Hitt og þetta 11. apríl 2006

WSJE(4/11) Breakingviews: French Labor Reversal A Bad Sign

IN THE END, the surrender was unconditional. The French government gave in completely to protesters' demands to scrap the CPE youth employment contract. There will be no more efforts at labor reform before the next election, in April 2007.

Jacques Chirac had hoped to give up with some dignity. But his offer to enact -- but immediately modify -- the law came too late for the angry mobs. So Dominique de Villepin, the prime minister who had promised never to abandon the CPE, was forced to do exactly that.

Nobody in the French political establishment emerges with any credit. Messrs. Chirac and de Villepin have shown themselves to be both inept and cowardly. The prime minister said last week that he would lead the battle "until the end." That could come soon.

Nor has Nicolas Sarkozy, the ambitious interior minister, covered himself in glory. Not only did he fail to offer his government full support, but he failed to come up with an acceptable compromise. And the Socialist opposition failed to offer any alternative policies to fight unemployment.

The mob of mainly middle-class students may have had their studies disrupted -- a delay to the final exams could be their next demand -- but a lesson has been learned. The French government yields to disorder.

That's bad news for the French economy. The death of labor reform will hurt growth. It's also likely to be bad for the whole of Europe. The risk is that the weakened government abandons economic sense altogether and tries to bolster its popularity through antiliberal policies. Look for more protectionism.

Wacker Chemie

German retail investors are back -- and bankers and groups looking for capital in the public markets are breathing a sigh of relief. The initial public offering of Wacker Chemie has gone remarkably well. Not only did the conglomerate's shares float at the top of the indicated range, but they popped a further 22% in the opening day's trading to 97.50 euros ($118) a share.

Nearly 20% of the shares were taken up by retail investors. This is pretty remarkable. Few consumers run across the name Wacker in the daily grind. And small investors have been burned before by investing in things they don't understand. The Neuer Markt, Germany's market for smaller, high-tech firms, was shut down three years ago after widespread fraud and financial implosions. Retail investors were heavily overrepresented in the defunct market. These pains now appear to be fading. And retail investors are regaining their appetite for risk.

True, one can't assume that the 30 or so initial public offerings lining up for takeoff will go as well. Wacker was priced reasonably, so institutional demand was high. And the group has a sexy story in that it makes material used in solar panels. But the Wacker float is good news -- especially for those coming floats of groups such as discount airline Air Berlin that are counting on heavy interest by retail investors.


Investors haven't exactly blown a raspberry at Compass Group's spectacular GBP 1.8 billion ($3.1 billion) sale of its SSP concessions business. But they haven't been very generous in their applause, either. Despite the U.K. catering group getting about GBP 500 million more for the unit than expected, they marked the shares up by just 3.5% -- or GBP 175 million -- by yesterday lunchtime.

This may seem a bit mealy-mouthed. After all, the price tag for SSP is pretty good by any standards. Compass squeezed an above-market multiple of 11 times 2005 earnings before interest, taxes, depreciation and amortization out of Swedish private-equity firm EQT Partners and Australia's Macquarie Bank, while retaining the supply contract -- thus preserving the group's considerable purchasing power. The cash inflow will help the group cut its pensions deficit, too.

But selling companies is the easy bit -- especially when you are peddling assets of interest to private equity at a time of high liquidity.

Still, offloading SSP frees up new boss Richard Cousins to focus on the bigger task of fixing the core U.K. catering business when he joins in May. The group still faces rising costs, slowing growth and more demanding customers, all of which are squeezing margins hard. Mr. Cousins will need to make some inroads into these problems before the shares really bounce back.


At $5,828 a ton, the copper price is up 27% this year and almost 150% since the beginning of 2004. But miners don't take that price seriously. They think more about the cost of production over the lifespan of a typical mine, or two or three decades. They are right to do so. This boom looks like a speculative bubble.

After twenty years of inadequate exploration and investment, no one really knows how much it will cost to add enough production to meet rapidly growing Asian demand. Most miners still talk about $2,000 a ton, but that may not be enough to get ore out of increasingly inhospitable terrains. Citigroup says $2,600 and Bloomsbury Minerals Economics argues for $2,755. But any way you look at it, the current price is way off the mark.

Why the big gap? In part, it reflects a genuine shortage of metal. Between 2003 and 2008, use will have exceeded production by 2%, according to Bloomsbury.

But cheap money has been more important. Speculators have had little to lose, and customers have been able to borrow to pay up. Copper is just one of a long list of pumped-up commodities -- oil, sugar, aluminum, indeed pretty much anything that stands still.

Miners don't trust speculators, so they have been slow to respond to higher prices. But they are now stepping up the pace of investment. Ironically, their cautious response may have sucked in even more financial investors, who see an industry left behind by rising demand.

More metal will eventually bring the price down. But higher interest rates could pop the bubble much faster. As the cost of holding this nonyielding asset rises, speculative owners are likely to become more jittery. With the copper price so far above the cost of production, a correction could easily turn into a rout.