported since January 2004.

For new homes, the seasonally adjusted annual sales volume figure in September was 1.1 million — 14.2 percent lower than in September 2005.

Another closely watched economic barometer released this morning — the Census Bureau’s report on durable goods orders — showed an unexpected 7.8 percent rise for September from August. Durable goods, which include things like dishwashers, are monitored by economists as a gauge of business investment.

The upswing, however, was almost entirely a result of a surge in orders for aircraft. Boeing took orders for 175 planes last month, nearly tripling the nonmilitary aircraft component of the durable goods figure.

Over all, the latest economic data pointed to continued but slower growth through the end of the summer. When orders for the transportation equipment sector were stripped out, the gain in durable goods orders was only 0.1 percent.

The NYT also reports that at a black-tie event this summer, some of the world’s most powerful bankers and business executives gathered for a toast: “We are the international finance and business capital of the world, the world’s greatest global financial center, without question,” the mayor told the assembled crowd.

But that was not Michael R. Bloomberg talking. The city was not New York — it was London.

Even as the Dow Jones industrial average reaches new highs and Wall Street companies report robust profits, by some measures New York’s long-held crown as the financial capital of the world may be slipping.

London, whose lord mayor, David Brewer, made the summertime boast at the city’s annual merchants and bankers dinner, has had a heady resurgence in banking and lending. In recent years, its stock market has attracted a growing number of companies that once would have sought to list in the United States. And London is drawing an increasing tide of hedge fund assets.

Other financial centers are growing, too: Chicago will be the home of the world’s largest derivatives market when the Chicago Mercantile Exchange and the Chicago Board of Trade merge, while Hong Kong is poised to be the biggest market for initial public offerings this year, with today’s pricing of the huge offering of the Industrial and Commercial Bank of China.

The possibility that New York is losing ground has raised alarms in Washington and in Mr. Bloomberg’s office.

“There’s a genuine recognition that we need to make some changes,” said Laure Aubuchon, head of international business development for the New York City Economic Development Corporation. Winning financial business is “so important to New York City,” she said. The financial services industry makes up 9 percent of the city’s work force and provides 31 percent of the tax base, she said.

The rise of London has been particularly notable as a reflection of its geography. Some of the most rapidly developing markets and fastest-growing companies can be found in Asia and Russia, which are within time zones that can do business easily with London but not with New York.

“In the 1980s and 1990s, large transactions did not get done without the United States capital markets,” said Michael Cole-Fontayn, a managing director with the Bank of New York in London. That is no longer true, he said.

“The European and Asian capital markets are becoming deeper and more liquid by the day,” he said. “You can get a $5 billion stock global depository receipt offering or a $10 billion privatization satisfied outside the United States S.E.C.-registered markets.”

TMK, a Russian pipe manufacturer, hopes to raise $1 billion in a November public offering. The company was approached by the New York Stock Exchange but chose to list on the London Stock Exchange.

London “is the world’s biggest financial center and very internationally flavored,” Vladimir Shmatovich, the chief financial officer, said in a telephone interview. And, he said, London is a closer flight to Moscow.

Of course, Wall Street banks dominate London and have benefited from doing business with the new wealth of Russia, Asia and the Middle East. But because the banks do a growing amount of business outside New York, the city misses out on some of the taxes, the financial services jobs and the jobs that support those jobs.

Beyond its location, London is attracting investors and companies because of a perception that regulatory scrutiny is more burdensome in the United States than in London. At the same time, while London does not use the euro, that common currency has helped bring depth to the capital markets of Europe, benefiting London.

“At the moment, people are still arguing New York versus London,” said Shaun Springer, the head of Napier Scott, a headhunting firm based in London that specializes in trading jobs. In five years, he predicts, “there will be a real, visible gap,” with London taking the lead.

So far, the only financial arena where New York is clearly being surpassed is initial public offerings. This year, through the end of September, companies raised £17.9 billion ($33.2 billion) in initial public offerings on London’s exchanges. In New York, initial public offerings raised $26.5 billion through September. By the end of 2006, more than $40 billion will be raised in Hong Kong, thanks to two oversize bank offerings. Hong Kong’s leadership in public offerings is not expected to extend to 2007, when the battle between London and New York will be fiercer than ever.

Other trends seem to favor London. Syndicated lending grew 54 percent in Europe in 2005, but just 15 percent in the United States, according to Thomson Financial. Hedge fund assets in Europe grew 80 percent from 2003 to 2005, versus 28 percent in the United States, according to International Financial Services London, which promotes British banking business.

High oil prices have in the past meant a flood of money from the Middle East into the United States. But cash-rich Middle Eastern families and governments are now looking to invest in Europe or Asia — through London or another financial center, rather than through New York.

Not surprisingly, there are few people in New York willing to acknowledge London’s superiority.

“I laugh, because if you were to dial back to the late 1980s, Tokyo was going to rule the world,” said Ms. Aubuchon of the city’s Economic Development Corporation. “I would never underestimate the power of Americans, when they get annoyed at being put down, to come roaring back.”

To assist that comeback, Mr. Bloomberg’s office is spending $600,000 on a study by the McKinsey consulting firm on the issue.

Many executives outside the United States say they could probably save them the time and trouble — the biggest problem is that it has become just too forbidding to do business in New York.

The Sarbanes-Oxley Act, which imposed stricter rules on corporate controls, “is just one problem of many,” said Alan Yarrow, vice chairman of the German bank Dresdner Kleinwort, who is based in London. Others include the Patriot Act, the Department of Homeland Security and the perception that America does not welcome outsiders, he said.

“Getting people into the country is becoming a problem,” Mr. Yarrow said. “You have to have a situation where clients can come and see you.”

Many foreign companies and executives have a “fear of the United States: of litigation, of Sarbanes-Oxley, of the reach of the S.E.C., of the disclosure requirements and penalties associated with false disclosure,” said Mr. Cole-Fontayn of the Bank of New York.

The New York markets, meanwhile, have not been lobbying hard overseas over these issues, some executives say.

The London Stock Exchange “came after us very aggressively and did a good job of selling themselves,” said Christian Hogg, the chief executive of Chi-Med in Hong Kong, a Hutchison Whampoa division that began trading in May on London’s small capitalization stock market division, AIM.

Nasdaq, however, never contacted the company, Mr. Hogg said.

And companies pay more to list in the United States. A study by the consulting firm Oxera that was commissioned this summer by the City of London found that investment banks’ underwriting fees for listing a company in Europe were about half those for listing in the United States.

But listing in London has had its challenges, Mr. Hogg added. Executives have to work hard to get brokers and analysts to notice their companies. “Nothing is guaranteed on Day 1 on AIM. It requires a lot of money,” he said.

Company executives are not the only ones in finance choosing not to come to New York. Stricter entry rules after Sept. 11, 2001, mean that some of the world’s banking talent that would have gravitated to New York is going elsewhere.

“Just getting into America, even if you’re British, is an issue,” Mr. Springer of Napier Scott said. “We’ve had candidates that arrived for an interview, were told they couldn’t leave a room in the airport and were put on the next plane back,” he said. Consequently, America is not experiencing the same explosion in specialized trading products that London is, he said. London, on the other hand, has a more open visa and work permit policy, he said.

Mark Warms, the global head of sales and marketing for FXall, a large foreign exchange platform for institutional customers, said, “Certainly, you have to argue that London is the most culturally diverse financial center in the world.”

London’s talent pool may be international and its finance business growing, but newly arrived Wall Street bankers may be astonished by some of its local traditions: most of the city’s bars, for example, close at 11 p.m., and most restaurants stop serving food around 10 p.m. Food delivery is still a rarity. Sending a FedEx package after 6 p.m. is difficult and the subway closes at midnight.

Still, London’s growing financial business has put the end to one British tradition that few will mourn: “the food,” said Stanley Fink, the former chief executive and chairman of the Man Group, the investment and hedge fund giant. London has gone from “one of the poorer places in the world to eat to one of the best,” he said.

There has been an explosion in high-end dining in London. “Over the last five years, London’s upscale restaurant offering has grown, largely as a result of the strength” of the financial district, said Iqbal Wahhab, the owner of Roast, a new restaurant, which uses only ingredients from Britain and features dishes like herring roe on toast.

In perhaps another sign of London’s ascendancy, Mr. Wahhab said he was seriously considering expanding Roast — to New York.