TheChek News Flow

Those relying on fees might need larger buffers to absorb losses under planned rules

WASHINGTON—U.S. regulators are preparing to force large banks to shore up their financial footing, moves they say will help boost the resilience of the system after a spate of midsize bank failures this year.

The changes, which regulators are on track to propose as early as this month, could raise overall capital requirements by roughly 20% at larger banks on average, people familiar with the plans said. The precise amount will depend on a firm’s business activities, with the biggest increases expected to be reserved for U.S. megabanks with big trading businesses.

Banks that are heavily dependent on fee income—such as that from investment banking or wealth management—could also face large capital increases. Capital is the buffer banks are required to hold to absorb potential losses.

The plan to ratchet up capital is expected to be the first of several steps to beef up rules for Wall Street, a shift from the lighter regulatory approach taken during the Trump administration. The industry says more stringent requirements aren’t needed, could force more banks to merge to stay competitive and could make it harder for Americans to get loans from banks.

Tougher rules were already on the way for the biggest lenders before the March failures of Silicon Valley Bank and another bank sent tremors through the industry. Since then, regulators have said they plan to apply new rules to a wider range of banks.

Institutions with at least $100 billion in assets might have to comply, effectively lowering an existing $250 billion threshold for which regulators have reserved their toughest rules.

Critics in the banking industry say a relatively large increase in bank-capital requirements could raise costs for consumers and lead banks to stop offering certain services.

“Higher capital requirements are unwarranted,” said Kevin Fromer, the CEO of the Financial Services Forum, which represents the largest U.S. banks. “Additional requirements would mainly serve to burden businesses and borrowers, hampering the economy at the wrong time.”

They also say the proposal could punish banks for relatively benign services that revolve around fee income. The new rules are expected to treat fee-based activities as an operational risk, a category that includes the potential to lose money from flawed internal processes, people and systems or from external threats such as cyberattacks.

The framework for calculating operational risk charges “would disproportionately and inappropriately” increase capital requirements for firms focused on fee-generating activities, said Katie Collard, senior vice president and associate general counsel at industry group Bank Policy Institute.

That could include banks with large wealth-management businesses, such as Morgan Stanley as well as American Express, which owns a credit-card network that generates swipe-fee income, people familiar with the proposal said.

“The strength and breadth of the U.S. financial system requires a tailored approach to capital standards,” said Andrew Johnson, a spokesman for American Express, adding that regulators should take the size and business models of different banks into account when writing rules.

A spokesman for Morgan Stanley declined to comment.

While the largest U.S. banks emerged from the pandemic in solid financial shape, Federal Reserve Vice Chair for Supervision Michael Barr has signaled he believes capital requirements should be higher. “The banking system might need additional capital to be more resilient precisely because we don’t know the nature of the kinds of ways we might experience shocks to the system, as has happened with these recent bank failures,” he told House lawmakers in May.

The coming proposal is the last piece of capital rules that global policy makers agreed to implement after the 2007-09 financial crisis. The overhaul forced banks around the world to boost their capital cushions in hopes of making them better prepared to weather downturns without taxpayer bailouts.

Banks must have loss-absorbing buffers to account for the risks tied to their activities, but regulators believe the way some firms currently measure these risks varies too widely. The last step of the global overhaul is aimed at making measures of riskiness more transparent and comparable around the world.

The new framework was completed in 2017, but efforts to implement it in the U.S. were delayed by the pandemic. The Fed is playing a leading role in crafting the measure, along with the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

All three agencies are expected to seek comment on the proposed capital rules. They would have to vote again to complete the changes, likely implementing them over the coming years.

They are also expected to propose ending a regulatory reprieve that had allowed some midsize banks to effectively mask losses on securities they hold, a contributing factor in the collapse of SVB SIVBQ -5.19%decrease; red down pointing triangle. Supporters of the change say it would have forced SVB to address the issue earlier as interest rates began rising and the value of its holdings declined.

And the ECB sees some evil, in shadow banks

There is, as Unhedged has pointed out recently, something amiss with the low-end US consumer. And if the trouble is going to spread it seems likely that it might spread to auto credit — the kind of debt that many Americans in the lower income deciles have little choice but to carry. The closest thing to timely data on subprime auto debt we’ve found is Fitch’s index of 60 day delinquencies in the subprime auto-backed securities they rate. The numbers go through April:

Delinquencies are now running along at pre-pandemic highs and the trend is sharply up. Jenn Thomas, portfolio manager at Loomis Sayles and Unhedged’s favourite consumer debt expert, tells us that the stress in subprime auto is concentrated in the more recent vintages — loans taken out in 2020 and 2021. 

While the trend has gotten a little better recently, this is because the borrowers in these vintages who got into the worst trouble have defaulted on their loans and been removed from the asset-backed securities’ underlying loan pools. Rather than defaults reaching recessionary levels, Thomas says, what we are seeing is borrowers “playing games again”: falling into early delinquency but paying just enough just in time to avoid repossession, and so on. But demand for subprime auto ABS remains very strong, she says: “It is hard not to like over a 5 per cent yield for two year paper.”

We’ll be watching the delinquency numbers closely. Meanwhile, is something similar happening with the lowest-quality corporate bonds? Well, maybe — just. Bank of America’s Oleg Melentyev reports that 10 US high yield issuers defaulted on $7.2bn in bonds in May, a 7.3 per cent annualised default rate and a notable acceleration from the 2.3 per cent default rate over the past year (according to Moody’s, there were 20 defaults in the entire first quarter). Here, from Melentyev’s team, is a chart of the default rate through the end of March. Notice that the ex-energy default rate (the brown line) is still below the levels of 2016-2018:

Melentyev also notes that yield dispersion (defined in high yield as the percentage of bonds that are trading 4 percentage points or more away from the benchmark index yield) has been rising. Over 50 per cent of CCC (the riskiest junk) bonds now trade that far off the index, up from a low of under 20 per cent in 2021. The market is discriminating more between “good bad junk” and “bad junk”. Finally, recoveries (the amount bondholders receive in case of a default), at about 30 cents on the dollar, are “near historical lows”.

Is the market responding to these stress signals by demanding bigger discounts to own the riskiest debt? Bloomberg reports that, looked at on a global basis, it is: 

This is emphatically not happening in the US, however. US CCC spreads over treasuries narrowed over the last several months. Furthermore, the difference in spread between US CCC debt and both single B (slightly less risky junk) and BBB (the lowest rung of investment grade) debt has been narrowing since late last year. In other words, the premium for owning the very riskiest US debt is narrowing:

The US corporate debt market does not appear to be pricing in much recession risk. This may be because the market is under supplied with bonds, as my colleague Harriet Clarfelt has written. Melentyev thinks that the market is stuck where it is in part because, in a highly disperse junk bond market, the “good stuff is already tight [expensive]; and difficult stuff gets no bid.” All the same, the pattern of fundamentals weakening at the margin while prices stay firm is similar to what we see in equities. There is risk appetite out there. 

Usually Unhedged keeps its attention squarely on the US. But even for US investors, the European Central Bank’s financial stability report, and in particular the section on shadow bank risks, is worth reading. 

The basic points made in the report are familiar enough. Non-bank financial institutions — investment funds, pension funds, money market funds, insurers — are growing much faster than banks. With higher interest rates, there is a possibility they will face withdrawals and liquidity shortfalls, especially since shadow banks increased exposure to illiquid assets like real estate during the low-rate era.

Importantly, the report notes, there are significant links between the non-bank financial system and banks — in particular, the former owns a lot of the latter’s non-deposit liabilities, including almost all of European banks’ convertible bonds. “Significant outflows from such investment funds may trigger sales of securities issued by banks and other financials. This could amplify the negative impact of price pressures on bank funding markets.”

The risks are not theoretical: we have already seen micro-crises where some combination of leverage and illiquidity at non-bank institutions have set off tremors in wider markets. The ECB provides this handy table, which serves as a sort of glossary of how things can go wrong:

Ian Harnett at Absolute Strategy Research — who was kind enough to point out the ECB report to us over the weekend — notes that essentially all the growth in financial asset holdings since the crisis has happened outside of the banking system. Non-banks now hold well over half of Euro area financial assets. This makes the ECB report, in his words, “uneasy reading.” The next European financial mess is unlikely to start at a bank. 

Real estate arm aims to capitalise on high demand for motion picture and TV production space

Axa Investment Managers has struck a €150mn deal to buy a French film studio and expand the site near Paris into one of Europe’s largest filmmaking facilities, as big real estate investors continue to snap up sparse motion picture and television production space. 

The real estate arm of the French insurance company has agreed to purchase Bry-sur-Marne Studios, east of Paris, which produced director Sofia Coppola’s 2006 film Marie Antoinette, one of the Hunger Games series and this year’s screen adaptation of Astérix et Obélix.

Film studios have emerged as a popular niche for real estate investors as they look for opportunities outside traditional sectors such as offices and retail, which are suffering from post-Covid trends towards online working and shopping. 

Investors say the rise of streaming services such as Netflix has boosted demand for studio space, which is in short supply — especially near large cities. 

“Film studio space is still lagging behind, notably in Europe,” said Louis Leveillé Nizerolle, head of transactions for France at Axa IM Alts. “We have conviction that it will be a long-lasting trend.” 

He said the studio should benefit from pressure on streamers to invest in domestic production in European countries, and that the facility would ultimately aim to compete with the UK for international productions. 

British production companies are expecting to use more studio space in the coming year to keep up with demand, according to research by real estate advisers CBRE. 

“The recent growth in the industry has meant the demand for production space is high and outweighs the available supply,” CBRE said. 

Axa said it was planning a “significant development programme” across the 12-hectare site it acquired from developer Nexity, which will more than double the studio’s production capacity to create “one of the largest studios in continental Europe”. 

The French investor’s first foray into the studio sector follows moves by other big asset managers in recent years. Blackstone and Hudson Pacific Properties, a US-based studio and office investor, in 2021 acquired a 91-acre site in Broxbourne, north of London, in a £700mn project to create a new studio. 

However, the new investment by Axa comes at a time when streamers and other content producers are expected to sharply slow original TV production as they try to control costs and weather an economic downturn.

Lenders prepare to offload debt at a discount even when borrowers are up to date on payments

Some US banks are preparing to sell off property loans at a discount even when borrowers are up to date on repayments, a sign of their determination to reduce exposure to the teetering commercial real estate market.

The willingness of some lenders to take losses on so-called performing real estate loans follows multiple warnings that the asset class is the “next shoe to drop” after the recent turmoil in the US regional banking industry.

“The fact that banks want to sell loans is coming up in a lot of conversations,” said Chad Littell, an analyst at CoStar, a research company focused on commercial real estate. “I am hearing more about it than any time in the past decade.”

HSBC USA is in the process of selling off hundreds of millions of dollars of commercial real estate loans, potentially at a discount, as part of an effort to wind down direct lending to US property developers, according to three people familiar with the matter.

Meanwhile, PacWest last month sold $2.6bn of construction loans at a loss. And a clutch of other banks are making it easier to execute similar sales in the future by changing the way they account for commercial real estate debt.

Typically, banks are reluctant to accept losses on big blocks of loans that will retain their full value as long as borrowers make repayments on time. But some are being convinced to take the plunge amid fears of an increase in delinquencies — especially on debt secured against office properties that have experienced falling demand due to the enduring popularity of working from home.

Meanwhile, a slowdown in demand for commercial mortgage-backed securities has left banks of all sizes holding on to more property debt than they or regulators would like.

While the practice of offloading performing loans is not as prevalent as it was during the 2008 crisis, many market participants expect the volume of deals to increase this year and next.

As banks prepare to close the second quarter “they are super focused on keeping a clean loan book”, said David Aviram, a principal at Maverick Real Estate Partners, a private fund that specialises in commercial real estate loans. “The banks don’t want to raise the concerns of regulators or investors.”

The moves by banks to offload the loans come as executives and regulators raise alarm bells over the health of the commercial real estate sector.

Wells Fargo chief executive Charlie Scharf this week told analysts and investors that the bank, which has $142bn in commercial real estate loans outstanding, is managing its exposure to the area. “We will see losses, no question about it,” said Scharf.

Meanwhile, Martin Gruenberg, chair of the US Federal Deposit Insurance Corporation, this week warned that real estate loans — especially those backed by offices — face challenges if demand remains weak and “values continue to soften”.

“These will be matters of ongoing supervisory attention by the FDIC,” he added.

Other banks are changing the way they account for loans by switching their designation to “available for sale” from “hold to maturity”, a move that makes it easier to offload the debt down the line.

Citizens, which has been reducing its commercial property lending, more than doubled its stock of loans available for sale to $1.8bn during the first quarter. Like many other banks, it does not disclose what percentage of those loans are to commercial real estate borrowers.

Customers Bancorp, based in suburban Philadelphia, cut its commercial real estate lending by nearly $25mn in the first quarter. It also recategorised $16mn of these loans as “held for sale”, up from zero in the previous quarter.

One loan broker said it was preparing to bring several deals to market in the coming weeks and was experiencing the largest amount of activity in three years.

The discounts applied to sales of performing loans outside of the office sector remain relatively modest and are driven partly by interest rate rises.

Real estate investment group Kennedy-Wilson, for instance, agreed to pay $2.4bn, or 92 cents on the dollar, for the block of PacWest loans that had an aggregate principal value of $2.6bn. Shares of PacWest surged nearly 20 per cent after it announced the transaction.

“We’re getting more calls . . . as a result of what PacWest was able to execute with Kennedy-Wilson,” one real estate credit investor said. “All the regional banks are looking at that stock price and saying ‘the market really liked that and we should execute something similar’.”

According to two of the people briefed on the HSBC sales process, the loans are fetching bids that would price the loans in the mid-90s as a percentage of their face value — meaning the bank would have to take a loss of as much as 5 per cent.

HSBC has not decided whether it is willing take a loss on the sale or how large one might be, according to another person familiar with the process. HSBC declined to comment.

Let's hear the startup perspective

There’s room for startups to cut their cloud costs, even if they have to balance the implicit costs of doing so, such as the time required and the potential for slower development. The question then becomes: How much of a priority is finding incremental savings for young tech companies?

A recent survey of founders by TechCrunch+ indicates that a change in investor expectations is spurring startups to take a closer look at their cloud spending and move away from a position more focused on speed than cost efficiency — just not too much.

The changing economy and the resulting impact on both venture capital availability and the price of money keeps showing up in our investigative work. Put another way, rising interest rates are having a knock-on effect on cloud spending at tech companies, and therefore, slowing growth at public cloud incumbents.

TechCrunch+ also recently asked startup founders if new startups should pursue a multicloud strategy. They answered mostly in the negative, with some caveats regarding edge cases.

Dior, Saint Laurent and Chanel were the big brands that were consistently mentioned online at Cannes Film Festival, according to a report from WeArisma.

LONDON — The city of Cannes had its busiest month in May with the Cannes Film Festival and a Versace fashion show in collaboration with Dua Lipa.

According to a report from WeArisma, an influence analytics company, the events occurring in the French Riviera generated millions of dollars in media value.

Rosé, one of the members of the K-pop group Blackpink, generated a media value of $6.6 million with a post of her wearing a black Saint Laurent dress on the famous red carpet at Cannes.

Rosé was named a global ambassador for Saint Laurent in 2020. The French label’s creative director Anthony Vaccarello described her as “the Saint Laurent girl of the future.”

Meanwhile, a TikTok of Naomi Campbell celebrating her birthday with German brand Boss generated an engagement rate of 313 percent.

Another top moment was Anushka Sharma’s pink Prada look that gathered $2.2 million worth of engagement on Instagram.

The brands that drove big media value at Cannes were Saint Laurent; Dior because of its ongoing relationship with its ambassadors Natalie Portman and Jennifer Lawrence wearing the brand, and Chanel, which resonated with a younger audience because of Lily-Rose Depp at “The Idol” premiere.

Dior, Saint Laurent and Chanel were also the big three brands that were consistently mentioned online, followed by Versace, Celine, Valentino, Louis Vuitton and Alexander McQueen.

Content creator Alexandra Burnier posted a TikTok of herself getting ready wearing Rick Owens, which generated $97,200 in media value and 950,000 views in engagement.

Other brands that ruled the engagement chart were Jacquemus, Vivienne Westwood and Ann Demeulemeester.

Kingdom will make additional ‘voluntary’ cut while African members accept revised baselines from 2024 after difficult meeting

Saudi Arabia will make additional voluntary cuts of 1mn barrels a day to its oil production in an effort to prop up prices following a fractious meeting of Opec+ in Vienna.

The kingdom’s energy minister Prince Abdulaziz bin Salman, Opec’s de facto leader, made the move as part of a deal in which several weaker African members will have quotas reduced from next year. Russia, the world’s second-largest oil exporter, could also have its production targets lowered, though the group said this was subject to review. Meanwhile, the UAE will be able to increase its production.

The kingdom’s energy minister Prince Abdulaziz bin Salman, Opec’s de facto leader, made the move as he tries to support an oil price that has slid in the past 10 months despite several attempts by producers to tighten supplies.

The kingdom and other members announced a surprise cut in April but, after briefly rallying towards $90 a barrel, prices again reversed, falling towards $70 a barrel at one stage last week.

The 1mn b/d cut will initially be for July but could be extended, Prince Abdulaziz said, describing it as a “Saudi lollipop” or sweetener for the group.

“We want to just ice the cake with what we have done,” the minister said. “We will do whatever is necessary to bring stability to this market.”

The IMF says Riyadh requires an oil price above $80 a barrel to balance its budget, and to fund some of the “giga-projects” that Crown Prince Mohammed bin Salman hopes can transform its economy.

The Opec+ group’s collective production targets were adjusted to 40.5mn barrels a day for the duration of 2024, formalising and extending the voluntary cuts announced in April at the group level.

But the distribution of cuts was contentious, with many African members initially resisting efforts to revise down their so-called production baselines, which are supposed to reflect their maximum output capacity and are used to calculate the size of cuts they must make.

Weaker Opec members including Nigeria and Angola had already been struggling to hit existing output targets after years of under-investment, and were reluctant to make deeper cuts.

But the UAE has been pushing for a higher production baseline, reflecting investments in its industry.

Discussions between members went on late into the night after the meeting of core Opec countries on Saturday, according to delegates. Broader Opec+ talks involving Russia, Kazakhstan and Mexico got under way on Sunday. “We, as always, find common ground,” Russia’s energy minister Alexander Novak said as he left the meeting.

In a sign of growing tension between the Saudi energy minister and parts of the press, several journalists, including the entire teams from Reuters and Bloomberg, were blocked from attending the weekend’s meetings. It is the first time that Opec, through decades of wars, price spikes and crashes, has excluded news organisations in this way.

Opec has faced criticism for its alliance with Russia following the full-scale invasion of Ukraine and for trying to prop up prices during an energy crisis triggered by Moscow’s actions.

The decline in oil prices since October may have made the White House more sanguine about further production cuts, however, according to analysts, as the US tries to mend ties with Saudi Arabia.

Large amounts of the mineral are needed for electric car batteries, but getting it out of the ground and refining it often requires clearing rainforests and generating large amounts of carbon

In the electric-vehicle business, the quandary is known as the nickel pickle.

To make batteries for EVs, companies need to mine and refine large amounts of nickel. The process of getting the mineral out of the ground and turning it into battery-ready substances, though, is particularly environmentally unfriendly. Reaching the nickel means cutting down swaths of rainforest. Refining it is a carbon-intensive process that involves extreme heat and high pressure, producing waste slurry that’s hard to dispose of.

The nickel issue reflects a larger contradiction within the EV industry: Though electric vehicles are designed to be less damaging to the environment in the long term than conventional cars, the process of building them carries substantial environmental harm.

The challenge is playing out across Indonesia’s mineral-rich islands, by far the world’s largest source of nickel. These deposits aren’t deep underground but lie close to the surface, under stretches of overlapping forests. Getting to the nickel is easy and inexpensive, but only after the forests are cleared.

One Indonesian mine, known as Hengjaya, obtained permits five years ago to expand its operations into a forested area nearly three times the size of New York City’s Central Park. The mine’s Australian owner, Nickel Industries, said that rainforest clearing in 2021 caused greenhouse gas emissions equivalent to 56,000 tons of carbon-dioxide. That’s roughly equal to driving 12,000 conventional cars for a year, according to calculations by The Wall Street Journal based on U.S. Environmental Protection Agency data.

Nickel Industries says that forestland it cleared had previously been degraded by illegal logging, which is why the Indonesian government allowed mining there. The company says it works hard to rehabilitate land, including planting over two million trees, and notes that its efforts have received environmental stewardship awards from Indonesia’s government.

“Unfortunately, land clearing is required for all open-cast mining processes, including our operations,” said the firm’s sustainability manager, Muchtazar, who, like many Indonesians goes by one name. The negative impact is offset, he said, by nickel’s use in environmentally friendly batteries.

Tesla said in an April report that EVs cause more emissions during the manufacturing phase than conventional vehicles, due in part to the process of extracting and refining minerals. The company said it takes less than two years of driving for an EV’s total emissions to fall below that of a comparable internal combustion engine vehicle, however.

Nickel is responsible for more than a third of the carbon emissions generated from making a common type of battery cell—more than any other mineral or production process—the report said.

A new source

Before 2018, most of the nickel used in EVs was the type generally found in non-equatorial countries, including Canada and Russia. The sulfide nickel found there is generally of a higher grade and easier to process than other varieties. The mines, often located deep underground, are expensive and time-consuming to develop.

Auto executives worried about having enough nickel to meet rapidly growing demand for EVs. They had moved away from cobalt, another battery component, after human-rights groups and journalists reported on widespread child labor in cobalt operations and dangerous conditions faced by miners in the Democratic Republic of Congo. Automakers tweaked their batteries to reduce cobalt by adding more nickel.

Tesla Chief Executive Elon Musk said in a 2020 earnings call: “Any mining companies out there, please mine more nickel, OK?” Nickel prices soared on growing demand.

By then, Chinese companies had begun working to unlock an expansive, albeit tricky, source.

Millions of years ago, tectonic plates converged in what is now eastern Indonesia, lifting the ocean’s mineral-rich seafloor to the surface and creating today’s nickel bounty. The region is covered in rainforest, filled with flora especially adapted to the nickel-rich soil. Many of the creatures here don’t live anywhere else, like the maleo, a pink-breasted bird that buries its eggs underground, where they are heated by geothermal energy, and the anoa, the world’s smallest wild cattle species.

But the laterite nickel found here wasn’t particularly suitable for EVs. Chinese companies focused on a process that turns that type of nickel into materials for EV batteries, known as high-pressure acid leach, or HPAL. The technique had been around for decades, but had proved glitchy.

If Chinese scientists and engineers could develop facilities at scale, they could power the shift to electric vehicles.

That was the pitch China’s Lygend Resources and Technology made to Indonesian miner Harita Group in 2018, when the two companies discussed setting up what would become Indonesia’s first HPAL facility. Investments such as these were encouraged by an Indonesian policy that in 2020 banned the export of raw nickel and required companies to process domestically.

By 2021, at least two other Chinese companies had announced plans to construct billion-dollar nickel facilities, and more were drawing up proposals. The projects ramped up quickly.

Indonesia produced around half of all nickel used in EV batteries made last year, up from somewhere between zero and 5% in 2017, according to CRU, a London-based firm specializing in commodities business intelligence. That’s expected to exceed 80% by 2027, CRU says.

The nickel rush has created pressing new environmental concerns. The HPAL process involves dousing nickel ore in sulfuric acid and heating it to more than 400 degrees Fahrenheit at enormous pressures. Producing nickel this way is nearly twice as carbon-intensive as mining and processing sulfide nickel found in Canada and Russia. Another way of processing laterite ore that often uses coal-powered furnaces is six times as carbon-intensive, according to the International Energy Agency.

Companies also face questions about how to get rid of the processing waste. It is difficult to safely sequester in tropical countries because frequent earthquakes and heavy rains destabilize soil, which can cause waste dams to collapse. A 2018 Indonesian law allowed companies to obtain permits to discard mineral processing waste into the ocean.

Environmentalists campaigned against the practice, which they said could pollute eastern Indonesia’s seas. A Maritime and Investment Affairs Ministry official, Septian Hario Seto, said authorities hadn’t approved any requests for deep-sea tailings disposal for HPAL plants and wouldn’t do so, as the contents of the waste didn’t meet criteria for being dumped into the ocean.

Indonesia’s government says it is committed to enforcing environmental law and prosecutes companies it alleges have illegally mined in forests. Earlier this year, officials told nickel-industry executives to facilitate building military and police posts near their operations to ensure better oversight, according to an official presentation seen by the Journal.

Competing with China

China’s domination of Indonesian nickel processing poses risks for Western electric-vehicle companies at a time of fraying relations between Washington and Beijing. Last year, the U.S. government declared nickel a critical mineral whose supply is vulnerable to disruption, with very limited nickel production operations in the U.S.

In March, Ford Motor announced that it was investing in a nickel-processing operation on Indonesia’s nickel-rich Sulawesi island. The company said the investment will help it hit its target of producing approximately two million electric vehicles in 2026.

A Chinese company is at the center of that operation. For years, the the Indonesian unit of Brazilian miner Vale worked with Japan’s Sumitomo Metal Mining to develop the project. But the partnership hit snags. Sumitomo withdrew last year, and Vale signed an agreement with Zhejiang Huayou Cobalt, a Chinese firm, to develop a nickel HPAL facility that Vale says will be larger than any that exist today.

A Sumitomo spokesman said the venture was scrapped because of differences in scheduling. A Vale spokeswoman said the company partnered with Zhejiang Huayou because that project was larger.

“This framework gives Ford direct control to source the nickel we need—in one of the industry’s lowest-cost ways—and allows us to ensure the nickel is mined in line with our company’s sustainability targets” said Lisa Drake, a senior Ford executive.

French miner Eramet is also in the early stages of developing a nickel facility alongside German chemical giant BASF. It isn’t seeking a Chinese partner, but its model takes advantage of “what has been unlocked by the Chinese engineering companies,” said Geoff Streeton, Eramet’s chief development officer. The ore for its potential plant will be sourced from a mine in which a Chinese company holds the largest stake.

Clearing land in order to mine is inevitable, said Mr. Streeton. “Our intent is to rehabilitate back to a biodiverse outcome,” he said.

Cartel seeks to support price in face of African pushback on output reductions and criticism over Russia’s role

The Opec+ group was locked in talks over a further cut in oil supplies on Sunday as Saudi Arabia and its allies scrambled to prop up the price, but hesitation from weaker African members of the group raised the prospect that no deal may be reached.

Saudi Arabia’s energy minister Prince Abdulaziz bin Salman, Opec’s de facto leader, is expected to target cutting up to 1mn barrels a day from the market, or about 1 per cent of global supplies, marking the third cut the combined Opec+ group has made since October.

But other weaker members including Nigeria and Angola are already struggling to hit existing output targets after years of under-investment, and are reluctant to make deeper cuts.

Nigeria wanted to increase its own production target, not cut it, one Opec delegate said. The country argued it had addressed some of the problems that had held back its output and it was ready to pump more, the delegate said after Saturday’s meeting, adding that Angola had also opposed further cuts.

Prince Abdulaziz later convened talks at his hotel with African producers including Equatorial Guinea and Congo, without reaching an agreement.

Talks with other producers including Russia, which helped form the expanded Opec+ grouping in 2016, could also be complicated by a desire to raise production baselines — the maximum output capacity levels from which cuts are calculated — for some members, chiefly the UAE.

The UAE has long sought a higher baseline to reflect its growing production capacity, and the country’s energy minister expressed confidence ahead of the meeting that Opec+ would reach an agreement.

Discussions between members went on late in to the night after the meeting of core Opec countries on Saturday, according to delegates. Broader Opec+ talks involving Russia, Kazakhstan and Mexico are under way on Sunday.

One person close to the Saudi delegation said it believed most issues had been resolved ahead of Sunday’s meeting, though about two hours after talks got under way Angola’s resources minister, Diamantino Pedro Azevedo, departed Opec headquarters without explaining why.

Opec secretary-general Haitham Al Ghais, the group’s official leader, accompanied Azevedo to his ministerial car and hugged him goodbye.

Saudi Arabia is keen for the Opec+ alliance to cut production again to prop up oil prices, which have slid towards $70 a barrel in recent weeks, from over $120 a year ago.

Riyadh requires an oil price above $80 a barrel to balance its budget, according to the IMF, and to fund some of the “giga-projects” that crown prince Mohammed bin Salman hopes can transform its economy.

When asked about further cuts or any potential changes to members’ maximum production levels, Prince Abdulaziz deflected. “You have no idea what we are discussing,” he said before Sunday’s meeting.

In a sign of growing tension between the Saudi energy minister and parts of the press, several journalists, including the entire teams from Reuters and Bloomberg, were blocked from attending the weekend’s meetings. It is the first time that Opec, through decades of wars, price spikes and crashes, has excluded news organisations in this way.

Opec has faced criticism for its alliance with Russia following the full-scale invasion of Ukraine and for attempting to prop up prices during an energy crisis triggered by Moscow’s actions.

The decline in oil prices since October may have made the White House more sanguine about further production cuts, however, according to analysts, as the US tries to mend ties with Saudi Arabia.

This raises hard questions for the continent in an age of vast wealth inequality and slow growth

European markets have received a big lift from the global boom in luxury sales — a piece of unambiguously good news for the region. Nonetheless this success story also raises a troubling question: has Europe become too reliant on a sector many see as a symbol of decadence? 

Contrast Europe to the US, where over the past 12 months 10 of the biggest tech firms accounted for 65 per cent of stock market returns — which is itself an alarming sign of industry concentration. The similar signs of concentration are even more concerning in Europe. There, 10 of the biggest luxury stocks, from LVMH to Ferrari, have accounted for about 30 per cent of returns — a share unmatched since records began.

Long a source of pride in Europe, the luxury industry took off over the past decade and had its best years ever during the pandemic. Record stimulus added trillions in new wealth, much of it in the hands of the very rich, who spent a good chunk of it on high-end goods. 

As a result, Europe is finally making sizeable money from an industry that it has ruled for centuries. Two-thirds of global luxury sales revenues flow to Europe, and now the continent has stock market winners to show for it. 

Europe’s list of top 10 companies by market capitalisation, which has historically been dominated by banks, utilities and industrial conglomerates, now features four luxury names, up from zero at the start of the 2010s. Its big luxury brands are even more profitable than big US tech, with earnings amounting to nearly 25 per cent of revenue. 

This may be a step forward for the luxury industry but it is not so much of one for Europe. Building a knowledge economy on crafts dating back to the 17th century is arguably a backwards move at a time when western capitalism faces weak productivity growth, rising wealth inequality and the conundrum of how to compete and coexist with China.

If it’s not clear how much smartphones boost productivity growth, it is safe to say that French perfume and Italian handbags contribute even less. While tech tycoons are subjects of controversy in the US, luxury tycoons are targets of street protests in France. And as the west debates whether to “derisk” its relationship with China, the European luxury sector is as dependent as ever on Chinese consumers, who now account for about a third of its sales.

As US tech got bigger over the past decade, so did European luxury. Since 2010, the 10 big tech firms have roughly quadrupled their share of the US stock market to nearly 25 per cent. Over the same period, the 10 biggest luxury stocks have roughly tripled their share of the European markets to nearly 15 per cent — with much of that gain over the past year. 

In luxury as in tech, power is concentrating at the very top. The top European brands now account for a third of global sales, up from a quarter in 2010. Europe’s top four luxury companies, by market cap, are all French: LVMH, L’Oréal, Hermès, and Christian Dior (which is owned by LVMH). 

The roots of French dominance lie in a luxury ecosystem that dates to the court of Louis XIV, and a culture of corporate raiding that began with Bernard Arnault. After gaining control of LVMH in 1989, he set out to build the first house of luxury brands through serial acquisitions. Rivals followed his lead. Increasingly, the global luxury industry is based on goods that are still made by small Italian firms but sold by big French conglomerates. Gucci, Bulgari, Fendi — all are Italian brands now under French owners.

While US tech firms overshadow all rivals, the same can be said of French luxury. Among the top luxury firms, the French have annual sales three times higher than the Swiss, more than four times the Americans and Chinese and 12 times the Italians. 

In April, LVMH became the first European company to pass the half-trillion-dollar mark. Hermès now has margins over 40 per cent, up from 25 per cent in 2010 and above that of even Microsoft, the most profitable of the big tech firms. 

One reason for such high profits is pricing power. Luxury companies serve a clientele that is increasingly price-insensitive. The price of a Chanel handbag has doubled over the past five years to $10,000 — far outpacing the surge in general consumer price inflation seen over that period. 

So Europe has finally found a winner, but with an asterisk. Capitalism gains more from competition than concentration. And given the choice between concentration in high tech or high luxury, the answer would be clear. There is something a bit outdated, if not actually decadent, in Europe’s luxury-led model.