MARKET REPORT UK MARKET REPORT


The UK is now entering the slow build up period prior to a General Election, which pundits predict will occur around the middle of next year. In the UK, the sitting government can decide when to call an election, during their five-year term.


Rod Parker, Executive Director


During the run-up, it is unlikely that any major new initiatives will be introduced, although at the recent state opening of the new parliamentary session, Her Majesty announced that Her Government has a very full programme for the next 12 months. Most parliamentary commentators don’t believe that too much of this programme will see the light of day, as the election will be called, before any significant headway to the programme has been made.


There is one annual occurrence that always happens, the setting of the government’s Budget, the Finance Bill. As a result, industry trade bodies have started lobbying the UK’s Chancellor (Finance Minister) Gordon Brown, as he puts the finishing touches to his pre-Budget report, published early December.


Industry’s message is that they will fight future business tax hikes, after published figures suggested the government may have to constrain spending or raise taxes by an average of £7bn a year, over the next economic cycle. This marks the start of a campaign to highlight fears over declining tax competitiveness.


Mr Brown has a “golden rule”, which states that the government will borrow only to invest over the economic cycle. During this cycle, which the Treasury has suggested will end in 2005-6, one recent analysis suggests that government will either just meet the golden rule or miss it by “a negligible amount”.


The worry is that the next cycle will start with a Budget deficit of some £34bn, with little prospect of an underlying improvement in public finances, without government action.


With the UK economy close to full capacity, with high employment and tight labour market, something our continental cousins just dream about, there will be little scope for the faster-than-average growth, which would start to close the deficit through the next cycle.


This suggests any government would have to raise


taxes or constrain spending to meet the golden rule in the next parliament. Industry’s Trade association, the Confederation of British Industry currently estimates the tax shortfall will be around £7bn a year.


Other trade bodies are also lobbying on other issues, one close to the lubricant industry is pushing Chancellor Brown to delay or postpone planned tax increases on ‘Red’ gas oil, due mainly to the continued high crude oil prices and the effect this is having on some sectors, including agriculture. There is an article about this campaign in this issue.


At this time, the UK lubricants industry doesn’t have any lubricant specific issues to raise with Government, other than the anticipated compliance cost of future REACH legislation. The lubricant industry’s bête noire is the continued high crude oil prices and if you are lubricant manufacturer/base oil buyer, the continued lower availability of some grades, their continued high prices and trying to recover these costs from the consumer. All these are something the government cannot really influence.


Currently UK GDP is reducing, though it is expected to increase next year. The previous 12 months averages were 4Q03 = 2.8%, 1Q04 = 3.4%, 2Q04 = 3.7%, but 3Q04 was 3.1%, a gradual decline towards the traditional underlying UK average of around 2.5%. This deceleration reflects a decline of 1.4% in the production sector, following an increase of 1.2% in 2Q04.


One other area that UK government is trying to tackle is productivity. UK productivity, however measured, lags that of other major industrialised countries. The labour productivity gap with the US was 45 per cent in 1999, that with France was 18 per cent and that with Germany 11 per cent.


If the UK were to match the productivity performance of the US, for example, output per head would be over £6,000 higher. The challenge for government is to achieve its long-term economic ambition to have a faster rise in productivity than its main competitors as it closes that gap.


LUBRICANT RAW MATERIALS


The continuing high crude oil prices are putting the lubricant sector suppliers and manufacturers alike, under big pressures. High crude oil prices have carried through into most other refinery side-streams and therefore into many of the lubricant industry’s raw materials such as additives, base oils and synthetics.


Already price increases have been seen for some of the raw materials, including a fair number for base oils and these will eventually need to be passed onto the consumers, evidenced by a recently fairly large price hike for USA blended lubricants, by one of the multinationals. I have heard of several UK upward price movements for blended lubricants. How successfully they were implemented, is not yet known.


My big worry is any possible effect that the continued high crude oil price has on the global recovery, which is still fragile in many regions. The continued high demand for oil products, especially in China, the security of crude oil supply issues from several regions are all said to be the underlying reasons for the oil- trader’s nervousness and willingness to accept higher prices.


Looking at the global scene, I suspect the nervousness will continue for a while, so the pressures will be around into 2005.


Rod Parker


4 ISSUE NO. 64 DECEMBER 2004


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