TheChek News Flow

Cairo considers downgrading diplomatic ties and joining an international court case accusing Israel of genocide

In the almost 45 years since their historic peace deal, Israel and Egypt have become essential partners, a close though never warm relationship that underpins both countries’ national security. Israel’s Rafah offensive is threatening to undo all of that.

Egypt, a center of Arab military, political and cultural power, is now considering a downgrade to its diplomatic ties with Israel, Egyptian officials say. Egypt has in recent days said it would join South Africa’s court case charging Israel with genocide. And Egypt has refused to reopen its border with Gaza after Israeli forces seized the Palestinian side of the crossing.

Mohammed Anwar Sadat, nephew of the Egyptian president of the same name who negotiated the Egypt-Israel peace treaty of 1979, said the current dispute was the countries’ worst bilateral crisis since then.

“There is now a lack of trust,” said Sadat, a former member of Egypt’s Parliament. “And there is now a kind of suspicion from both sides actually.”

The current standoff began when Israel gave Egypt just hours notice before launching the military operation last week in which the Israeli military seized control of the Gazan side of the Rafah border crossing with Egypt, Egyptian officials say.

The abrupt message, relayed unexpectedly to Egyptian intelligence officials on May 6, followed months of careful negotiations between Israeli and Egyptian military and intelligence officials over the long-threatened attack on Rafah, where more than a million Palestinians are sheltering.

Israel had previously briefed Egypt about its plans for Rafah, assuring Cairo that the crossing point, a key entry point for humanitarian aid into the besieged enclave, wouldn’t be affected and that Palestinians there would be given weeks to evacuate the area safely.

“None of these assurances materialized, with Israel giving us a very short notice about entering the crossing,” said an Egyptian official familiar with the events.

Israel’s military declined to comment. The Israeli Foreign Ministry didn’t respond to a request for comment. Israeli Prime Minister Benjamin Netanyahu has said that taking control of the Rafah crossing was necessary to cut off smuggling by Hamas.

After fighting a series of wars, Israel and Egypt have developed an important security partnership since 1979. The nations’ militaries have worked closely together, particularly over the last decade under President Abdel Fattah Al Sisi, during which they shared intelligence to help defeat Islamic State extremists in Egypt’s north Sinai region.

The countries still cooperate on intelligence sharing and security issues. And Egypt depends on billions of dollars in U.S. military aid that depends on the peace treaty.

But the Rafah operation has piled more stress on the deeply strained relationship. Egypt is a key mediator in indirect talks between Israel and Hamas over a deal aiming to free Israeli hostages held by Hamas and impose a cease-fire in Gaza.

“They don’t like to be caught by surprise, and they make their point vocally and by other means,” said retired Israeli Brig. Gen. Assaf Orion, who formerly oversaw Israel’s military liaison with Egypt.

The Egypt-Israel divisions add to the challenges facing the Biden administration, which has struggled to help broker a cease-fire deal and last week decided to pause delivery to Israel of some bombs used in the war in Gaza to pressure it to back away from the attack on Rafah. The U.S., which brokered the 1979 treaty between the two countries, has commended Egypt’s role as a mediator in the conflict.

Egypt has protested Israel’s Rafah invasion to the U.S. and European countries, saying the operation puts the peace treaty in jeopardy. In another sign of worsening ties, the Egyptian foreign ministry on Sunday also said it would join South Africa’s case charging Israel with genocide at the International Court of Justice. Israel strongly rejects the accusations.

Israel says that the current operation in Rafah isn’t yet a full-blown ground invasion of the city, though the attack has already displaced nearly 360,000 Palestinians, according to the United Nations.

Egypt also is refusing to cooperate with Israel to operate the Rafah crossing point, which until last week had been the last remaining entry point to the strip that wasn’t under full Israeli control. The crossing was one of very few entry points for humanitarian aid into the strip, and the only exit for the tiny number of Gazans that Egypt and Israel would allow to leave the territory.

Egyptian officials also say they are considering downgrading diplomatic relations with Israel by pulling the country’s ambassador in Tel Aviv.

“As we stand, there are no plans to suspend ties or throw away Camp David,” said another Egyptian official, referring to the Camp David Accords that led to the 1979 peace treaty. “But as long as Israeli forces remain at Rafah crossing, Egypt will not send a single truck to Rafah.”

The war in Gaza has heaped economic and political pressure on Egypt, the Middle East’s most populous nation.

The assault, which has forced most of the strip’s 2.2 million residents to flee their homes, has raised fears in Cairo of a mass displacement of Palestinians into Egypt.

“The risks for Egypt are really high,” said Yezid Sayigh, a senior fellow at the Carnegie Middle East Center in Beirut. “And I think they resent enormously that the Israelis are paying no attention whatsoever to Egyptian interests or advice.”

The crisis in the wider Middle East sparked by the war has also squeezed an Egyptian economy that was already struggling under Sisi, a former general who came to power in a 2013 coup.

Attacks by Yemen’s Houthi rebels on ships in the Red Sea have forced ships to divert around the Horn of Africa, approximately halving Egypt’s transit fees from the Suez Canal, a critical source of foreign currency, Sisi said in February.

Israel’s seizure of the Rafah crossing has also aggravated Egypt by removing one of the country’s points of leverage over Hamas and a key means for it to demonstrate its solidarity with Palestinians, say observers on both sides.

An Israeli official said that providing aid to Palestinians and achieving a truce remained priorities for Egypt.

“There is no deal, and Israel is endangering [aid flows], it puts them in a really hard position,” the Israeli official said. “The fact that aid hasn’t come in, it’s bad for them, but it’s very bad for us,” the Israeli official added, noting that Israel is required by the International Court of Justice to bring aid into Gaza.

Because both Egypt and Israel have an interest in maintaining their peace treaty, diplomatic measures such as joining South Africa’s case against Israel, analysts say, are a means of pressuring both Israel and the U.S., without fully cutting off ties.

“The Egyptians can say what do you want us to do, would you rather us send a tank battalion to Sinai?” said Sayigh.

Without an understanding between the two countries about how the war will unfold, relations will continue to deteriorate, said Ofir Winter, an expert on Israel-Egypt ties at the Institute for National Security Studies in Tel Aviv.

“Israel needs Egypt as a mediator in the hostages’ exchange deal, and it will need it to stabilize the situation in Gaza in any future scenario after the war,” Winter said.

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The U.S. and China are competing to acquire the metal essential for EVs and data centers. It is also at the center of a $43 billion takeover battle.

After one of the world’s top copper producers recently hit a financial crunch, the Biden administration started huddling with potential investors about taking a stake in the company’s Zambian mines worth as much as $3 billion.

The search isn’t restricted to American companies, with entities from the United Arab Emirates, Japan and Saudi Arabia—all viewed as friendly to U.S. interests—expressing interest in the stake in First Quantum Minerals’ FM -1.48%decrease; red down pointing triangle assets, according to people familiar with the matter.

The goal is simple: to keep it out of Chinese control and prevent the Asian superpower from tightening its grip over the global supply of crucial metals and minerals.

The bidding, expected to be concluded later this year, is part of a global rush to acquire more copper, a key component in everything from electric cars to transmission lines and the data centers powering the AI revolution.

BHP Group’s record nearly $43 billion takeover bid for Anglo American, which was rejected Monday, puts a fresh spotlight on the intense demand for copper. While London-listed Anglo produces a range of commodities, from diamonds to nickel, Australia’s BHP has made clear that it most prizes the company’s copper assets. Anglo rebuffed BHP’s first offer last month, and other companies are believed to be weighing rival bids.

While the U.S. government doesn’t have any oversight over a proposed deal, officials have communicated to Anglo executives that they are concerned consolidation could limit the overall supply of copper, said people familiar with the matter. The U.S. is also concerned that China could put pressure on BHP to sell some assets or agree to sell more of its copper to the country to address potential anticompetitive concerns.

For the U.S., the current frenzy highlights the importance of its yearslong effort to build up supplies of the metals and minerals critical to the green-energy transition.

Demand for copper is expected to rise as certain mines close or scale back production. Copper futures are up 20% this year.

The U.S. doesn’t have a ministry for mining, a sovereign wealth-fund or much of a domestic mining industry. That has put it at a disadvantage with China, which can direct its state-owned enterprises to invest heavily no matter how commodity prices are performing.

The U.S. government is limited in how much money it can directly pump into projects of national security. That means it must work with private companies at home and abroad, as well as friendly countries with sovereign-wealth funds, to entice them to invest in assets helpful to national interests.

The Wall Street Journal reported last year, for example, that the U.S. and Saudi Arabia have held talks for potential agreements in the Democratic Republic of Congo, under which Saudi Arabia would take stakes in mines and U.S. companies would be guaranteed some of the rights to production.

One of President Biden’s senior advisers, Amos Hochstein, is a linchpin of this effort. Hochstein and a small team at the State Department have been flying around the world, meeting with government officials in sub-Saharan Africa one day and with U.S. investors the next.

Regarding copper, “We don’t have a lot of new supply coming online around the world,” Hochstein said in an interview. “What concerns me is even when a discovery is made, it could take between seven and 15 years before the first copper comes out.”

The U.S. has committed more than $1 billion to the Lobito Corridor to develop local infrastructure, including clean power and a railroad connecting Angola, Congo and Zambia to export critical minerals. Also in Zambia, the U.S. last year urged the U.A.E. to consider investing in Mopani Copper Mines, according to people familiar with the matter.

The effort was successful: Zambia in December chose the U.A.E.’s International Resources Holding as a new equity partner.

Hochstein declined to comment on specific deals.

Hochstein said he and his team have made clear to African governments that the U.S. is trying to put forward an alternative model that won’t result in debt, corruption and environmental degradation.

“We are putting our money where our mouth is,” he said.

A central part of the U.S. effort is the International Development Finance Corp., a federal agency that helps finance projects overseas. The agency agreed to invest $740 million last year in the mining sector, up from $245 million it had committed to legacy mining projects.

It is currently in talks to finance a multibillion-dollar copper mine in Pakistan that, when it comes online in 2028, will be among the world’s largest copper projects, according to people familiar with the matter.

An Irish company called TechMet is one of its signature investments. Under the Trump and Biden administrations, the agency has given TechMet some $105 million in funding and become its second-largest shareholder. An investment firm backed by a scion of the Walton family also invested in the most recent fundraising round, which valued the company at more than $1 billion.

“We are in a second Cold War,” said TechMet CEO Brian Menell, a South African. “One has to increasingly pick sides. For me it’s never been a moment’s doubt. It is a competition between Western values and dictatorship.”

TechMet owns stakes in lithium, cobalt, nickel, vanadium and rare-earth miners.

Meanwhile, Chinese miners, with government backing, are rapidly snapping up assets. In Belt and Road countries, which don’t include Brazil or Australia, China spent more than $19 billion last year on metals and mining investments, up 158% from 2022, according to the Green Finance & Development Center at Fudan University in Shanghai. That is the highest level since 2013.

In the latest example, a Chinese firm is in advanced talks to buy Chemaf, a metals producer that is developing a cobalt and copper mine in Congo, according to people familiar with the matter.

At least two Western suitors were interested in buying the company, according to people familiar with the matter, including Chilean Cobalt Corp., or C3, a U.S. company with copper-cobalt operations in northern Chile.

Duncan Blount, chief executive of C3, said he spoke with the International Development Finance Corp and State Department about making a bid, but concluded it would have been too expensive. Still, he said, “They were incredibly helpful on this venture and other projects. They’re keen to see American businesses and entrepreneurs go back into Congo.”

Miner proposes demerging its De Beers, Amplats and coal businesses

Anglo American is planning to break itself up after the mining group rejected a £34bn takeover bid from rival BHP.

In a statement on Tuesday, the miner said it would split off its De Beers diamond business, its Anglo American Platinum operation and its steelmaking coal assets. The group plans to focus on its copper, iron ore and crop nutrients businesses.

Chief executive Duncan Wanblad said: “Our decision to focus Anglo American’s portfolio in our world-class resource asset base in copper and premium iron ore — while retaining our crop nutrients optionality at Woodsmith — marks a major new phase in executing our strategy.

“We expect that a radically simpler business will deliver sustainable incremental value creation through a step change in operational performance and cost reduction.”

US move to one-day trade settlement happens over a public holiday weekend between major index rebalancings

The exchange traded fund industry faces a perfect storm on May 28 when the US cuts trade settlement times — with the transition occurring over a public holiday weekend and amid a series of major index rebalancings.

Gerard Walsh, who heads Northern Trust’s global banking and markets client solutions group, said he was having urgent last-minute talks with asset management clients, some of whom still seemed oblivious to the looming task at hand.

“Our key thing at Northern Trust is we’re talking to as many people as we possibly can to at least raise awareness of the fact that this is not a slam dunk. This is not going to be something that has limited-to-no-impact on portfolio managers in the front office,” he said.

The US Securities and Exchange Commission said in February 2023 that it would require trades to settle one day after trade agreement (known as T+1, a change from the current T+2 regime) by May 28, but Walsh is among industry figures who say this has not given the ETF industry enough time to thoroughly assess and prepare for all the risks.

Walsh pointed out that most ETFs are passive index trackers and will therefore have no choice but to trade in their underlying constituents in order to align themselves with the forthcoming index changes.

“I seem to have been the only one worrying about ETF trading, but I’ve seen lots and lots and lots of people pick up on it in the last month,” he added.

The choice of transition date might seem particularly ill advised. Announcements of the Russell Annual Reconstitution and the semi-annual rebalancing of the FTSE All World index will be made after the US market closes on May 24, which is also the last day that the US will trade on T+2.

The US then heads into a long weekend, but Canada and Mexico will move to T+1 on Monday, May 27 (a public holiday not only in the US but also in the UK).

When the US reopens on May 28, settlement staff will still be dealing with the last trades from Friday on the old T+2 schedule and any outstanding problems from the Canada and Mexico moves. However, at the same time they will be hit by a tidal wave of new T+1 orders due to the index announcements.

To cap it all, said Walsh, before the new system has had a chance to bed in, May 31 is MSCI rebalance day — “typically one of the largest trading days of the year”.

“The real crunch is those rebalances. Those rebalances happening around that week will put stress on the system immediately,” he said.

Sarah Simmonds, partner at Alpha FMC, a global consultancy whose client base includes the 20 largest global asset managers, said she too had concerns.

“The public holidays will mean this is happening at a time when staff aren’t working,” she said, adding that many clients had already responded by cancelling holiday for support staff.

“We are expecting to see a higher volume of settlement failures,” she said, adding: “I do agree that [the rebalancings] will only increase the problems.” In addition, she pointed out, additional cash that European Ucits ETFs take on in order to be able to bridge the period before the ETF wrapper settles could mean that the funds hit cash limit rules — which would incur a fine.

ETFs face particular difficulties because of the potential mismatch if their underlying constituents — traded on the so-called primary market by authorised participants who create and redeem ETF shares to match demand in the secondary market — settle at a different time to the ETF wrapper itself.

A European ETF, for example, has to wait up to two days after a buy order for payment from the ETF investor, but if it has US constituents, it will have to pay for the constituents a day earlier.

Walsh explained that some ETF managers might not be in a position to take on risk or to fund the risk that their authorised participants will have to adopt, particularly over the looming 72-hour long weekend.

James Pike, interim chief executive at Taskize, a web platform owned by Euroclear that aims to solve problems quickly between counterparties, said there were also technical difficulties to contend with.

He said the manual routing of exceptions, for example mismatches of trade information such as name of custodian, remained far too prevalent and would not be scalable to handle a jump in trade failures.

“Non-US-based market participants also need to implement the ability to ‘pass the book’ internally to other operations teams [in different time zones] so issues don’t persist beyond the end of the trading day,” Pike said.

Worst of all, Walsh pointed out, was a potential capacity issue, even if managers move fast to try to iron out last-minute problems.

“The industry has deep pockets, but they’re not unlimited,” he said, adding that all managers should be asking themselves if they have adequate lines of credit, overdrafts and access to cash-like instruments, and the cost of these if they are suddenly needed in the dead of night.

Not all industry participants are so worried. Frank Koudelka, global head of ETF solutions at State Street, said there had been a significant amount of planning and while there were mixed views there would be an “element of wait and see over the first couple of months”.

But even Koudelka said that from a custodian perspective State Street was “reliant on investment managers” to get ready for May 28 and ensure they had updated their settlement cycles and have adequate funding in place.

“The thing that we won’t be able to see until it’s in the rear-view mirror is the rate of failure and the impact of those failures,” said Walsh, noting that failed trades incur fines in Europe and that some Asian markets are “no fail” markets, which means the trade voids if it does not settle in time.

Great Wall Motor’s international head defends China’s industry as it exports more vehicles amid slowing domestic demand

A senior executive at one of China’s biggest privately owned carmakers has said overcapacity in the Chinese car industry is a “fake concept”, joining a chorus of officials and state media hitting back at western criticism of Beijing’s industrial policy.

The Biden administration on Tuesday is expected to announce plans to raise tariffs on Chinese electric vehicle imports from 25 per cent to 100 per cent, along with other new tariffs on clean energy imports.

The announcement comes six months out from the US presidential elections in November and with Biden under pressure over protecting US jobs and managing the world’s biggest economy.

Parker Shi, who leads international operations for Great Wall Motor, acknowledged geopolitical challenges as the company tries to sell more cars overseas. However, criticism of Chinese overcapacity was “not accepted”, he told the Financial Times.

China is expected to make 27mn passenger vehicles this year, despite annual production capacity for 48.8mn units, according to Goldman Sachs forecasts. This is mostly driven by a years-long structural shift in Chinese car sales, with a boom in electric vehicles and a massive fall in sales of internal combustion engine (ICE) cars. Exports are expected to rise 25 per cent this year to more than 5.3mn cars.

“It is a fake concept,” Shi said on the allegations of overcapacity. “I don’t like that kind of judgment from the third party — they don’t know what is happening in my house.”

According to Goldman Sachs, the capacity utilisation rate for plants producing ICE cars in China will decline from 54 per cent of a factory’s capacity being used this year to 48 per cent in 2030. For EVs, capacity utilisation will improve from 58 per cent this year to about 80 per cent by the end of the decade.

Yet senior US and European officials have complained that China, after drawing foreign investment for joint car ventures and obtaining key technologies, has begun offering massive subsidies and cheap loans for domestic producers before dumping excess supply on foreign markets.

Shi, who previously led Great Wall’s operations in India, argued that car companies often designed factories with production capacity beyond their immediate requirements in case of “good business”.

“Some factories [have] 70 to 80 per cent utilisation, some factories 60 per cent, some factories 100 per cent,” he said, adding that in “a lot of countries, official statistics are all wrong”. Great Wall plans to increase manufacturing of its cars overseas, closer to their foreign markets, he added.

Since last year, the European Union has launched probes into EVs imported from China. There have also been two investigations into Chinese solar panel manufacturers that Brussels alleges benefited from market-distorting subsidies and an inquiry into Chinese wind turbine company subsidies.

Chinese President Xi Jinping told French President Emmanuel Macron and European Commission president Ursula von der Leyen in Paris last week that there was no such thing as an overcapacity problem in China, according to statements carried by Chinese state media.

Xi also told Macron and von der Leyen that China’s new energy industry — which includes electric vehicle, solar and wind technology — would not only increase the world’s supply and alleviate the pressure of global inflation but also contribute to the green transition, state media added.

Lin Jian, China’s foreign ministry spokesperson, earlier told reporters in Beijing that accusations of overcapacity ignored “more than 200 years” of basic economic advantage enjoyed by the west.

“If a country should be accused of overcapacity and asked to cut capacity whenever it produces more than its domestic demand, then what would countries trade with?” he said.

“If exporting 12 per cent of Chinese-made EVs is called overcapacity, then what about Germany, Japan and the US, who export 80, 50 and 25 per cent, respectively, of their automobiles?”