TheChek News Flow

Chinese credit stimulus and higher demand for steel helped boost prices

Record production and sales at iron ore miner Ferrexpo helped drive a sharp rise in profits last year and allowed the company to reinstate its dividend after suspending it for 2015.

The company, which makes iron ore pellets in Ukraine for use in steelmaking, said pre-tax profits rose to $231m last year, from $25m in 2015.

A year ago it suspended its dividend after the collapse of the bank where most of its cash was deposited cost it $175m, while a commodity price slump created uncertainty about future iron ore prices.

Last year a Chinese credit stimulus, lower domestic iron ore production and higher demand for steel helped boost prices.

On Wednesday Ferrexpo said it would pay a final dividend of 3.3 cents per share for 2016 and a special dividend of the same amount.

The company reported record sales volumes and an improved cash position in January.

Its share price climbed more than 2 per cent after an initial dip on Monday, defying the 1 per cent fall in the wider FTSE 250 index. The company’s shares have risen by more than 400 per cent in the past two years.

Ferrexpo is the third-largest exporter in the world behind Brazilian-based Vale and Swedish miner LKAB, with a 10 per cent market share. It accounts for nearly 2 per cent of all Ukraine’s export revenue.

Iron ore prices recovered from eight-year lows of $42 a tonne in January last year to $80 by December, driven by the developments in China. Prices have continued to rise, with the average over the past three months reaching $86 a tonne.

Ferrexpo also benefited from restricted global supply after the shuttering of the Samarco iron ore mine in Brazil following the collapse of a dam there in November 2015, and higher demand caused by rising coking coal prices. Using more pellets and high grade iron ore in the blast furnace to make steel allows manufacturers to cut the amount of coking coal they use in production.

Steve Lucas, chairman of Ferrexpo, said cash generation so far in 2017 had been strong. The company has already almost halved its net debt to ebitda ratio, which now stands at 1.57 times, down from 2.78 times in 2015. Mr Lucas expected further improvements during this year.

High barriers to entry in the industry have limited growth in pellet capacity to 5 per cent over the past 16 years.

In China, the company said a rationalisation in Chinese steel capacity, with a bias towards larger and more environmentally efficient blast furnaces that consume more pellets, should support strong demand for its higher-grade pellets, while environmental controls should limit local production of iron ore.

EU negotiator lays out the consequences of failing to reach a deal

Britain will face nuclear fuel shortages, truck queues at Dover and “serious disruption” to air traffic if Brexit talks fail, the EU’s chief negotiator has warned as he outlined conditions for an “ambitious” UK-EU trade deal.

In a wide-ranging speech ahead of Article 50 exit talks, Michel Barnier warned London it must agree “principles for an orderly withdrawal” before trade talks, including its financial dues and the rights of 4m UK and EU migrants.

While endorsing Theresa May’s call for a “bold and ambitious free-trade agreement”, Mr Barnier insisted that ambition must also maintain “a level playing field” on tax, labour law and consumer rights.

“The sooner we agree on the principles of an orderly withdrawal, the sooner we can start preparing this future relationship,” he said. “On the other hand if we do not address these uncertainties and put off difficult subjects to the end of the negotiations we will be heading for failure.”

Mr Barnier did not completely rule out the possibility of agreeing a free-trade deal in time for Britain’s exit — one of London’s key demands. However, he said the new partnership would “take time” and that transition arrangements may be necessary.

Brushing aside one of the British prime minister’s redlines over the future role of European judges, he explicitly stated the EU’s demand that interim measures “will be within the framework of European law” and the European Court of Justice. Such a transition could not allow Britain to pick and chose access to areas of the single market.

In one of the most provocative parts of his address, Mr Barnier tackled head-on Mrs May’s assertion that “no deal is better than a bad deal”, setting out a bleak vision of the “serious consequences” from leaving without agreement.

“More than 4m British citizens in the EU and European citizens in the UK faced with complete uncertainty about their rights and their future; the reintroduction of binding customs controls, which will inevitably slow down trade and lead to queues of trucks at Dover; serious disruption to air traffic; an overnight suspension in the movement of nuclear materials to the UK,” he said.

“A no-deal scenario is not our goal. We want an agreement. We want to succeed.”

Although Mr Barnier was uncompromising on the need for Britain to “settle its accounts”, he avoided putting a figure on any exit payment, or explaining in more detail what principles for a withdrawal would need to be agreed.

The European Commission is also keen to show it will be constructive and ambitious in its handling of trade talks, once the basics of a divorce are worked out.

“We agree with Theresa May in her call for a `bold and ambitious free-trade agreement’. Yes to ambition!” Mr Barnier said. But in a sign of the how difficult trade talks may become, he added: “This ambition will also apply to social welfare, tax, environmental and consumer protection standards to which our citizens are rightly attached”.

U.S. Stocks Overvalued? Time to Look at Europe

Balance of political risks seems to have shifted

The market’s political pendulum may be swinging back. Hope for U.S. President Donald Trump’s new administration has been driving U.S. markets, while fear of populist upheaval has gripped Europe. The balance of risks are now shifting in Europe’s favor.

Tuesday’s 1.2% drop in the S&P 500 is mostly notable for how long it has been since the market has seen such an event. The last time the index fell more than 1% was in October. But it also represents a challenge to a market that has been running on hopes for good things to happen, namely optimism about corporate tax reform and growth. Bond markets have been more circumspect, with yields locked in a relatively narrow range since December.

By contrast, the conversation in Europe has been all about avoiding bad things, especially the risks posed by 2017’s electoral calendar. The French presidential elections are set to dominate headlines in the next two months, but the closely watched Dutch vote passed without drama. And meanwhile, the European economy has been moving ahead. In February, IHS Markit’s eurozone composite purchasing managers index hit a near six-year high at 56. The European Central Bank has started to sound more confident as the threat of deflation has passed.

Importantly, European companies seem finally to be emerging from an earnings drought. The results for the final quarter of 2016 showed a net 20% of the 450 companies tracked by UBS beating earnings expectations, the best result for six years. Meanwhile, flows out of European equities continued even as the eurozone PMI climbed last year, Citigroup notes. While the S&P 500 has set a record high this year, the Stoxx Europe 600 is still some 10% below its 2015 peak.

On forward earnings multiples, the spread between S&P 500 and the Stoxx Europe 600 is close to its widest over the past five years. Should America under-deliver the good news and Europe skate through the bad, European stocks should end up being the winners.

Two leading shareholders in Akzo Nobel have called on the company to “engage” with PPG Industries, after the Dutch paints and chemicals group rejected a revised €22.4bn takeover bid from its US rival.

The maker of Dulux paints on Wednesday revealed it had dismissed a second cash-and-shares approach from PPG, saying the offer undervalued the company, was not in the best interest of shareholders and raised concerns around antitrust and potential job cuts.

Activist hedge fund Elliot Advisors, a top five shareholder with more than 3 per cent of the stock, spoke out against the decision.

“Elliott urges Akzo Nobel to engage with PPG immediately to determine whether PPG is prepared to bid at a level that provides adequate consideration to Akzo Nobel shareholders and whether PPG can adequately address all relevant stakeholder considerations,” it said in a statement.

Another top 20 shareholder, Columbia Threadneedle, made a similar intervention.

David Dudding, portfolio manager at Columbia Threadneedle Investments, told the FT: “We see strong logic in a combination of Akzo Nobel and PPG and the potential benefits this offers all stakeholders. Akzo needs to recognise this and engage.”

VEB, an influential Dutch shareholder group, called for the company to consider the deal.

Paul Koster, director of VEB, told the FT: “They can’t just shut the door. I can understand them saying it is too low. But when a second bid comes in from a serious player, then you should talk to each other.”

Akzo Nobel’s chief executive Ton Büchner said the the company had “listened carefully” to shareholders and taken their views into consideration when arriving at the decision, which was taken unanimously by its boards.

A combination would require “substantial divestitures” on competition grounds, the Dutch group said.

PPG’s second bid was at €90 per ordinary share, including a dividend about to be paid, comprised of cash of €57.50 and 0.331 share of PPG common stock. It said this represented a 40 per cent premium to Akzo Nobel’s undisturbed share price of 8 March, before details of the initial bid were announced, and was a €7 increase on the original offer.

Shares in Akzo Nobel slipped 2.25 per cent to €74.88 on Wednesday.

Instagram’s advertiser base has doubled again.

The Facebook-owned photo and video app is announcing that it now has 1 million monthly active advertisers, compared to 500,000 in September and 200,000 just over a year ago.

Some of that growth can be attributed to the simple fact that a lot of people use Instagram — 150 million every day, as of January. But James Quarles, who leads Instagram’s ad business, said the platform stands out in a few key ways, beyond just attracting a lot of eyeballs.

First, he said Instagram is a place where people follow their passions, whether that’s “a very mainstream thing like following their favorite musician, or a niche business like candy art.” One sign that that’s paid off for companies with a presence on Instagram: 80 percent users follow a business.

Second, there’s the “ease and simplicity” of using Instagram. For example, Quarles said, “It takes only four taps to place an ad on a business profile.”

And lastly, he said Instagram is trying to “produce visible action” — it’s not just about getting users to like a photo or follow an account, but also convincing them to visit your website and maybe buy a product.

Quarles didn’t just use our call to boast about Instagram’s continued growth. He also talked about new features that the service will be adding for advertisers in the comings. For one thing, he said it will be adding insights data around multi-image posts and Instagram Stories.

In addition, businesses will soon be able to add a button to their profiles for that allows users to make a booking or appointment directly through Instagram. This enables Instagram to become more of “a primary storefront for the businesses,” Quarles said, while making it easier for consumers to engage with businesses “just by swiping your finger.”