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Liquidity storm could throw UK into chaos

The Bank of England has warned that global liquidity and the threat of Greek default could throw the UK economy into chaos.

The FPC (Financial Planning Committee), which is tasked with maintaining financial stability at thhe Bank Of England said that liquidity – the degree to which assets can easily be traded – may have become “more fragile” in some markets around the world.

Mark Carney, governor of the Bank Of England said they would be working with the Financial Conduct Authority to assess whether asset managers could cope with a fast paced change in market conditions.

“The Committee remains concerned that investment allocations and pricing of some securities may presume that asset sales can be performed in an environment of continuous market liquidity, although liquidity in some markets may have become more fragile,” the FPC said this week.

“Trading volumes in fixed income markets have fallen relative to market size and recent events in financial markets, including in US Treasury markets in October 2014, appear to suggest that sudden changes in market conditions can occur in response to modest news. This could lead to heightened volatility and undermine financial stability.”

Although the FPC has highlighted the risk that liquidity poses to the UK, members said the Bank Of England would work with market participants to ensure that they were aware of the risks and price liquidity appropriately in an attempt to mitigate negative effects.

Just last month Mr. Carney warned that diverging monetary policies across North America, the UK, Europe and and Asia may cause further turbulence and “test capital flows across the global economy, including emerging markets.”

The FPC was also quite clear that the situation in Greece posed a real threat to the UK, “There also remain significant risks in relation to Greece and its financing needs, including in the near term.”

“Any of these risks could trigger abrupt shifts in global risk appetite that in turn might lead to a sudden reappraisal of underlying vulnerabilities in highly indebted economies, or sharp adjustments in financial markets.”

Writing to George Osbourne, Mr. Carney said that the risk to financial stability remained “elevated” and added that he would review UK bank capital rules that might result in lenders having to raise their buffers.
The Bank Of England will ask asset managers about their strategies for managing liquidity of their funds. “This would inform assessment of the extent to which markets are reliant on investment funds offering redemptions at short notice,” the FPC said.

How do companies deal with the problems posed by in-direct procurement spending?

Is maverick spending by non-procurement employees the biggest challenge relating to indirect procurement? 
Recently Supply Management conducted a market intelligence survey in which 71% of respondents said that a lack of oversight of what employees, with purchasing power but outside the procurement function, spend in categories ranging from work wear to HR services were among the top issues they faced. 

However opinions on how to deal with the issue are split. 34% percent suggest non-procurement professionals must be trained more effectively in procurement processes and a further 16% said supplier numbers should be consolidated. A further 31% percent from the private and public sectors said control of indirect spend should be handed to the procurement function, as this is one way to keep the spending in line to control the problem. This is despite the results showing that indirect costs appear to be a responsibility shared over a number of different departments within organisations: procurement (63 per cent), senior department heads (42 per cent), finance (39 per cent) and operational staff (25 per cent).
“We are a government procurement department so can only advise other departments on spend – rather than take ownership – which is frustrating,” one respondent said. “We can provide the best advice but the stakeholders can decide to overrule our advice and do what they want.”
Many of the other challenges in relation to indirect procurement are linked to maverick spend and stakeholder management. Nearly half (46 per cent) cite misclassified items and poor reporting as a challenge, 45 per cent say little understanding exists of where indirect spend lies and how much it covers. And 49 per cent say lack of ownership by stakeholders is a problem.
Again, respondents were split on the best way to increase the influence and profile of procurement in the organisation. Nearly half (47 per cent) of the 360 people surveyed said a higher status in the boardroom would help, 42 per cent said procurement needs better oversight and reporting metrics of departments’ spend and 36 per cent said more training should be available to stakeholders.
But respondents also admitted that their skills for managing indirect spend fall short in some areas. When it comes to improving their understanding of indirect spend, 54 per cent said they need to analyse supply chain and commercial commitments and 46 per cent said they need the ability to benchmark prices.
“It’s a complicated picture and one not easily overcome with basic strategy or sweeping statements,” said Chris Aston, director, Expense Reduction Analysts.
“The focus is constantly shifting between direct and indirect spend and not always in the same direction. There are huge gains to be made by allowing procurement strategies to be given higher status by businesses, and better analysis of indirect spend can have significant benefits.”
David Noble, group CEO, CIPS, added: “Boardrooms are starting to wake up to the need for professionally qualified supply chain managers because of the added value that best practice, ethical sourcing can add to their bottom line and the role they play in safeguarding their business’ reputation.”

Greece too slow to address mounting debt, says president of EU commission

Jean-Claude Juncker, President of the European Commission has criticised the sluggish pace of progress in talks over Greece’s mounting debt.

In meeting with Greece’s Prime Minister Alexis Tsipras, Mr. Juncker said he was not satisfied. The Greek PM is in dire need of EU support for reforms in order to unlock vital funds for his country and avoid the possibility of bankruptcy and being ejected from the Eurozone.

Mr. Tsipras has pledged to end austerity measures in Greece, such plans have been opposed by Greece’s EU creditors. Greece managed to negotiate a four month extension on its bailout terms last month after heated talks with creditors.

Hoping to persuade EU leaders of its promise and worthiness of credit, Greece has announced a series of reforms, but it would still like the EU to agree new, more lenient terms for the repayment of its debts.

In the eventuality that no agreement is reached, Greece risks being unable to meet its agreed payments. In the next two weeks alone it will need to find €6bn to pay its creditors.

Mr Juncket also said that he was “not satisfied with the developments in recent weeks”.

“I don’t think that we have made sufficient progress, but we’ll try to push in the direction of a successful conclusion of the issues we have to deal with.”

“I am totally excluding a failure, I don’t want a failure. I would like Europeans to go together. This is not the time for division,” he said.

Speaking alongside Mr Juncker, Mr Tsipras said he remained optimistic. “If there is political will, everything is possible,” he said.

In a previous meeting with Martin Schulz, president of the European Parliament, Mr. Tsipras urged the EU to back growth in Greece. “Now is the time to give hope to the Greek people, not only ‘implement, implement, implement’ and ‘obligations, obligations, obligations,'” said Mr Tsipras.
Analysts described last months’s interim bailout agreement as a climbdown for the Greek government, which gained power in the country under the promise that it would have half of the Greek debt re-written off.
Even if the bailout extension is approved, Greece still has a huge mountain to climb in meeting its debt obligations.

Speculation of $60 anchor for oil

Another jump in US crude stockpiles pushed the price of oil down to $61 a barrel on Thursday, going against indications that there was to be an imminent rise in global demand.

The United States government’s latest supply report shows that domestic inventories of oil rose last week to 434.1 million barrels, setting a record high for the seventh consecutive week.

Brent crude LCOc1 fell 40 cents to $61.24. US crude CLc1 fell 96 cents to $50.03. “At present, it would appear that Brent is bottoming out at $60 per barrel,” said Carsten Fritsch, analyst at Commerzbank. “The renewed sharp rise in U.S. crude oil stocks … points to a market that is still oversupplied.”

Burgeoning crude supplies in the US is further increasing the discount at which US crude is traded to Brent. The spread reached $11.81 on Thursday, the widest gap in over a year.

Brent collapsed in 2014, falling from the $115 high reached in June due to global oversupply. The decline worsened after OPEC (Organisation of the Petroleum Exporting Countries) chose to defend their market share against rival sources, rather than slash its own output.

The price has come back 35 percent from a six year low of $45.19 reached in January, supported by signs that lower prices are starting to negatively impact the investment in US and other supplies outside of OPEC.

Just two months into 2015 and oil prices have bounced back from the January low of just $45 a barrel, much faster than the Saudis had hoped after convincing OPEC members in November not to cut output to defend market share against shale.

Veteran Saudi Oil Minister ALi al-Naimi said that he was happy with the current state of the market, and that he saw oil demand growing in the future.

“The Saudis are saying – look, everything is happening the way it needs to happen. Others are cutting capex, production growth is slowing and low prices are stimulating demand,” said OPEC watcher Yasser Elguindi from economic consultants Medley Global Advisors.

“Of course, the main unknown is how resilient U.S. oil production will be. It may take more than just two quarters for markets to adjust to new patterns. It may take a year or two to sort out what is fair value for crude,” said Elguindi.

“Price may need to be at $60 to allow for a rational supply-demand trajectory. It doesn’t mean of course that we can’t temporarily go to $40 or $80 under certain circumstances,” he added.

Shale oil output in the US is not expected to start slowing in growth until the second half of 2015. This will put oil prices under even more pressure as global stockpiles continue to mount.

If the price of oil does stay around the $60 mark for an extended period this could be troublesome for Saudi Arabia, let alone the poorer oil-producing nations.

“It is interesting that Naimi says he doesn’t like to talk about oil because he wants calmness,” said Olivier Jakob from Petromatrix consultancy.

“After the OPEC meeting…we had the oil ministers of Saudi Arabia, Kuwait and the UAE going to the newswires to talk the market down. They did like to talk oil then and (Naimi’s current remarks) is probably another indication that they have reached their objective,” said Jakob.

British Gas reports slump in profits

Owner of British Gas, Centrica has reported a 35 percent slump in profits, prompting speculation that energy prices will remain low, with the possibility of further cuts coming this year.

The company reported that profits had fallen to £1.7 billion in 2014 due to the drop in gas and oil prices worldwide. Customers used a fifth less energy last year, the warmest on record, causing further problems for British Gas.

Iian Conn, chief executive of parent company, Centrica, said: “lower wholesale prices will persist for all of 2015 and potentially 2016 and into 2017”.

“If prices do stay low then, as we are buying ahead, the average price we have been buying ahead will also fall and if it stays low there is the possibility of further reductions we could pass through to our customers.”

He also said it was “absolutely feasible” that we would see further cuts in the price for oil and gas this year. Mr Conn announced Centrica would be cutting its dividend payments as well as writing down £1.4 billion post tax in the value of its power plants and assets in the North Sea. Centrica will also drastically reduce investment in the North Sea, by 40 percent.

Shares in the company fell eight percent, worse than analysts expected. Mr Conn said: “2014 was a very difficult year for Centrica and the recent fall in oil and gas prices creates further challenge. We are cutting investment and costs in response.” British Gas, which is still the UK’s largest energy supplier continues to lose customers to rivals offering very competitive deals. The problem has been exacerbated by reports from the Competition and Markets Authority, finding millions of hosueholds could save up to £234 a year by switching supplier.

“The market remains highly competitive, with recent reductions in standard tariffs and most suppliers also offering a range of fixed price products,” said Centrica.

The FTSE fell from a 15 year high as a result of the sharp decline in the share price of Centrica. “Centrica is another energy company that is suffering from a low oil price. Also, the fact that they’ve cut their dividend by such an amount will mean that some investors will now look elsewhere for better yields,” said Dafydd Davies, partner at Charles Hanover Investments.

The wholesale price of gas is currently down 20 percent on last year. The big six energy firms, (SSE, Scottish Power, RWE Npower, Centrica, EDF and E.on) which together account for 95% of the UK energy market, insist that the gas price only accounts for 45% of the final bill for consumers, the rest accounting for administration, network maintentance, supploy costs and profit.

Wholesale gas is bought on the futures market by energy companies to hedge their purchases in order to protect themselves from price rises. As a result, they argue that they cannot pass on savings to customers with immediate efffect to reflect the fall in oil and gas prices.
The Procurement Group

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