Outlook: A problem with chemistry as BP opts for IPO

Opec's target range; Lost in translation; E-mailed in error
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If BP's Lord Browne of Madingley wants to get shot of his low return but capital intensive chemical interests, why doesn't he simply demerge them? Granted, it would be hard to sell a business of this size to a trade buyer in what remains a largely bombed out industry, but is it really necessary to go to the expense and bother of an IPO?

If BP's Lord Browne of Madingley wants to get shot of his low return but capital intensive chemical interests, why doesn't he simply demerge them? Granted, it would be hard to sell a business of this size to a trade buyer in what remains a largely bombed out industry, but is it really necessary to go to the expense and bother of an IPO?

People invest in BP as an oil company, Lord Browne insists, and they would therefore be unlikely to want to hold shares in a pure chemicals enterprise. If BP went the demerger route, the price might collapse as large numbers of shareholders offloaded their unwanted chemical shares, and everyone would end up worse off.

By floating off a minority, BP maintains a share in any upside while immediately delivering a fresh injection of capital that can be used for equity buy-backs. I find the argument only half convincing. In a demerger, the market decides where the value lies. If investors dump their stock at an undervalue, that's their look out. Some other clever chappy will reap the benefit.

Still, at least Lord Browne isn't intending to spend the money on some hare-brained new business escapade in a far away land, as happened when National Grid sold down its shares in Energis. A large part of the money was spent laying telephone lines across the Amazonian jungle. Those that weren't eaten by parrots never made a dime.

BP is already throwing off surplus capital by the bucket load. The money raised from floating Olefins and Derivatives will further swell the pool of capital available for share buy-backs. The more capital that's bought back, the greater the return on what remains. The removal of the low-returning chemicals business alone will significantly boost the group's overall averages, which in itself must be worth a couple of mill on Lord Browne's bonus. But let's not get too cynical here. Shell has already done quite enough for the cause of cynicism in this trouble shooting industry. By contrast, BP stands out as a beacon of switched-on management and shareholder value. The ever-widening valuation gulf with Shell is richly deserved. Shell reports first-quarter results tomorrow. Many expect them to confirm that output has sunk below that of BP for the first time anyone can remember. How are the mighty fallen.

Opec's target range

Pressure is growing among members of the Organisation of Petroleum Exporting Countries for an increase in the official target range for the price of oil. As it happens, oil has been consistently above the top end of the target range of $22 to $28 for more than a year now, so in some respects any adjustment to the range would only reflect what has already become a reality. The president of Opec, Purnomo Yusgiantoro, has none the less created a stir by suggesting the target should be increased by 30 per cent.

Already both Venezuela and Nigeria have openly called for an increase in the range. Only Saudi Arabia, the big daddy of oil producers, remains vehemently opposed, though this is possibly more out of lip service to America than a reflection of its underlying position. The price of oil may look high in dollar terms, but against the euro and some producer country currencies, it's not that strong at all. Saudi would appear to have as much interest as everyone else, as long as the dollar remains weak, in maintaining a relatively strong oil price.

As things stand, the case for a higher range is easily argued. The price has been high for a while now without damage either to demand or the world economy. It, therefore, seems reasonable to conclude that customers can afford the higher prices.

Saudi's oil minister, Ali al-Naimi, contends that to raise the target range would only play into the hands of the "speculators" who have been driving up the price. Furthermore, he worries that if the price remains too high for too long, it will eventually encourage overproduction ­ only 40 per cent of world oil supplies are controlled by Opec ­ and the price will collapse, playing havoc with Saudi's ability to pay its bills. For him, the issue is about Saudi's stability, both political and economic. Tricky stuff, price rigging.

Lost in translation

Tesco's small-scale but determined expansion into the Japanese market is something of an oddity in the supermarket group's overseas strategy, in that the rest of it is targeted at less developed economies where the opportunity for profitable growth looks more enticing. It's hard to think of a maturer economy than Japan's, with it's ageing population and exceptionally high GDP per head. Yet its retail sector is curiously old fashioned, highly priced, and hopelessly inefficient. Without a zero per cent interest rate, large swathes of it would be bust.

An opportunity for Tesco then? Well yes and no, seems to be the answer. One of Japan's problems as a modern economy is that it is pretty much immune to direct inward investment. Compared with the other developed economies of Europe and North America, the amount of non stock market foreign investment is pathetically small. The reasons are a mixture of structural and cultural. Even when foreign companies do get access to the Japanese market, they tend to fail, ostracised by customers and discriminated against by suppliers. Both Wal-Mart and the French supermarket giant Carrefour have gone down like a lead balloon in attempting to graft a home-grown formula on to the Japanese market.

Tesco has adopted a somewhat different approach. It spent two years researching the market before concluding that the "every little helps" format that's proved such a success in Britain just wouldn't work in Japan, or at least not yet. Instead it bought into a smallish chain of convenience stores, C Two-Network Co, which better caters for Japanese tastes and habits ­ exceptionally fresh produce, and smaller but more frequent visits to the shops. Yesterday Tesco added to that chain by agreeing to take on another smallish neighbourhood supermarket business which operates in the Tokyo area. Both acquisitions are tiny by Tesco's standards, so why bother?

The answer is that it is a toe in the water of a very different kind of retail market. Tesco's chief executive, Sir Terry Leahy, reckons he can learn from Japanese tastes and shopping habits. In time, all societies will be as aged as Japan's. The experience Tesco gains in Japan will help it anticipate and manage these trends elsewhere. Act global, think local, goes the old business cliché. Unlike Carrefour, Tesco seems to be applying it with some effect.

E-mailed in error

Things just seem to get worse and worse at Amvescap, the Anglo-US fund manager that trades in Britain under the name of Invesco. As if yesterday's first-quarter figures were not bad enough, the group managed erroneously to e-mail the City with a strictly private internal presentation to the executive management committee. Needless to say, the picture painted in private of the outlook for new business and profits was much gloomier than the one for public consumption.

Amvescap feebly protests that "no reliance" should be placed on the internal presentation, which predicts a net outflow of $7.1bn from the AIM funds business in the US and a further $5.6bn from Invesco in North America. Regrettably, the cat is out of the bag and it cannot now be put back in.

Amvescap is one of the companies at the centre of allegations of market timing abuse in the US. Many clients disadvantaged by the practice are voting with their feet as an act of revenge. Amvescap has yet to agree on a settlement with the New York Attorney General, and although the brand may not have been irreparably harmed, it's proving hard to draw a line under the affair. Reputation and trust are all in fund management. Amvescap will struggle to restore it.

jeremy.warner@independent.co.uk

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