Commercial Awareness Breakdown: 2–6 March 2020

Coronavirus, Africa Cloud Computing and British Steel

Posted at youthlaw.co.uk…

Commercial Awareness Breakdown deconstructs three of the week’s commercial stories in an understandable and jargon-free manner. Terms bolded and underlined may be more difficult to understand and are explained at the bottom.

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1) Coronavirus

A huge number of investors are withdrawing their money from global equity mutual funds and exchange traded funds due to uncertainties and poor performance stemming from the outbreak of the coronavirus (COVID-19 caused by SARS-CoV-2). The amount withdrawn in the past week is $23.2 billion, the most since August of 2019 and even more than the $19.4 billion taken the week before. Similarly, in Europe, the outflows were around $2.9 billion — the most significant since July 2016. Bond funds have also been affected, with investors pulling $2.6 billion over the past week, the first outflows since December 2019.

Another shocking withdrawal rate comes from the high-yield debt market, wherein funds have seen outflows of $7.9 billion in the past week, the worst since February of 2018. The pace in the US was slightly slower, with withdrawals of $2.9 billion (down from $6.7 billion the week before) taking place. Clearly the United States Federal Reserve’s emergency interest rate cut has helped ease the pressure on the country’s markets.

Italy, one of the most severely affected regions, has announced plans to inject €3.6 billion into its economy with the aim of mitigating these severe economic effects. The virus stems from an outbreak in Wuhan, the capital of Hubei, and has done significant economic damage to the area. Some economists claim that the reports on China’s economy are underestimating the damage, with figures potentially suggesting the country’s economic growth in the current quarter has been halved. Reuters, in conducting a poll of economists, published the following results:

The poll “forecast growth to fall to a median of 3.5% this quarter from 6.0% in the fourth quarter of 2019, a full percentage point lower than predicted in a Feb.

The range of views was wide, from two banks saying no growth at all to one saying 5.0%.

Under a worst-case scenario, the median forecast for Q1 was 2.4%, compared with 3.5% in the previous poll — essentially meaning the worst-case view from three weeks ago is now the central scenario for private sector economists.

Growth is still expected to bounce back in Q2, to 5.6%, slightly lower than the 5.7% forecast three weeks ago. But even there, the range of forecasts was wide, 3.7%-6.5%” (Reuters, 2020).

Unpacking this data, we see that predictions indicate not only an almost 50% reduction in economic growth, but also an active shift in the economists’ views — their worst-case from three weeks ago is now the central likelihood for today. Furthermore, the predictions for Q2’s growth are wide in range, and predictions will almost inevitably change as the spread continues.

One of the worst affected areas is the travel sector, with airlines being significantly hit by the virus’ effects. Despite private plane usage having risen, demand in commercial flights has dropped steeply, meaning many airlines, particularly those with low cash reserves, are feeling the pressure. Flybe, a British airline that was already on the edge, has recently collapsed under the strain. Similarly, Norwegian Air Shuttle’s shares have plummeted by more than 70% in less than a month. On average, airlines around the globe have had around 25% removed from their value.

Coronavirus’ impact on the global economy has been huge, and is only likely to increase in scale as the virus continues to spread. The extent to which the day-to-day lives of ordinary members of the public will be affected by these economic hits will be determined significantly by how, and to what extent, governments intervene.

2) Africa Cloud Computing

Africa’s cloud computing market has boomed, prompting investors from across the globe to invest in powering the technology. As the continent becomes increasingly tech-focused, the need for data centres and a technology infrastructure has risen drastically. The window for investment is certainly present — currently, despite accounting for 17% of the world’s population, Africa holds less than 1% of the total global data centre capacity (Xalam Analytics) — this is double the capacity three years ago.

Rack Centre, a Nigerian company, currently provides data services for a significant proportion of west Africa, and after investment from private equity firm Actis, will seek to double its 750kW capacity, becoming one of the most prominent data centres on the continent. The $250 million investment from Actis will occur over three years, and will provide the firm with a controlling stake in Rack Centre. Kabir Chal, director at Actis, wrote that these technological trends have “played out in many markets and led to significant growth of the data centre sector […] Africa is no different”.

Cloud computing has shifted data storage demands from in-house to date centres. Normally, these centres would have to compete with in-house operators for speed and cost, often as their servers are continents away from the end-user. In Africa, however, many operators are wary of the expense of security and other factors in-house data storage, and are therefore keen to opt for the cloud approach. Uzoma Dozie, former CEO of Diamond Bank, Nigeria, noted that cyber security is “not an expert capability of banks, and continuous upgrading […] is expensive”.

The main issue for data centres is the relative lack of infrastructure across Africa — petrol/diesel generators are often used instead of relying on power stations, and a lack of fibre internet networks make the operation expensive, and at points slow.

International investors are keen to capitalise on this opportunity — last year, Boston private equity firm Berkshire Partners bought a portion of Teraco Date Environments, a firm owning Africa’s largest data centre. Microsoft has also recently launched cloud data centres across Africa, while Amazon plans to open centres in Cape Town. For African consumers, these investments can only be beneficial, helping to improve the slow internet speeds the continent currently suffers from. These services will allow customers to take advantage of streaming services, and maybe even the rise in cloud-based gaming, for example Google’s Stadia platform.

3) British Steel

British Steel, the steel manufacturing firm based out of Scunthorpe Steelworks, England, is about to be taken over by Chinese multi-industrial group Jingye. The move, worth £1.2 billion, should save thousands of jobs at the failing manufacture (currently the second largest in the UK).

Scunthorpe is renowned for its steel industry, and for the past 130 years has been one of the main manufacturing hubs in the United Kingdom. British Steel, formed in 2016, has not fared so well, and has been running on taxpayer funding for some time now, having gone into liquidation in May of 2019.

Although Jingye’s investment will preserve around 3,000 jobs, 400 workers have been made redundant in the takeover. Jingye’s CEO, Li Huiming, says he looks forward to beginning a “new chapter in British steelmaking”. However, only time will tell how Jingye’s investment fairs in the rocky climate within the steel industry — many firms have tried, and failed, to make a mark in Scunthorpe’s turbulent steel market.

The takeover includes British Steel’s UK and Dutch sites, but does not include their factory in France, as this element of the transaction is pending state approval. The site, based in Hayange, is considered a useful national asset, supplying tracks for the French rail system — as such officials have expressed doubts over Jingye’s takeover plans.

Interest initially came from a Turkish bidder, but quickly dissolved after a refusal by one of British Steel’s suppliers to accept the bidder’s proposed price cuts. A further asset not included in the sale is British Steel’s Redcar Bulk Terminal, a dock located in Yorkshire which is to be sold separately.

Jingye has also announced its plans to increase the firm’s output from 2.5 million tonnes per year to three. In spite of this, Rob Waltham, leader of the North Lincolnshire Council, has reminded those not offered positions within the takeover that the council is there to help: “[…] there are contingency plans in place to help people affected. […] Options will include retraining or help in setting up their own business, as well as CV preparation to help them secure new jobs.”
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Difficult Terms:

Bidder — An individual or organisation making a formal offer to buy something.

Bond — A financial instrument through which an investor buys the bond, loaning money to the issuer. This loan has a certain duration, and the investor receives a coupon (interest payments), often annually. The face value of the bond is what will be paid back to the borrower once the bond matures.

Cash Reserves — Funds that companies have set aside. These may be in preparation for emergency situations, but may also be for a variety of other reasons.

CEO — Chief Executive Officer — the most senior officer in charge of an organisation.

Cloud Computing — Technology which bases most/all of its operation over the internet on external servers.

Controlling Stake — A majority shareholder in a company is a shareholder who holds a stake larger than 50%, meaning they can dictate the company’s direction through their voting power.

Data Centres — A space/building dedicated to storing data racks, on which data is stored and managed.

Exchange Traded Funds — An investment fund traded on stock exchanges.

Fibre Internet — An internet network that transfers data using fibre optic cables. Generally, the technology is quicker than traditional cable data transfer.

High-Yield Debt — The yield of a bond is the return an investor realises on that bond. High-yield bonds are below investment grade and have a higher risk of default (payment not being made) — as such these high-yield bonds typically pay better to attract investors.

In-house — Something is in-house when it is kept within a company, instead of being outsourced.

Interest Rate — An interest rate is a percentage charged against the amount you borrow or save.

kW Capacity — The average rack in a data centre consumes around 7kW of power — as such the kW capacity of a data centre refers to the total power consumption a centre operates at.

Liquidation — The process through which a business is brought to an end in order to pay its creditors (those to whom it owes money).

Mutual Funds — A fund in which many investors’ money is pooled together to purchase financial instruments.

Outflows — Outflow is the money moving out of a business or fund.

Private Equity Firm — A firm which uses its capital to privately invest in companies’ equity.

Quarter — A financial quarter is a three-month period in a financial calendar, the end of which normally requires publishing of financial reports. There are four financial quarters in a year — Q1, Q2, Q3 and Q4.

Redundancy — A form of dismissal from a job, normally occurring when an employer needs to save money.

Share — A financial unit of ownership interest in a company.

Takeover — A takeover occurs when one company buys another.