TheChek News Flow

- 2024 Spring Festival holiday lasted from Feb. 10 to Feb. 17, one day more than the previous years.

- 474M domestic tourism trips were made during the Spring Festival holiday, +34.3% y/y, +19% v 2019 pcp

- Trip.com reported China outbound and inbound tourism orders both exceeded the same period in 2019, particularly inbound tourism, +48% v 2019 pcp

- The National Immigration Administration, reported 13.5M inbound and outbound visits were made during the holiday. Daily average visits was 1.69M, +2.8x y/y

Christopher Wray warns that pre-positioned malware could be triggered to disrupt critical systems in the U.S.

MUNICH—As intelligence chiefs and policymakers gathered for this city’s annual security conference focused on the wars in Ukraine and the Middle East, the director of the Federal Bureau of Investigation urged them not to lose sight of another threat: China.

Christopher Wray on Sunday said Beijing’s efforts to covertly plant offensive malware inside U.S. critical infrastructure networks is now at “a scale greater than we’d seen before,” an issue he has deemed a defining national security threat.

Citing Volt Typhoon, the name given to the Chinese hacking network that was revealed last year to be lying dormant inside U.S. critical infrastructure, Wray said Beijing-backed actors were pre-positioning malware that could be triggered at any moment to disrupt U.S. critical infrastructure.

“It’s the tip of the iceberg… it’s one of many such efforts by the Chinese ,” he said on the sidelines of the security conference that has been dominated by questions over Ukraine and the death of Russian opposition leader Alexei Navalny. China, he had earlier told delegates, is increasingly inserting “offensive weapons within our critical infrastructure poised to attack whenever Beijing decides the time is right.”

The FBI chief declined to elaborate on what other critical infrastructure had been targeted, stressing that the Bureau had “a lot of work under way.”

Wray’s comments are the latest in a string of public warnings by senior Biden administration officials to animate their fears about China’s advanced and well-resourced hacking prowess. Western intelligence officials say its scale and sophistication has accelerated over the past decade. Officials have grown particularly alarmed at Beijing’s interest in infiltrating U.S. critical infrastructure networks, planting malware inside U.S. computer systems responsible for everything from safe drinking water to aviation traffic so it could detonate, at a moment’s notice, damaging cyberattacks during a conflict.

The director has been prodding foreign governments in Europe and Asia to increase resources on the threat of Chinese hacking campaigns, particularly protecting critical infrastructure. He described the response as gratifying and a step change from several years ago when some were still skeptical about the Chinese cyber threat.

In California, Wray met with counterparts from the Five Eyes intelligence community—which encompasses the U.S., Australia, New Zealand, Canada and the U.K.—to share respective strategies for cyber defense; he has also traveled to Malaysia and India to discuss China’s hacking campaign with authorities in both countries.

“I am seeing more from Europe,” he said. “We’re laser focused on this as a real threat and we’re working with a lot of partners to try to identify it, anticipate it and disrupt it.”

The Netherlands’ spy agencies said earlier this month that Chinese hackers had used malware to gain access to a Dutch military network last year. The agency, considered to have one of Europe’s top cyber capabilities, said it made the rare disclosure to show the scale of the threat and reduce the stigma of being targeted so allied governments can better pool knowledge.

Beijing routinely denies any accusations of cyberattacks and espionage linked to or backed by the Chinese state and has accused the U.S. of mounting its own cyberattacks. But evidence of a Chinese state-backed program has been building in recent years and the U.S. has charged a string of officers from the People’s Liberation Army cyber units with stealing secrets.

Wray said the U.S. is particularly focused on the threat of pre-positioning, which some European officials have described as the cyber equivalent of pointing a ballistic missile at critical infrastructure.

A report released this month by agencies including the FBI, the Cybersecurity and Infrastructure Agency and the National Security Agency said Volt Typhoon hackers had maintained access in some U.S. networks for five or more years, and while it targeted only U.S. infrastructure directly, the infiltration was likely to have affected “Five Eyes” allies.

The Justice Department and FBI took action in December after obtaining court approval to dismantle a botnet, or network of hacked devices, consisting of small office and home office, or SOHO, routers. Mostly from Cisco or Netgear, the routers were vulnerable because they had reached so-called end-of-life status, meaning they were no longer receiving routine security updates from the manufacturers.

Those attacks are now being amplified by artificial intelligence tools, Wray said.

“The word ‘force multiplier’ is not really enough,” he said.

Machine learning translation has helped Chinese security operatives to more plausibly recruit assets, steal secrets and rapidly process more of the information they are collecting, the director said.

“They already have built economic espionage and theft of personal and corporate data as a kind of a bedrock of their economic strategy and are eagerly pursuing AI advancements to try to accelerate that process,” he said.

LISBON - It’s the end of an era and a moment of mourning for corporate Portugal. On Thursday, José Neves was ousted from Farfetch, the marketplace he founded in 2007 after it was acquired by Coupang, a South Korean marketplace and fast delivery company. Around half of Farfetch’s executive team resigned and the rest are expected to leave in the next few weeks or months, sources close to the company said. Neves continues to act as a consultant for Coupang.

The management exodus comes as Farfetch is slashing up to 30 percent of its workforce, or around 2,000 people, starting with more than half of that number in Portugal, Neves’ homeland and where the company has the most staff. Farfetch employs more than 6,000 worldwide (after a peak of 6,800 end-2022) and between 3,000 and 4,000 in Portugal. It nearly doubled its workforce in 2021 and 2022 after the pandemic-led boom in e-commerce.

The collapse of Farfetch and the resignation of Neves, one of the southern European country’s most prominent company leaders, has shaken corporate Portugal. Farfetch’s hiring spree made it impossible for other companies in Portugal to hire software developers and IT specialists. Many of them were corralled by Farfetch, which offered attractive terms and share rewards. Now they will be free to join other companies but as many of them will land on the job market at the same time, they may be scrambling to find work. Video calls with people being fired at Farfetch started on Friday, Portuguese media reported.

A NATIONAL HERO

Neves’ exit dominated the headlines in Portugal, where he was considered a national hero particularly among the younger generations. Farfetch was the country’s first unicorn, or a company worth more than €1 billion. Neves was awarded many medals and prizes by politicians who used Farfetch to promote Portugal as an attractive country for setting up businesses.

Portugal counts now just a handful of unicorns, including Sword Health, a company that provides virtual and digital physical therapy. “At Sword, it’s thanks to Farfetch’s example that we started to believe in the possibility of creating a billion-dollar company,” Sword Health CEO Virgilio Bento commented on LinkedIn in reaction to Neves’ exit from Farfetch. In spite of what happened, he said Portugal had to be grateful for what Farfetch had achieved. In the past few days, LinkedIn has been inundated with comments from people praising Neves’ leadership and vision, even though, ultimately, he destroyed his own company.

Had Neves moved to a chairman position nine months ago and appointed a CEO who would have made some order and cut losses, Farfetch could have been saved, several former Farfetch managers told Miss Tweed under condition of anonymity. But Neves did not want to give up control – as often happens with founders of a company.

“Neves was a great visionary, but the market wanted execution and focus on profitability which he never delivered,” a former senior Farfetch manager told Miss Tweed. “Many executives have left already but the entire executive team eventually will leave, it’s just a matter of time.” The reason is cultural. The company’s managers believed in Neves’ vision and the Farfetch he built. They are not ready to be bossed around by South Koreans who have already made clear that maximizing revenue was the focus, not building the Farfetch brand.

Farfetch was worth as much as $21 billion back in February 2021. It saw its entire market value wiped out after the company was delisted from the New York Stock Exchange at the end of December. The deal with Coupang became effective on Jan. 31. All shareholders, including Neves, Farfetch staff, Cartier owner and former business partner Richemont and Artemis, the Pinault family investment company, lost their entire investment. Chanel, which was once a Farfetch shareholder, sold its stake in 2022, sources close to the company have said. Chanel adopted Farfetch’s Store of the Future technology for some of its flagship stores. It’s not clear what will happen to that relationship.

INVESTIGATION

“There are a lot of people who are angry at José,” a former senior Farfetch executive told Miss Tweed. “I think José will be spending the next few years in court.” Neves did not respond to emails from Miss Tweed asking for comment.

Investors want to understand how it’s possible that, in August 2023, Farfetch told investors it had sufficient funding and the company was doing well and four months later, it escaped bankruptcy by being acquired by Coupang in a deal put together in 10 days. Farfetch bondholders are planning to take legal action to try to get some of their money back. The Securities and Exchange Commission, the U.S. stock market regulator, has declined to confirm whether it had launched an investigation into what happened.

“I don’t think anybody did anything illegal but there were clearly some issues regarding transparency about the company’s numbers and performance,” one former Farfetch manager said.

Now that the deal with Coupang has been closed, Farfetch will be able to go ahead with the sale of some of its prime assets, including New Guards Group (NGG) which owns the license for several fashion brands including Off-White and Palm Angels. For sale are also the Reebok distribution business in Europe, the sneaker resale website Stadium Goods and the London multi-brand boutique Browns. These businesses are not strategic for Coupang.

Italian private equity firm Style Capital is in talks to buy NGG while British retailer Frasers Group is interested in acquiring Browns, industry sources have said. Frasers Group bought online fashion retailer MatchesFashion in December, hours after the Coupang deal was announced, a deal Miss Tweed was first to report.

For now, Farfetch’s Group President Stephanie Phair is still in place and will remain so for the foreseeable future, sources close to the company said. Phair is also chairman of NGG, which is a company based in Italy. She has to stay put until NGG is sold. “I am delighted to confirm that I will continue in my role as NGGH (NGG Holdings) Chair and I am dedicated to serving the business and supporting the teams,” Phair wrote in an email to NGGH staff on Thursday of which Miss Tweed obtained a copy. “It is undeniably an unsettled time for us and in the industry,” she stated in the note. “But there are also a lot of positives that we should celebrate – the Off-White appearance at the Super Bowl half-time being just one example.”

Farfetch bondholders are hoping to force Coupang to give them some of their money back once the company raises funds from selling various assets, as Miss Tweed reported last month.

“The entire multi-brand Internet ecosystem is in a state of flux,” one senior fashion executive told Miss Tweed on Friday. “Neves did not only run his company to the ground, he actually killed the reputation of the digital channel.” The clear winner, industry insiders say, is online fashion retailer Mytheresa, as Miss Tweed reported in a deep dive analysis of the industry published last year before Farfetch’s woes became public. Mytheresa targets mainly affluent customers who can afford the online retailer’s carefully curated looks in spite of the tough economic environment.

More than 500 Italian multi-brand boutiques sell stock on Farfetch. During the crucial holiday shopping season in November and December, they were afraid they would not get paid by Farfetch for the clothes they sold on the marketplace during that period. Had that happened, some of them would have gone bankrupt, several industry sources said. In the end, they were paid. This highlights to what extent Farfetch plays a central role in the fashion retail ecosystem.

Most of Farfetch’s partner brands and retailers are in a “wait and see” mode, industry sources say. As of now, only Gucci owner Kering has stopped working with Farfetch’s platform on a concession model. Other groups or major brands could follow suit. Customers for now do not see the difference. Products by Kering brands such as Saint Laurent, Gucci and Balenciaga continue to be sold on the Farfetch marketplace by wholesalers, not by the brands themselves. Kering co-CEO Jean-Marc Duplaix told investors last week during the group’s annual results presentation that the group had done “a recent internalization of some e-tailers’ accounts” but stopped short of referring to Farfetch by name.

Earlier this month, U.S. retailer Neiman Marcus Group announced it had abandoned plans to use Farfetch’s e-commerce software to power Bergdorf Goodman’s online storefront and mobile application. It’s not clear if Harrods, which uses Farfetch’s technology, will continue working with the company. Harrods and Neiman Marcus did not reply to requests for comment.

THE ESTHE, NEVES FAMILY’S NEW STARTUP VENTURE

In an interesting twist, José Neves’ wife Daniela Cecilio Neves is actively promoting her fashion brand The Esthe, which launched in London in December, just days before the collapse of her husband’s company. The Esthe has already received prominent reviews from various publications including Another and the Financial Times’ HTSI(How to Spend it) magazine, which published a feature on the brand on Feb. 14.

“The living room in Neves’ South Kensington stucco house, with soaring ceilings, parquet floors, abstract artworks and curvilinear Mario Bellini sofas, serves as an ideal improvised showroom,” the luxury supplement of the FT paper said about José and Daniela Neves’s house. “The clothes, meanwhile, made with ethereal linens, Brazilian organic fabrics and UK-made underpinnings, are cool. There’s a dash of Vionnet via Calvin Klein and John Galliano in the many iterations of slip dresses and the languid air of Daisy Fellowes in the silhouettes.”

Daniela, with whom José has two children, helped build Farfetch in Brazil and worked for the company a few years before she founded a mobile application called ASAP 54, that was meant to be for fashion what Shazam was for music. As she struggled to monetize her application, she transformed it into a shopping concierge service which Farfetch acquired in 2017 for $2 million in shares. It was integrated into the website’s VIP proposition.

José and Daniela have been the target of much flak on social media, so much so that Daniela had to make her Instagram private and close some accounts, sources close to the former power couple said. Not easy to launch a fashion brand when your husband is being accused of mismanagement and massive value destruction.

José Neves sold $10 million worth of Farfetch shares in 2022. Some of that money may have helped finance the launch Daniela’s fashion brand. The Esthe is still a tiny brand, but it may help the 49-year-old Portuguese entrepreneur think about something else than the messy court cases in which he is inevitably going to be stuck for quite a while.

Even the World’s Biggest Electric-Vehicle Market Is Slowing

China’s government is urging carmakers to expand overseas and BYD is ramping up export targets

HONG KONG—Chinese electric-vehicle makers that enjoyed years of explosive growth now face a slowdown in domestic demand, spurring them to push overseas and challenge global auto giants already struggling with a transition to battery-powered cars.

A subsidies-driven boom in past years helped China sell more electric cars than Europe and the U.S. combined. The sales surge created a wave of investment into homegrown automakers that have become the envy of the global industry.

A deceleration in the China market, after subsidies were reduced and consumers cut back spending, means the growth rate there has fallen behind those two regions.

The slowdown has fueled a fierce price war in China embroiling dozens of EV startups and foreign players such as Tesla. Many Chinese EV makers burned through cash to chase a share of the growing market. Many are yet to turn a profit despite rising sales, leaving some at risk of going bust or needing injections of capital.

Slower growth also leaves an industry geared up to make millions more cars than it can sell domestically in the next few years. China’s government has acknowledged overcapacity and underused factories, and is pushing automakers to expand overseas. Analysts say that trend could lead to oversupply at home and abroad.

Automakers in China are projected to add capacity for five million cars between 2023 and 2025, most of which are EVs, according to an estimate by Bernstein Research. EV sales in China are expected to grow by around 3.7 million during this period, it said.

BYD, the crown jewel among Chinese carmakers that is backed by Warren Buffett, added enough factory capacity in China alone by December to churn out four million cars a year, Bernstein said. That figure is a million more than it sold in 2023.

Global ambitions

BYD, which has ousted Tesla as the top global EV seller, has ambitious plans to increase sales overseas in the coming years, including buying ships to transport cars to Europe.

Its first foreign factory making passenger EVs began delivering cars this year, from Uzbekistan, and a second in Thailand starts deliveries in July. It plans to open two more factories—in Brazil and Hungary—in the coming years, and is weighing setting up a plant in Mexico from which it would consider exporting to the U.S. BYD’s cheapest car sells for around $11,000 in China.

China’s commerce ministry this month encouraged its EV makers to expand overseas, such as by tying up with foreign partners for research, logistics and supply chains. Chinese auto suppliers will get credit from banks to support the push.

“There is clear overcapacity in China, and this overcapacity will be exported. Especially if overcapacity is driven by direct and indirect subsidies,” the head of the European Commission, Ursula von der Leyen, said late last year.

The commission launched an antisubsidies probe against Chinese carmakers in September, amid concerns Europe’s auto powerhouses could be hurt by China’s emerging rivals.

Rapid growth created price a war

Global auto giants that previously counted on sizable sales from China are now struggling to make gains there against dominant local upstarts, as overall appetite for electric vehicles wanes in other major markets. General Motors and Ford Motor have dialed back on their electric-car production plans. Elon Musk’s Tesla warned of notably slower growth this year, including in China, during an earnings call last month.

Last year, more than one million domestically made electric vehicles were shipped from China as it became the world’s biggest auto exporter, to countries such as Australia and Thailand. That total included vehicles from Tesla and Polestar as well as Chinese-owned brands including BYD, MG and NIO.

Chinese automakers have so far had limited success in developed markets such as Europe, and they are largely shut out of the U.S. by tariffs and an inability to tap green-transition subsidies.

Whether China can prevent oversupply depends on whether policymakers can control the electric-car revolution as well as they juiced it.

Favorable consumption policies—including tax waivers, cash subsidies and incentives such as priority for rationed car licenses and parking—led to a three-year streak during which consumer demand for EVs soared and often outran supply.

The central government withdrew EV-purchase subsidies for consumers at the start of last year, sending growth down to 21% for 2023 from 74% a year earlier. In comparison, EV sales in 2023 grew 47% in the U.S. and 37% in Europe, according to industry analysts.

The demand downshift sparked a fierce price war in China, with discount rates for electric passenger cars in the country climbing steadily last year to a historic high of around 8% by year-end, according to the China Passenger Car Association.

“Right now in China we already see overcapacity. This is because in the past few years many auto brands believe in the immense demand and that they will remain strong,” said Ming Hsun Lee, auto analyst at Bank of America.

A senior Chinese official last month indicated Beijing was concerned about disorderly competition, saying some local governments and companies had gone ahead blindly with electric-car construction projects or projects that are redundant.

Too many cars

A record 158 new car models came onto China’s market last year, more than 70% of which were EVs, according to CMB International’s auto analysts. China has too many car models available, around 400 of which are electric, according to HSBC analysts.

Carmakers in China will see “the most intense competition” in the next two years, William Li, founder of Tesla-rival NIO, said in December. U.S.-listed Chinese NIO is planning to launch a second brand this year with cheaper models as its debts mount. The company has cut back on staff and deferred projects such as battery production.

BYD didn’t respond to a request for comment. NIO declined to comment.

Many Chinese carmakers will produce and sell more cars that will lead to a collapse in pricing, said Qu Ke, autos analyst at CCB International. Eventually, there could be an oversupply of EVs even in overseas markets, he added.

Exported EVs are sold at a premium compared with prices in China, even after taking into account shipping costs. BYD and MG, the Shanghai-government-owned British marque, are estimated to bring 5 to 10 percentage points more in margins from exports than domestic sales, according to Bernstein.

HSBC has reduced its estimate for BYD’s earnings this year by 13%, saying it is expecting lower volume, pricing and margin from BYD as the price war in China intensifies. BYD took almost a third of all EV sales in China last year.

BYD has a target to sell 400,000 cars overseas this year. It exported around 242,000 worldwide last year, only 13,000 of which went to the European Union, according to estimates by GlobalData.

In Germany, one of BYD’s local distributors announced an up to 15% price cut for all its available models last month. A BYD cargo ship has set sail for Europe with thousands more vehicles.

Macquarie looks to cut stake in UK’s biggest gas network Cadent

Sale will be a key test of investor appetite for gas infrastructure as Britain tries to shift to renewables

Australian investment manager Macquarie has joined forces with another shareholder to try to sell a combined £1.3bn stake in Cadent, the UK’s biggest gas network, as it prepares for the transition to renewable energy.

Macquarie currently owns 26 per cent of the business and is in early stage talks to sell a near 5 per cent stake, according to two people close to the discussions. Cadent runs about half of the UK’s eight local gas distribution networks, providing gas to 11mn homes and businesses in North West and East England, the Midlands and north London.

US-based Federated Hermes is looking to sell a 4.6 per cent stake, the people said. It currently owns 13 per cent of Cadent.

The sale will be a key test of investor appetite for gas infrastructure as Britain tries to reduce its use of natural gas as part of its efforts to reach net zero carbon emissions by 2050. 

Gas pipeline owners hope the UK will encourage the use of hydrogen, which does not produce carbon dioxide emissions when it is burnt, as a replacement for natural gas for home heating.

But the UK’s advisory National Infrastructure Commission last year urged the government to back heat pumps, which run on electricity, instead saying hydrogen for heating was “simply not ready at scale”. 

Macquarie had been increasing its investment in UK gas infrastructure, buying into Cadent in 2017. Three years ago, it bought a majority 60 per cent stake in National Grid’s gas transmission and metering network in partnership with British Columbia Investment. Last year, it raised that stake to 80 per cent. 

The high-pressure pipelines in the transmission network carry gas from the North Sea and import terminals over long distances to large power stations and factories, as well as to regional distribution networks such as Cadent, which then pipe it to homes and businesses.

Cadent has already replaced 70 per cent of its steel pipes with the plastic pipes necessary for hydrogen distribution and is on track to complete this by 2032. It believes it can convert its network to hydrogen, despite the uncertainty over its future role in the UK energy mix. 

The government has said it will decide on the role of hydrogen in home heating in 2026, following trials in people’s homes. However, two potential trials were cancelled last year because of local opposition and low availability of hydrogen, leaving only one left to run, in Fife, Scotland. 

Colm Gibson, a managing director at consultancy Berkeley Research Group, said: “There are a number of promising hydrogen technologies out there, but any buyer will need to engage proactively in the decarbonisation debate to maximise the value of their stake.”

Macquarie said there was no change in strategy despite the sale. “We are a committed long-term shareholder in Cadent and are supporting significant investment across the network to maintain the safe, secure and reliable supply of gas,” the group said.

It added that it had increased average annual investment in Cadent to £830mn in the years 2018-2024 compared with £536mn between 2014 and 2017, while customer bills had fallen 15 per cent in real terms.

Federated Hermes said it remained a “committed and supportive long-term investor” in Cadent, adding “we believe that the company will continue to play an instrumental role in the UK’s energy transition”.

Macquarie invested in Cadent in a £5.4bn deal in March 2017 alongside other investors including Qatar and Chinese sovereign wealth funds.

The Australian group is the largest infrastructure investor in the UK but has attracted some controversy particularly over its involvement in English water companies. It previously owned South East Water and Thames Water and currently owns Southern Water, which is under fire for sewage pollution.

Geologists signal start of hydrogen energy ‘gold rush’

Natural sources of the gas are more abundant than expected and could supply energy needs for centuries, study shows

Geologists are signalling the start of a new energy “gold rush” for a previously neglected carbon-free resource — hydrogen generated naturally within Earth.

As much as 5tn tonnes of hydrogen exists in underground reservoirs worldwide, according to an unpublished study by the US Geological Survey.

Previewing the results at the American Association for the Advancement of Science annual meeting in Denver, project leader Geoffrey Ellis said: “Most hydrogen is likely inaccessible, but a few per cent recovery would still supply all projected demand — 500mn tonnes a year — for hundreds of years.”

The demand for hydrogen as a fuel and industrial raw material, particularly to make ammonia for fertiliser production, has been mainly met so far by chemically reforming gas that is made up largely of methane, known as “blue hydrogen” when the carbon emissions are captured or “grey hydrogen” when they are not.

A smaller amount is made by splitting water through electrolysis using renewable energy sources, known as “green hydrogen”.

But Mengli Zhang of the Colorado School of Mines said tapping natural hydrogen — also known as geologic or gold hydrogen — would be cleaner and cheaper than blue or green hydrogen. “A gold rush for gold hydrogen is coming,” she told the conference.

The prospect is beginning to attract interest from investors. US start-up Koloma raised $91mn last year from funds including Bill Gates’s Breakthrough Energy Ventures.

“Geologic hydrogen represents an extraordinary opportunity to produce clean hydrogen in a way that is not only low carbon, but also low land footprint, low water footprint and low energy consumption,” said Paul Harraka, Koloma’s chief business officer.

US company Natural Hydrogen Energy has drilled an exploratory well in Nebraska. “It will take a couple of years to ramp up to commercial production,” said Viacheslav Zgonnik, chief executive. “We are doing everything we can to get there faster.”

Previous scientific opinion held that little pure hydrogen was likely to exist near Earth’s surface because it would be consumed by subterranean microbes or destroyed in geochemical processes.

But geologists now believe hydrogen is generated in large quantities when certain iron-rich minerals react with water, Alexis Templeton of the University of Colorado, Boulder, told the AAAS conference.

Hydrogen requires different geological conditions from oil and natural gasfields. “We haven’t looked for hydrogen resources in the right places with the right tools,” said Ellis.

Geologists are now finding natural hydrogen reserves around the world. This month researchers reported that more than 200 tonnes of hydrogen a year were flowing from the Bulqizë chromite mine in Albania.

The village of Bourakébougou in Mali is often seen as the birthplace of natural hydrogen extraction. Since 2012, almost pure hydrogen has flowed from a borehole there with no diminution of pressure, giving villagers their first electricity supply.

Ellis said the Bourakébougou gas well may have inspired a hydrogen rush comparable with the birth of the petroleum industry in 1859, when Edwin Drake drove a pipe into the ground at Titusville, Pennsylvania and struck oil.

New registration regime ‘is primarily about principal trading firms’, says chair of regulator

The top US securities regulator has played down the impact on hedge funds of a new rule tightening oversight of the Treasury bond market, telling the Financial Times that they are not the main target.

Gary Gensler, chair of the Securities and Exchange Commission, said in an interview on Friday that the so-called dealer rule his agency passed this month is more focused on big high-speed trading firms than on hedge funds.

The rule mandates that more large traders must register as dealers — firms that are regularly engaged in providing liquidity to the market place — a status that requires them to hold capital and report trades to the regulator.

Hedge fund groups have sounded worries that registration will be required for their members, but Gensler said the rule was aimed mainly at the high-speed trading firms that often buy and sell securities in fractions of a second.

“[The dealer rule] is primarily about principal trading firms that dealer trade. That’s what that rule is principally about,” Gensler said.

The impetus for the SEC rule is the increasingly important role played by some of the largest traders in the $26tn US government debt market as they enter an arena once dominated by banks. Treasury markets have been undergoing a sweeping overhaul intended to bolster stability after a series of crises.

Treasury traders that register as dealers are subject to greater SEC scrutiny over their positions and activity. Some principal trading groups have voluntarily registered, including DRW, Citadel Securities and Jump Trading.

Gensler said: “In the equity markets, we have all the [principal trading firms] registered. In the Treasury market, we have some but not all, and that rule really addresses that directly.”

He said criteria for inclusion would depend on a firm’s trading strategy: “It’s about parties posting liquidity on both sides of the market in the same security. That’s what dealers do.”

“I couldn’t tell you whether some small number of hedge funds are doing that. To my knowledge, that’s not what they’re doing as a regular business,” said Gensler.

The hedge fund industry criticised the SEC immediately after the publication of the final rule on February 6, concerned they would be caught up in the new regulation.

“Alternative asset managers are not dealers,” said Bryan Corbett, president of the Managed Funds Association, raising concerns that “the rule may not go far enough in excluding them and private funds from being regulated as dealers”.

In analysis accompanying the final rule, the SEC said that there might be up to 16 private funds — a category that includes hedge funds — that fit the bill. Gensler emphasised that it was “up to” that figure.

Confusion over the dealer rule comes in part because its original draft, when it was proposed nearly two years ago, would have captured many hedge funds in addition to principal trading firms. The hedge fund industry responded with outrage.

The final rule seemed to take those objections into consideration. But, even with SEC concessions, hedge funds were not convinced that they had been excluded.

Natural gas prices plunge as US set for warmest winter on record

Lower demand during mild weather has coincided with surging production

US natural gas prices have plunged to a near-three-decade low as what is set to be the country’s warmest winter on record slashes demand for the heating fuel just as production surges to record levels. 

Winter months, when heating demand is highest, are on track this year to be the mildest since reliable records began in 1950, analysts said, leaving gas usage much lower than expected. 

Coupled with surging US gas production — which hit a record 105bn cubic feet a day in December — that has sent prices into freefall, plummeting by more than 50 per cent since mid-January. 

On Friday, benchmark Henry Hub contracts for March settled at $1.61 per mn British thermal units, up marginally from $1.58/mn btu on Thursday. Apart from a handful of days in mid-2020 — when the Covid-19 pandemic crushed demand — that is the lowest closing price for the month-ahead contract since 1995.

“It’s just nuts . . . something very unusual is going on,” said Matt Rogers at the Commodity Weather Group, a consultancy. “I hate to use the word devastating — but the floor really fell out on demand expectations.”

Climate change has led to increasingly warm winters across the world. Data released this month showed the average global temperature for the first time breaching the benchmark of 1.5C above pre-industrial levels over a 12-month period. 

That has undermined demand for heating fuel, even as a shift away from coal pushes up the use of gas in electricity.

The number of heating degree days — a measure of coldness based on how often temperatures fall below a certain reference point — has dropped 7 per cent over the past two decades, according to the US Energy Information Administration. 

The US National Oceanic and Atmospheric Administration, the government agency responsible for mapping weather trends, warned this week that ice cover in the Great Lakes has fallen to a historical low for this time of year.

Based on available data to date, analysts reckon the latest December-to-February winter period will be the warmest since reliable tracking equipment was installed in US airports in the 1950s. CWG estimates it will be 3 per cent warmer than the previous record set in 2015-16, based on gas-weighted heating degree days.

Meanwhile, US gas production, which has surged since the beginning of the shale revolution 15 years ago, has scaled new heights. S&P Global Commodity Insights estimates that production rose to a record of more than 105bn cubic feet per day in December. Output slipped in January before returning to around 105bn cu ft/d again in early February.

“It comes down to weather and record levels of production that we ended up the year with,” said Luke Larsen, director of research at S&P, of the price collapse, noting that gas producers would soon have to throttle back output.

“I think we’re going to probably run into some issues from a production standpoint if we do continue at this level,” he said. “We very well may see production shut-ins.”

A handful of gas producers indicated plans to curtail drilling programmes in recent days as weak prices put pressure on their profit margins.

Comstock Resources said it would cut its rigs in the field from seven to five and suspend its dividend until prices rise. Antero Resources has cut rig numbers from three to two and slashed its exploration budget. 

EQT, the country’s biggest producer, said it was ready to reduce production as needed this year, depending on how prices move. 

“In the short term, we need to be sensitive to the market that we’re in — activity reduction is going to be a big thing,” Toby Rice, EQT chief executive, told analysts this week. 

The gas glut has pushed up inventories, with storage sitting at about 2.54tn cu ft last week, according to the EIA — 11 per cent higher than a year ago and 16 per cent higher than the five-year average.

Sluggish demand has also depressed prices and driven up storage levels in other parts of the world. In Europe, the benchmark Title Transfer Facility (TTF) traded on the Intercontinental Exchange has fallen 22 per cent this year to trade around €25 per megawatt hour, or $7.90 mn btu — less than a tenth of what it was at the peak of the energy crisis in summer 2022.

The price of liquefied natural gas delivered to north-east Asia, assessed by price reporting agency Argus, has dropped 23 per cent this year, and is trading at levels last seen in 2021.

Traders reckon the supply-demand imbalance will take time to flush out, with options markets suggesting little chance of a significant US price improvement in the near term.

“I think the market has really written off 2024 in terms of any sustained upside rally,” said Charlie Macnamara, head of commodities at US Bank. “You’re starting to see the market really start to formulate an opinion that we need to be down here for a while to help solve this oversupply.”