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Economy in Brief

UK Corporations' Profitability Still Firm, Led by High Oil Company Returns
by Carol Stone January 5, 2006

Today, January 5, a wide variety of data was reported by national statistical agencies and private sources all over the world. Some of these reports glean considerable press coverage, particularly if the results are a surprise, such as with German manufacturing orders: these orders grew again in November, when market forecasters had expected them to decline.

But Haver's databases, of course, carry far more background material on the economies of myriad countries. For instance, yesterday in this space, we highlighted the CPI of Thailand, a major release in a small country. Today we take the opposite approach, describing a secondary release in a major country, to wit, corporate profitability in the UK. The ONS publishes quarterly rates of return for total private non-financial corporations and some subsets of companies. Most prominently, oil companies are highlighted, referred to as "UK continental shelf companies". Separately, manufacturing and service sector groups are shown. A few other miscellaneous sectors, such as construction, are not shown individually.

In Q3 2005, all private nonfinancial companies earned a 13.4% net return on their capital. This is down from 13.8% in Q2, but that was a 6-1/2 year high. The average for the last five years is 12.9%. Manufacturing companies earned just 6.2% on assets in Q3, following a somewhat higher 7.9% in Q2. This group has experienced basically flat returns in recent years, averaging about 7% since 2002. Services industries have higher rates of return, averaging 16.3% over the last four years, but these too are trendless, moving back and forth in a saw-tooth pattern.

The breakout of the petroleum industry is informative. It shows that back in the early 1990s this sector had about the same magnitude return as the rest of UK industry. However, this relationship has changed markedly, with the "Continental Shelf companies" seeing far higher returns now, 36.3% in Q3. Annual data from ONS give some detail on the operating surpluses and capital that generate the return ratio. They indicate that the recent high rates of return are not, as one might think, due totally to higher oil prices. Specifically, since 2000, the UK oil industry has stopped expanding, as capital employed, shown in the third graph, has flattened. At the same time, sharply higher oil prices are surely responsible for 2005's further escalation of returns into the mid-30% range.

Normally, higher returns might be expected to prompt the renewed expansion of an industry. There are mixed signals about these prospects. Haver's OGJ database and OGJANN from the "Oil and Gas Journal" contain other broad data on the UK petroleum industry. Petroleum reserves in the UK are decreasing, and daily production of crude oil has fallen even into Q3. However, the so-called "rig count" of operating oil rigs shows a sustained upturn over the last six months. With this mixed picture about specific UK potential, perhaps what the high returns mean is more general, and perhaps they will be used for new kinds of energy development, not just the expansion of local output.

United Kingdom:
Private Nonfin Corps: Net Rates of Return (%)
Q3 2005 Q2 2005 Q1 2005 2004 2003 2002
All PNFCs 13.4 13.8 13.3 13.3 12.9 12.5
UK Continental Shelf 36.3 34.4 30.6 29.3 29.2 30.4
Non-Continental Shelf 12.6 13.0 12.7 12.7 12.2 11.7
Manufacturing 6.2 7.9 5.8 7.1 6.9 7.2
Services 16.6 16.5 17.3 16.3 16.5 16.1
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