TheChek News Flow

Tree Energy Solutions says Washington’s Inflation Reduction Act has accelerated the methane project

TotalEnergies and a Belgian energy start-up plan to build a $2bn plant in the US to produce synthetic natural gas, underscoring how President Joe Biden’s Inflation Reduction Act is drawing clean energy infrastructure investment away from Europe and towards the United States.

The plant, which will probably be in Texas, will use wind and solar power to make hydrogen that will be combined with carbon dioxide to create synthetic methane — which has essentially the same chemical structure as natural gas.

Marco Alverà, chief executive of Tree Energy Solutions, which is focused on the production of green hydrogen, said the incentives provided by the IRA had accelerated the project by several years.

“The US has the best renewable potential when it comes to solar and wind, it has great ease of doing business, and it has available CO₂, available pipes and liquefaction capacity — so it ticks a lot of boxes even before the IRA.”

The downsides to building in the US, such as high inflation and high labour costs, were more than compensated for by the financial benefits of the IRA, Alvera added.

Synthetic methane has gained backing as it can be produced with CO₂ that is pulled from the atmosphere or captured from waste sources, effectively making it carbon neutral to burn.

The synthetic fuel is also identical to natural gas and can be used in existing natural gas infrastructure, including LNG facilities.

Similar projects are already under way in other countries, including Japan, where Tokyo Gas, the city’s top gas supplier, piloted a small-scale project last year, while French utility Engie injected synthetic gas into the French gas distribution network in 2022.

“This synthetic fuel will contribute to the energy transition by helping our customers to decarbonise their activities, notably the ones that are difficult to electrify,” said Stéphane Michel, president of gas, renewables and power at Total.

Tree Energy, which has raised about $200mn since it was launched in 2019, counts mining group Fortescue Future Industries, HSBC and German utility Eon as investors.

Total and Tree Energy are each taking a 50 per cent stake in the project but are looking to raise 80 per cent of the cost through debt. They plan to make a final investment decision in 2024. The plant is expected to produce 100,000 tonnes to 200,000 tonnes of synthetic natural gas per year, and likely to be based in Texas, the companies said. Its carbon dioxide derives from facilities that have natural waste that is being burnt.

The synthetic natural gas produced by this plant will be for the US market and for export to Europe and Asia.

Synthetic gas is “ultimately superior to natural gas from an emissions point of view” as the method reuses CO₂ that would otherwise be released, said Tim Hard, senior vice-president of energy transition at Argus Media.

But “you have a premium feedstock in green hydrogen, which is not cheap to produce, and CO₂ from biomass won’t be cheap either” he added, saying the cost will be the main hurdle for widescale adoption.

Meanwhile, sceptics of synthetic gases point out that there are risks of methane leakage in the production process, while others point out that being carbon neutral is not enough in the face of rapid climate change.

Nevertheless, Alverà believes in demand for the fuel. He thinks the shipping industry, which is increasingly looking at liquefied natural gas as fuel, as well as refineries, steel plants and “even trucks running on LNG” can be potential users of synthetic methane.

He added that TES was in talks with “some of the largest CO₂ emitters in Germany” and also with Japanese entities for the offtake of synthetic natural gas from the Texas plant and from its other future projects.

The LVMH-owned heritage beauty house is launching a premium hair care line, its first major foray into the category since 1970.

The brand launched its first commercial hair product in decades last year, introducing an oil-in-serum for hair and scalp that used technology from the brand’s best-selling skin care line Abeille Royale.

Now, following the success of the launch, Guerlain is rounding out the line with a shampoo ($82), conditioner ($82) and mask ($93) — all formulated with the same black-bee honey repair technology found in Abeille Royale skin care products — along with a scalp brush ($169).

It comes as the brand sees consumers increasingly investing more in hair products and scalp maintenance, said Cecile Koenig, Guerlain’s director of international skin care marketing.

”During the Covid crisis, we witnessed the rise of more premium hair care with far more sophisticated routines,” said Koenig. “We are now seeing that the category is booming.”

The hair care range, which is already available on Guerlain’s websites in France and the US, will go on sale at retailers including Saks Fifth Avenue and Bergdorf Goodman on June 12.

LVMH’s Tannery

LVMH Métiers d’Art has acquired an Italian tannery,

“With the addition of Nuti Ivo Group, we complete our operations in the leather business, expanding our savoir-faire and product offering while ensuring traceable and sustainable sourcing,” Matteo de Rosa, chief executive officer of LVMH Métiers d’Art, said in a statement Monday announcing the operation.

Ivo Nuti established the tannery in 1955 in Santa Croce sull’Arno, a historic leather-working and tanning area in Italy’s Tuscany region, in 1955. Today, the company is managed by Fabrizio and Andrea Nuti, second-generation members of the founding family, and counts more than 300 employees throughout Italy.

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According to Italian media reports, Nuti Ivo SpA’s revenue stood at 160 million euros for 2022.

The tannery company stated it exports 85 percent of its production abroad and has introduced technical and procedural innovations to the field of leather processing, investing in sustainability and reduction of waste and energy consumption. It has also developed partnerships in Paraguay, Morocco and China for materials destined to the footwear market or after-sales services.

For Fabrizio Nuti, president and CEO of the Italian company, the move was recognition of “more than 40 years of collaborations with the best brands in the world” as well as “a new beginning, a new departure, which serves as an incentive for us to grow and improve in all areas of our savoir-faire, guaranteeing a future for our history and our company.”

Jean-Baptiste Voisin, LVMH chief strategy officer and president of LVMH Métiers d’Art, said such an acquisition fit into its goal of “ensuring a future, by providing new opportunities to local artisan excellences which, alone, in the new scenarios of the luxury industry, may struggle to maintain an international projection.”

The Nuti Ivo acquisition reinforces the group’s presence in the leather, exotic skins and metal sectors, where it counts partners in breeding, tanning, finishing and leather ready-to-wear production across France, Italy and Spain for calfskin and lambskin, and in Africa, Australia and the U.S. for exotic skins. It also owns the noted Heng Long tannery in Singapore and Italy, specialized the tanning and finishing of crocodilian skins.

In April, LVMH Moët Hennessy Louis Vuitton reported an 18 percent jump in first-quarter revenue for its fashion and leather goods business, headlined by its star mega-brands Louis Vuitton and Christian Dior, and a 17 percent increase overall.

Leather goods, alongside hard luxury and apparel, have been leading the post-pandemic resurgence of the luxury industry, according to Federica Levato, partner at Bain & Co., leader of its EMEA Luxury Goods and Fashion practice, and coauthor of a Bain & Company Luxury Study in collaboration with Fondazione Altagamma released in November 2022. — LILY TEMPLETON AND MARTINO CARRERA

Deal ends lawsuit closely watched for its focus on which digital assets are securities

WASHINGTON—A former manager at Coinbase Global COIN 7.47%increase; green up pointing triangle has reached a settlement with regulators over a novel cryptocurrency enforcement action without resolving a key question for the Securities and Exchange Commission and the crypto industry: which of the exchange’s digital assets are securities.

Ishan Wahi’s deal with the SEC ends insider-trading claims over the agency’s claims that his trading tips involved crypto assets that are actually securities. While Wahi won’t pay any financial penalties to the SEC, he was recently sentenced to two years in prison in a related criminal case.

At Coinbase, the largest U.S. cryptocurrency exchange, Wahi worked in a role where he knew which assets would be added to the trading platform. Those announcements typically boosted demand for newly listed tokens and led to a rise in their trading prices.

Wahi has admitted in criminal court to tipping off his brother, Nikhil Wahi, and college friend Sameer Ramani to token listings before they were made public. The SEC alleged that nine of the traded tokens were securities sold in violation of federal investor-protection laws. Tuesday’s deal doesn’t specify which tokens are securities but prohibits Ishan Wahi from denying the SEC’s allegations.

SEC Enforcement Director Gurbir Grewal suggested in a statement that the outcome supports the agency’s claims about Coinbase’s assets. “The federal securities laws do not exempt crypto asset securities from the prohibition against insider trading, nor does the SEC,” he said.

Ishan Wahi and his lawyers at Greenberg Traurig and Jones Day sought early dismissal of the case, arguing the digital assets aren’t securities. An attorney for Wahi declined to comment. Coinbase, which is facing the prospect of a regulatory lawsuit, also filed a brief in Wahi’s case disputing the SEC’s authority to regulate its business.

Because Coinbase is itself a target of an SEC enforcement probe, Wahi’s interests were aligned with his former employer’s, even though it fired him and cooperated with insider-trading investigations.

“We are disappointed the court will not have the opportunity to rule on important issues…that we raised in our amicus brief in the case,” a Coinbase spokesperson said.

The settlement terms were made public Tuesday in a filing in Seattle federal court, where the SEC filed its case. Nikhil Wahi also settled the SEC’s allegations and won’t pay a fine beyond the $892,500 he was ordered to forfeit in his criminal case.

Opposing the SEC in lawsuits like the one against Wahi has become the crypto industry’s best hope for beating back the commission’s campaign to regulate digital assets. The industry hopes federal judges will find that crypto is too different from traditional stocks and bonds to fall under rules written for Wall Street.

Issuers of stocks and bonds sold to the public typically must register those offerings with the SEC. The process requires an issuer to provide investors with audited financial statements and detailed disclosures about future business risks. Developers of cryptocurrencies don’t provide coin buyers with that amount of disclosure.

Had a judge ruled on those arguments at some stage in the lawsuit, the order could have supported or hurt the SEC’s attempt to classify many crypto assets as securities—and its ability to go after Coinbase.

U.S. prosecutors say they wouldn’t pursue some criminal counts against the FTX founder if the island nation says they violate the terms of his extradition

The Justice Department said it would drop some of the criminal charges against FTX founder Sam Bankman-Fried if the Bahamas says they violate the terms of his extradition to the U.S.

Federal prosecutors said in a filing late Monday that they were waiting on the Bahamian government’s approval of three additional counts that they brought against Bankman-Fried after his arrest and extradition in December.

“The government will proceed on the new charges…if The Bahamas consents to trial on these charges, and will not proceed on those counts if The Bahamas denies the Government’s request,” prosecutors said.

Bankman-Fried is accused of stealing billions of dollars from FTX customers while defrauding investors and lenders to his crypto-investment firm, Alameda Research. Prosecutors initially charged Bankman-Fried with eight counts, including several fraud charges, a money-laundering conspiracy and conspiring to violate campaign-finance law in a scheme to mask the true source of political donations.

After his arrest, Bankman-Fried consented to his extradition from the Bahamas, allowing for his transfer to U.S. custody. Since his arrival, prosecutors have added more charges, including conspiring to commit bank fraud and conspiring to bribe a Chinese official.

Bankman-Fried’s lawyers have argued most of the new charges violate the rules of the extradition treaty between the U.S. and the Bahamas. Prosecutors responded Monday that the new charges don’t run afoul of the treaty and that it is up to the Bahamas—not Bankman-Fried—to object.

The filing was one of two from the Justice Department, which opposed motions by Bankman-Fried to have most charges dismissed. The FTX founder’s lawyers argued the government had brought flawed charges in a rush to indict him after FTX filed for bankruptcy protection in November.

A spokesman for the U.S. attorney’s office in Manhattan declined to comment. A representative of the Bahamas didn’t immediately respond to a request for comment. A spokesman for Bankman-Fried declined to comment.

Separately, lawyers for Bankman-Fried filed a motion late Tuesday to compel the government to provide documents showing the legal advice that the law firm Fenwick & West gave to FTX and Alameda, saying the material could be exculpatory evidence. The law firm served as outside counsel for both companies for years and at times represented Bankman-Fried personally, his lawyers said.

“Because Fenwick was so deeply involved with FTX and Alameda from their inception, Fenwick provided legal advice on many of the issues that are at the core of the Government’s allegations,” they said.

Bankman-Fried used the advice to make decisions that are now the subject of the charges, including the bank-fraud conspiracy count, his lawyers said. A representative for Fenwick & West didn’t immediately respond to a request for comment.

Bankman-Fried’s trial is scheduled to begin Oct. 2. His defense team previously asked for two separate trials, one on the fraud-related charges and one on the allegations related to campaign contributions and foreign bribery.

Prosecutors oppose that request.

“Severing the counts would waste Court and Government resources on two lengthy and complex trials, which would require many of the same witnesses—including more than one cooperating witness—to testify twice,” prosecutors said Monday.

Both Caroline Ellison and Nishad Singh, who were once among Bankman-Fried’s top lieutenants and are cooperating with the government, are expected to testify at trial, prosecutors said.

The government’s new submissions also offered a window into the breadth of its investigation, saying it included dozens of interviews with witnesses, more than 100 subpoenas or voluntary information requests, and numerous search and seizure warrants.

A Manhattan federal judge is expected to hear oral arguments June 15 on the recent motions.

Service sector expands less than expected in May as expectations grow for stimulus support

China’s factory activity has contracted for a second consecutive month, while growth in the service sector slowed, adding to signs of a slackening post-pandemic recovery in the world’s second-largest economy.

The official manufacturing purchasing managers’ index came in at 48.8 for May, compared with 49.2 in April, according to the National Bureau of Statistics.

The non-manufacturing PMI, which covers activity in the service sector and industries such as construction, was 54.5 in May, below the previous month’s figure of 56.4.

Economists said several months of manufacturing readings below 50, which indicates a contraction, would lead the government to consider stimulus policies to support the economy, which has struggled to maintain strong growth after Beijing relaxed draconian zero-Covid controls this year. Exports have also lagged, as global demand for Chinese goods has failed to pick up.

“We expected that the initial rebound would be led by consumption and services post-reopening and that optimism would eventually translate into a broadening of the base of this economic recovery to include stronger manufacturing and investment,” said Carlos Casanova, senior economist for Asia at UBP. “That broadening has not taken place yet.”

The weaker data sent regional currencies lower against the dollar on Wednesday and hit equity markets that were already weighed down by concerns about China’s uneven economic rebound. One index of Chinese stocks listed in Hong Kong slipped to bear market territory.

China’s economy grew rapidly in the first quarter, but the rebound has begun to falter in the past two months. Property investment, credit and industrial profits have declined, while indicators such as retail sales have fallen short of analysts’ expectations, casting doubt on the government’s modest full-year growth target of 5 per cent.

“The foundation for recovery and development still needs to be consolidated,” said Zhao Qinghe, a senior statistician at the NBS, in a statement on Wednesday. In the manufacturing sector, he said, “production and demand slowed distinctly”.

Hong Kong’s Hang Seng China Enterprises index, which tracks large mainland Chinese companies, fell more than 2 per cent on Wednesday, bringing the benchmark more than 20 per cent below its recent peak in January and plunging it into a bear market. China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks fell 1.2 per cent.

The renminbi slipped 0.4 per cent to Rmb7.1051 against the dollar, bringing it down almost 3 per cent for the year to date. Currencies of large exporters to China also sold off, with the Australian and New Zealand dollars down 0.5 per cent and 0.4 per cent, respectively, against the greenback.

A sub-index of new export orders declined to 47.2 in May from 47.6 in April, “pointing to weaker external demand”, Goldman Sachs said in a research note. The bank said deflationary pressures on the manufacturing sector were “partly due to falling commodities prices and muted market demand”.

The data indicated a strong expansion in service industries such as airlines, ship and road transport services and telecommunications but sustained weakness in property.

“There’s this widening discrepancy between the service part and the manufacturing side,” said UBP’s Casanova, adding that “the economic recovery has been exceptionally uneven”.

However, pent-up demand for services following the end of the Covid-19 controls would fade in the coming months, he said, making the outlook for economic growth this quarter and next “a bit more complicated than we thought at the beginning of the year”.

Ola Källenius calls for delay in post-Brexit sourcing rules and warns new tariffs will dent industry competitiveness

The head of Mercedes-Benz has called for a delay in post-Brexit rules that would add stiffer tariffs on shipments to and from the UK and Europe from next year, saying the car supply chain in Europe was not yet self-sufficient enough to meet tougher sourcing requirements.

The German carmaker’s chief executive Ola Källenius said January 2024 was “too soon” to bring in tariff rules set out in a post-Brexit trade agreement, rules intended to encourage more local sourcing of vehicle components.

Under these so-called rules of origin, electric cars exported between the UK and the EU will need to have 45 per cent of their parts sourced within the two regions to avoid 10 per cent tariffs. 

Källenius joined other European carmakers lobbying for a delay, including Stellantis boss Carlos Tavares who on Tuesday called for the phase-in date to be pushed back to 2027, warning the current timeframe was a “lose lose” situation for both the EU and the UK.

“As the production capacity of Europe’s battery industry is not yet sufficient, to demand stringent rules of origin poses a major challenge for the competitiveness of our industry,” Källenius said at the inauguration of a cell manufacturing plant in northern France, the first of four planned car battery plants planned in the region. 

The factory — which will supply Mercedes’ electric cars and is part of its battery partnership with TotalEnergies and Stellantis — was a step in the right direction towards building a standalone European car manufacturing industry, at a time when the region was trying to wean itself off dominant Chinese and Asian batteries, Källenius added. 

“But all in all, the first of January 2024 is too soon. We need more time for this transition and we would therefore appreciate political support, together with our British partners, in this matter,” Källenius said. 

The looming deadline and backlash from carmakers has highlighted the scale of Europe’s challenge to catch up with Chinese and South Korean battery producers, the main suppliers globally to electric vehicle manufacturers. 

Mercedes’ joint venture with Stellantis and Total, called Automotive Cells Co or ACC, is set to get under way this year with an initial 13 gigawatt/hour capacity at a plant in Douvrin, in northern France. Two more factories are expected to launch in Germany and Italy by 2030, with the aim eventually of supplying 2mn batteries a year. 

These are among a handful of similar projects carmakers are trying to progress across Europe, many of which are supported by state subsidies. French ministers on Tuesday said government support would help make local production competitive compared to Asian or US-made alternatives.

They also vaunted the lower carbon footprint of the European plants, which would add to the products’ appeal for car manufacturers trying to comply with increasingly strict emissions rules.

But battery supplies and production for now are constrained and dependent on Asia, just as carmakers are already racing to try and outdo each other with new electric models.

Tavares said a consensus was emerging that 2027 would be a reasonable phase-in date for the new tariff rules.

These could deal a further blow to Britain’s struggling car industry, not least because of Stellantis, the group behind Vauxhall, also threatening to close its UK factory of Ellesmere Port unless the tariff issue is renegotiated.

“It’s a technical adjustment that should not create too much trouble,” Tavares said on Tuesday, asked about delaying the phase-in to 2027. “Without [a deal] this looming deadline will create a lose-lose situation [for Britain and Europe]. As both will lose from it, it would be in both their interests to change the date.”

Investors need to check whether passive investment vehicles deliver the diversification they want

Mega market cap stocks are eating their indices, distorting their usefulness in some cases as market gauges for investors.

The most widely used index in the world is the S&P 500, which is supposed to be a broad barometer of the US stock market but has increasingly been driven by a small number of tech giants. This year, the S&P 500 is up by about 10 per cent but with much of its returns driven by Apple, Microsoft, Amazon, Alphabet, Nvidia, Meta and Tesla.

A similar trend can be seen in the Nasdaq 100. These seven stocks now account for about 29 per cent of the market capitalisation of the S&P 500 and 60 per cent of the Nasdaq 100. JPMorgan analysts last month said the US equity rally was driven by the narrowest leadership in a rising stock market since the 1990s.

As market tides come and go, there will always be periods when stocks or sectors dominate market indices. But the degree of imbalances now adds to the onus on investors, when choosing a passive investment vehicle, to check whether it actually provides diversification or exposure to the sector they are hoping for.

For example, the five largest exchange traded funds by assets under management include three S&P 500 trackers from BlackRock, Vanguard, and State Street, while the dominant ETF for the Nasdaq 100 is Invesco’s QQQ. Such increasingly concentrated indices are definitely not reflective of the health of the overall US stock market.

In more focused or sector-specific indices, the issues are starker. The ETF sector is highly liquid and transparent. Most major indices still work well mechanically. But for all the calls for index providers to ensure objectivity and rigour, industry classifications are always going to be somewhat subjective. Including or excluding a small group of the largest stocks can skew these indices significantly.

Take the recent shift of payments processors including Visa and Mastercard out of the S&P’s technology sector and into the financials sector. In many banking crises of the past, the Financial Select Sector SPDR Fund, or XLF ETF, has been a proxy way to gain or hedge exposure to the US banking sector as it tracked the S&P financials index.

During the recent banking crisis, the KBW US banks index was often referenced more publicly as a benchmark, but the XLF remains the largest and most liquid route to play the financial sector.

Yet today, a little under 30 per cent of this index is composed of Apple shareholder Berkshire Hathaway, Visa and Mastercard. The inclusion of a slew of data vendors, exchanges and fintechs means that banks are now a smaller proportion of this sector index and even Citigroup is no longer a top 10 constituent.

And the reclassification of Visa and Mastercard as financials leaves behind an unbalanced S&P technology index. Following recent share prices moves, Apple and Microsoft now account for about 47 per cent of the market capitalisation of the Technology Select Sector SPDR Fund, or XLK, which tracks the S&P index. This means the benchmark is hitting concentration limits allowed by US regulation, illustrating the challenges of index composition.

Even apart from concentration issues, there are questions about how representative the S&P technology sector index is of Big Tech stocks. Several years ago, the likes of Meta — then Facebook — and Alphabet were reclassified as communications companies.

Despite the huge value in its web services and cloud computing arm, Amazon is considered a consumer discretionary stock by S&P. The increasing tendency of companies to be technology-enabled is blurring the lines between the sectors they could belong to.

One of the fastest-growing areas for indices has been thematic investing and, in particular, strategies focused on environmental, social and governance factors. Under the threat of regulatory scrutiny, index providers are tightening disclosures, inclusion criteria and ratings. Nevertheless, in an area where we are dealing with less than perfect information, there will always be a huge number of value judgments and differences between index providers.

More generally, such differences and index imbalances of course provide opportunities for active fund managers to prove the case for their role — to bet against a market benchmark, say, to wager that the dominance of the likes of Microsoft or Apple might not last. For passive investors, they should serve as a reminder that indices are still flawed, human-made constructs with sometimes arbitrary classifications. We still need to do our homework when choosing them.