UK making hard work of engineering sustainable economic recovery

Scottish Engineering chief executive Bryan Buchan noted the major players in the oil and gas sector were “radically curtailing their activities” following the plunge in crude prices. And he highlighted the impact of this on Scottish engineering companies making components and equipment for these players, while expressing a view also voiced by senior figures in the oil and gas industry that the low crude-price environment is likely to continue for some time.

Weir Group has very significant exposure to the oil and gas sector, some of it in the North Sea but mainly in the North American shale arena.

And the Glasgow-based company is heavily reliant on the global mining sector, for which it also produces kit.

Financial market concerns over the momentum of the Chinese economy are weighing heavily on both the oil and gas, and mining sectors, as likely future demand from the giant Communist nation is reassessed.

Scottish Engineering was at pains this week to highlight the fact that its member companies are being weighed down by factors outwith their control.

Weir shares closed last night at 1328p – less than half of the peak level they recorded around this time last year.

The company has undoubtedly been hit hard by external factors.

And it is to be hoped that the plunge in Weir’s shares does not prompt any opportunistic takeover bid for the Scottish company.

About 16 years ago, Weir rejected a 300p-a-share bid approach from US sector stablemate Flowserve Corporation. This approach valued Weir at £611 million. The weakness of Weir’s share price back then attracted Flowserve. The Scottish company’s shares traded below 200p in early 1999.

Weir shares, while down heavily on a year ago on the back of the tumbling crude price and worries over global growth, are still trading at more than four times the level of the Flowserve approach. It is important to keep this longer-term context in mind.

It was interesting yesterday to see Finnish state investment company Solidium declare that it was looking to buy more shares in Helsinki-listed engineering groups Metso and Outotec.

Metso last year rebuffed an approach from Weir. Outotec has also been touted as a possible target for the Scottish engineering company.

Like Weir, Metso and Outotec have been hit by the slump in the global mining sector. This has caused the Finnish companies to be the subject of renewed bid speculation, although their chances of remaining independent would seem likely to be boosted by Solidium standing behind them with a long-term view of the situation.

We must not underestimate the importance of such a long-term approach from investors, a welcome change to what often seem to be much shorter attention spans exhibited by some shareholders. The key is always not to lose sight of the long-term picture and, in the context of the engineering companies, not to overlook the importance of cyclical patterns in the mining, and oil and gas sectors.

Scottish Engineering, in its survey of sector activity, also noted the impact of the strong pound on Scottish exporters. Sterling strength makes Scottish engineering companies, and those elsewhere in the UK, relatively less competitive in overseas markets. The survey signalled an eighth consecutive quarterly fall in export order intake for the Scottish engineering sector.

However, we should not lose sight of the weakness of the domestic UK economy, which looks likely to be exacerbated very significantly by the latest savage austerity measures unveiled by Chancellor George Osborne.

Scottish Engineering’s survey showed a sharp fall in orders received by companies from within the UK in the latest three months.

The UK manufacturing sector continues to struggle, having dashed Mr Osborne’s hopes that it was going to lead the recovery amid sharp corporation tax cuts.

A survey published yesterday by the Chartered Institute of Procurement & Supply showed growth in the UK’s dominant services sector slowing in August to its weakest pace in 27 months. This prompted economists to forecast UK growth could slow in the current quarter from the around-trend pace of 0.7 per cent in the three months to June. Second-quarter growth was not great in terms of its composition anyway, with UK manufacturing output falling 0.3 per cent.

We must remember the continuing poor showing of the UK economy is occurring against a backdrop of ultra-loose monetary policy, with base rates having been at a record low of 0.5 per cent since March 2009.

A poll of finance directors published today shows that they are downbeat about growth prospects for Scotland. The survey of more than 100 people, by the Institute of Chartered Accountants of Scotland and law firm DLA Piper, found 51 per cent of senior finance professionals based north of the Border thought that growth would be flat or negligible over the next 12 months.

This pessimism is not surprising, given the fairly grim domestic UK economic backdrop as well as those global forces outwith the control of the likes of Weir Group and the broader engineering sector.

It appears that the UK’s unbalanced recovery might well, yet again, be running out of steam.

And there are other risks out there, including the huge danger of a UK exit from the European Union highlighted at the Confederation of British Industry’s annual Scottish dinner last night by the business lobbying organisation’s president, Paul Drechsler.

Prime Minister David Cameron has promised a referendum on EU membership by 2017.

The economic road ahead for the UK certainly looks bumpy, not only because of undoubtedly significant external factors but crucially also as a result of the policies being pursued by the Conservative Government.