TheChek News Flow

Intervention follows Trump adviser’s criticism of German trade surpluses

German finance minister Wolfgang Schäuble has blamed the European Central Bank for an exchange rate that is “too low” for Germany, following criticism last week from US president Donald Trump’s top trade adviser.

Mr Schäuble acknowledged in a newspaper interview that the ECB had to set monetary policy for the eurozone as a whole, but said: “It is too loose for Germany.”

“The euro exchange rate is, strictly speaking, too low for the German economy’s competitive position,” he told Tagesspiegel. “When ECB chief Mario Draghi embarked on the expansive monetary policy, I told him he would drive up Germany’s export surplus . . . I promised then not to publicly criticise this [policy] course. But then I don’t want to be criticised for the consequences of this policy.”

Peter Navarro, the head of Mr Trump’s new National Trade Council, last week told the FT that Germany was exploiting the US and its EU partners by using a “grossly undervalued” euro to create a vast trade surplus. The comments appeared to place Germany in a category of countries that the Trump administration has accused of currency manipulation for competitive advantage.

Mr Schäuble pointed out that Germany was not able to set exchange rate policy and pinned responsibility for the euro’s weakness against the dollar on the ECB. The German finance ministry was “not an ardent fan” of the ECB’s policy of quantitative easing that had helped to weaken the single currency.

According to the Ifo Institute, Germany recorded a trade surplus of nearly $300bn last year, outpacing China by more than $50bn to hold the world’s largest trade surplus. Critics in Brussels and Washington have called for Germany to reframe its fiscal policy and stimulate domestic demand to increase imports.

Last month, Mr Trump called the EU a vehicle for Germany and undermined Nato by calling it obsolete.

In his newspaper interview, Mr Schäuble questioned why a US president would want to divide Europe given that the continent “is closer to them than anybody else in the world”. He added he did not believe that Mr Trump was seriously trying to split up Europe, but he was “testing” a lot.

Mr Schäuble’s comments on monetary policy are the latest in a series of attacks on the ECB’s easy money policies. Last year, the hawkish finance minister blamed Mr Draghi for “50 per cent” of the success of the populist rightwing Alternative for Germany party.

Mr Schäuble and others on the conservative wing of Chancellor Angela Merkel’s ruling CDU/CSU bloc are concerned that as well as profiting from the refugee crisis, the Eurosceptic AfD, which wants an end to the common currency bloc in its present form, is winning support from voters worried about the euro’s stability and the low interest on their savings.

Mr Schäuble appears to be broadening a recent push to drive Ms Merkel to the right as she prepares to run for a fourth term in elections in September. Last month, he openly attacked her refugees-welcome policy saying “mistakes” were made during the peak inflow in 2015.

Mr Draghi, meanwhile, was on Friday hailing efforts at European unification, defending the common currency and applauding some of Germany’s labour reform policies in a speech given in Ljubljana, Slovenia.

“There are some today who believe that Europe would be better off if we did not have the single currency and could devalue our exchange rates instead,” Mr Draghi said.

“But, as we have seen, countries that have implemented reforms do not depend on a flexible exchange rate to achieve sustainable growth. And for those that have not reformed, one has to ask how beneficial a flexible exchange rate would really be. After all, if a country has low productivity growth because of deep-rooted structural problems, the exchange rate cannot be the answer.”

Group nears milestone in development of $7bn offshore oil and gas project in Ghana

Vitol, the world’s biggest independent oil trader, is eyeing opportunities to expand its business in Africa as it nears a milestone in the development of a $7bn offshore oil and gas project in Ghana.

Kho Hui Meng, Vitol’s head in Asia, said the lack of refining capacity relative to demand in Africa created an opportunity for the trader, which ships more than 6m barrels of oil a day, equivalent to the combined daily consumption of the UK, Germany, France and Switzerland.

Vitol and Eni, the Italian energy group, are developing the Sankofa offshore oil and natural gas project, which will provide a long-term source of gas for Ghana’s domestic market, as well as oil for sale on international markets.

The companies are dispatching a 330-metre-long floating production platform from Singapore to west Africa at the end of this month. The first oil production from the Ghana fields is expected next summer.

The project, backed by $517m in debt and guarantees from World Bank members, marks a further deepening of Vitol’s engagement in Africa.

“This project goes a step further than just producing oil crude [for international markets] but also gas to support the domestic energy market in Ghana, which has been severely constrained,” said Lance Crist, global head, infrastructure and natural resources at the International Finance Corporation, a member of the World Bank.

Independent oil traders typically avoid involvement in big oil exploration projects, focusing on moving oil and fuel from where it is produced to where it is most needed. But a few have made tentative steps as it can provide an alternative source of revenue and secure source supply.

Vitol’s decision to explore for oil off the coast of Ghana was backed by its chief executive Ian Taylor, one of the most powerful figures in the oil industry.

Africa is an important market for trading companies because of limited infrastructure and a lack of refining capacity. While some African countries are large producers of crude, such as Nigeria, Libya and Angola, nearly all of them have to import large quantities of refined fuels.

“We like Africa,” Mr Kho said. “If you look at the African continent there’s a lack of investment in refining capacity. The Chinese, the Indians are all building a lot of refineries and the oil products have to move somewhere — Africa is the logical place.”

Vitol has been one of the big winners of the oil price crash, as the glut in supply led to arbitrage and storage opportunities. The company enjoyed one of its most profitable years on record in 2015, with a 15 per cent increase in net income to $1.6bn.

However, profits in the first half of 2016 declined 42 per cent to $546m because of fewer lucrative trading opportunities.

Mr Kho welcomed the Opec agreement last December to cut supply, which pushed oil prices back above $50 a barrel, saying that the market was “ready for change”. However, he expected that the higher price would lead to more US shale oil production.

“The oil price I think will stay in the range, the low $50s to low $60s . . . with the Opec cut, US tight oil is going to balance the market,” he said.

World’s most influential shipowner to oversee restructuring of oil-drilling company

The world’s most influential shipowner, John Fredriksen, has vowed to spend at least another “three to five” years in business to supervise the restructuring of $8bn of his oil-drilling company’s debts, just days after an unexpected return to dealmaking.

Mr Fredriksen, 72, said he had to “see through” the rescue of Seadrill, which he said was the most complicated transaction he had seen in more than half a century in shipping.

Mr Fredriksen’s vow comes less than a week after Frontline, his listed tanker operator, launched a $475m offer for Double Hull Tankers, a smaller rival. The deal is intended to make Frontline once again the world’s biggest crude tanker operator by fleet size.

However, Mr Fredriksen said Seadrill, which owns 64 rigs and drilling ships, and is one of the biggest companies of its kind, was consuming more of his attention.

Seadrill, like other rig operators, has been severely hit by the fall in oil prices and accompanying sharp downturn in offshore drilling activity. The company has also suffered from what Mr Fredriksen admitted was an excessive reliance on short-term bank finance.

“The capital structure was wrong. It was too short loans, too much guarantees, things like that,” said Mr Fredriksen, a Norwegian who is now a citizen of Cyprus.

The company has said it needs to amend and lengthen the terms of $8bn of its borrowings and raise at least another $1bn in capital.

But it faces a showdown with some bondholders who are blocking a deal. The company is considering multiple possible responses, including a “pre-packaged” Chapter 11 bankruptcy agreed with key creditors.

However, Seadrill looks most likely to become the latest of Mr Fredriksen’s listed vehicles to receive a bailout from Hemen Holding, which manages his holdings in the six listed companies he controls.

Hemen bailed out Frontline in 2012 during a prolonged slump in tanker rates and has had to put up funds for Golden Ocean, his dry bulk operator, twice — in 2009 and 2016. Some rivals’ companies in both sectors sought bankruptcy protection in the same period.

“I’ve never defaulted historically — not with banks, not with any loans,” Mr Fredriksen said.

Mr Fredriksen said 24 per cent of his wealth was tied up in shipping and offshore enterprises, but added: “Depending on the Seadrill situation, it may increase.”

The restructuring has already taken a year’s work and Mr Fredriksen vowed to remain in place while it was completed.

“I have to see this through and also a few other situations,” he said. “Retirement is not an option for me, at least for the next three to five years.”

On Frontline, Mr Fredriksen said the company was targeting Double Hull Tankers because Frontline’s fleet had declined in size in recent years and was growing old. The transaction would make Frontline again clearly the world’s largest operator by fleet size and help to make it more efficient.

“The synergies . . . will help in this instance DHT and us to reduce costs,” Mr Fredriksen said.

Chinese Luxury Shoppers’ Newest Destination: China

Shift in spending is giving high-end names a boost, but it also presents risks for brands

After years of flooding luxury stores from New York to Paris to snap up handbags and watches, Chinese consumers are shopping more at home.

High-end names such as Cie. Financière Richemont, Burberry Group PLC and LVMH Moët Hennessy Louis Vuitton are experiencing a surge in sales in mainland China as the government taxes overseas purchases and some luxury brands lower prices in China to bring them closer to those elsewhere.

The yuan’s depreciation and recent terrorist attacks in Europe are also deterring Chinese from traveling internationally, boosting luxury purchases on the mainland, some analysts say.

The shift in spending by the Chinese, the world’s top buyers of high-end goods, is an opportunity for luxury brands on the mainland but also a risk to their business elsewhere in the $267 billion personal luxury-goods industry.

Beijing has taken steps in recent years to bring consumption—and tax revenue—back to China. In 2015 and again in early 2016, the government cut import duties on products including cosmetics, shoes and clothing. And in April last year, China raised taxes on overseas purchases; rates vary depending on the type and value of the goods, but the tax applies to foreign goods bought online as well as those carried into China.

“The price difference has narrowed,” said Qi Fei, who bought an Yves Saint Laurent handbag in an upscale Beijing mall recently for about $1,600, around the same price she could buy it abroad. “The advantages of luxury stores in China are becoming more and more obvious.” Purchasing goods within China simplifies after-sales services such as warranty and repair, the 27-year-old said.

In constant dollars, sales of personal luxury goods in mainland China rose 4% in 2016 and will increase at an even faster pace this year, predicts Bruno Lannes, a Shanghai-based partner at consulting firm Bain & Co. Those sales slipped slightly in 2016 using annual average exchange rates. At the same time, Chinese spending on luxury goods world-wide, including China, fell for the first time in 2016, at both annual average and constant exchange rates, amid a multiyear crackdown on corruption by the Chinese government.

“What you had is a repatriation of Chinese consumption toward mainland China,” said Bernard Arnault, chief executive of LVMH, in late January, as sales there surged in the second half of 2016.

Richemont reported in January that mainland China and South Korea helped to boost its Asia-Pacific sales by 10% in the third quarter, double its overall sales growth rate. The company’s jewelry, watch and accessory brands include Dunhill and Cartier.

Richemont, whose profit and sales plunged in the first half of the year, has credited some of its growth in mainland China to what it calls a “fair pricing policy” initiated in 2015, in which it prices products in the same range world-wide, before accounting for local taxes and duties.

Chanel, which in 2015 became one of the first luxury brands to make prices the same around the world, said its policy improves the brand’s consistency, spreads out sales between countries and deters gray-market goods, which are bought at cheaper prices in one country then sold without the brand’s approval in another. A Chanel lambskin handbag from the brand’s current collection is listed on its website for the same price globally: $4,700.

Pricing disparities remain, though. A study by consulting firm L2 Inc. in mid-2016 found that customers in China still pay 25% more for Louis Vuitton than elsewhere in the world. LVMH declined to comment.

Richemont’s Chloe prices a suede calfskin bag at about 14,000 yuan (about $2,035) in China, nearly a third higher than its price in the U.K., 9% higher than in Japan and 5% more than the U.S. at current exchange rates. Chloe declined to comment.

U.K.-based Burberry, whose mainland China sales increased by a high-single-digit percentage in its fiscal third quarter, said last month that it adjusted prices in November in Hong Kong and mainland China, where it aims to keep prices within 15% of those at home.

“Luxury brands are trying to balance their pricing to maximize what they can get from the Chinese consumer,” said Danielle Bailey, head of research in the Asia-Pacific region for L2.

Many brands overexpanded in mainland China in recent years and some have closed stores since then or scrapped plans to open new ones due to weak demand. But the pickup in spending, if it continues, could lead high-end names to consider reinvesting on the mainland, said Luca Solca, head of luxury goods at Exane BNP Paribas.

While the Chinese stock and real-estate markets are recovering, boosting consumer confidence, some analysts and company executives say it’s unlikely that China’s economy will return to double-digit growth rates. The economy grew 6.7% last year, according to official data.

In October, as LVMH reported that purchases by Chinese nationals on the mainland and elsewhere boosted year-to-date sales growth, Chief Financial Officer Jean-Jacques Guiony warned that stronger spending by the Chinese could be short-lived.

While disposable income is expected to grow in China, not everyone will be able to travel, making it important for luxury brands to be able to attract Chinese shoppers in their home country, said Andrea Casavecchia, the head of Asia for Italian luxury shoemaker Santoni.

“China is a challenging market, but it’s the future,” said Mr. Casavecchia, who expects mainland China to become Santoni’s second-largest foreign market after the U.S. by 2020. “China is the golden land.”

Agrichemicals pair will offer to sell R&D capability to ease fears over $140bn merger

Dow Chemical and DuPont are on the verge of offering to sell research and development capability in response to Brussels’ antitrust concerns over the companies’ planned $140bn merger. The case, which will decide on Tuesday whether to approve the deal, has become a test of European competition regulators’ approach to industrial innovation.

The investigation is the first of three agrichemical megadeals, together worth nearly $250bn, that Margrethe Vestager, EU competition commissioner, will examine this year. Dow and DuPont are seeking to stop the merger being blocked, amid concerns from politicians and consumer groups.

Brussels’ objections to the deal have attracted particular scrutiny, because it marks the first time the commission has threatened to block a deal primarily based on concerns that it could cut innovation in a whole market. Previous antitrust cases have cited a narrower range of risks to product development in specific markets.

Raphaël De Coninck at Charles River Associates, the consultancy, said analysing the future impact of a merger on innovation across a whole market was “quite speculative”.

“We expect to see quite a lot of interest by the commission where innovation is an issue — the question is: ‘Will the commission set the bar too low for intervention?’” Mr De Coninck said. “With a type of concern about innovation in a rather general way, without being linked to clear specific projects, it is very difficult [for companies] to solve.”

Commission officials have already acknowledged breaking new ground in previous cases where they intervened because of concerns over future product innovation, including GE’s acquisition of Alstom’s power generation and transmission assets in 2015 and Novartis’ purchase of GSK’s oncology business the same year.

In both cases, Brussels required companies to sell parts of their businesses that developed products that might compete in future, to ensure both lines of research continued after the deal.

The commission’s objection to the Dow-Dupont deal goes one step further, looking more broadly at the risk to innovation in the whole crop protection market, estimated to be worth nearly €60bn annually.

In December, the commission outlined its evidence of a risk to the overall market, as well as some specific product market overlaps, in a more than 700-page statement of objections — one of the longest published by Brussels.

Options for Dow and DuPont range from rejecting the commission’s crop protection innovation concerns for lack of evidence through to fundamentally restructuring their merger plans.

Andrew Liveris, Dow chief executive, said in a recent earnings call that he was “confident that we can get to the right answer that satisfies [the commission’s] innovation remedy requests”, noting the companies would offer to sell “R&D capability of whatever we end up divesting”.

Mr Liveris said he believed US and Chinese authorities would “fall in” once European approval was obtained and that he expected the deal to close in the second quarter of 2017.

Dow and DuPont forecast $300m of annual R&D savings costs from the merger, but argue that efficiency gains will lead to more innovation after the deal and that ever growing resistance to current products requires constant product development.

Measuring innovation can be difficult. Matthew Phillips, of research group Phillips McDougall, said Dow and DuPont together accounted for just 6-8 per cent of agrochemical patents granted worldwide annually.

However, Diana Moss, president of the American Antitrust Institute, told a US Senate committee last year that the two companies accounted for 18 per cent of “genetic events” for corn, 21 per cent for soybeans and 28 per cent for cotton over more than two decades from 1991.

Dow and Dupont have gained $10bn in market value since the deal was announced in August.

European regulators will decide on the other two megamergers — ChemChina’s $44bn purchase of Syngenta and Bayer’s $66bn purchase of Monsanto — in turn.

The robots are rolling forward with a full-frontal assault to capture Wall Street’s vast investment fees and commissions.

More investors are warming to the cold, steely embrace of the increasingly sophisticated, low-cost automated robo-advisers. The primary reason is to save money on those fees and charges.

Bots are squeezing their flesh-and-blood competition and threatening the jobs of thousands of human brokers in the $20 trillion US wealth management business.

Nearly one in three investors says these machines are superior at picking stocks and lessen their risk, and almost as many say the machines are better at selecting investments for retirement than human brokers, according to a new study of US investors by advisory firm Spectrem Group.

Respondents had a minimum net worth of $100,000. An earlier study by Spectrem in 2015 was not as bullish, with 6 percent of affluent investors saying they’d used a pure technology-based platform to enter information for a robo-recommended portfolio.

Today, more US investors are pulling assets from human wealth managers and putting the money quietly to work with the expanding army of robo-advisers.

Spectrem says rookie investors — many of them millennials — are more often using robo-advisers than human ones.

Masood Vojdani, chief executive of Bethesda, Md.-based MV Financial, a wealth management firm with more than $500 million in assets under management, is not surprised. “Robo-advisers could be important for younger investors by allowing them to start investing earlier in their lives than a few years ago, which is incredibly valuable,” Vojdani told The Post, despite his mixed feelings about robos.

Robo-advisory, less than a decade old, may expand much faster than experts originally forecast. Consultancy A.T. Kearney earlier estimated that by 2020, robo-advisers will manage $2 trillion in the US, or roughly 5.6 percent of the country’s investment assets, up from 0.5 percent about 12 months ago.

The trend has sent the traditional wirehouses and brokers scrambling.

“Clearly, the pressure that rests on wealth management firms to trim the costs involved in manufacturing and distributing portfolios, paired with continuing fee pressure [will continue the firms to move toward robo advising],” said Isabella Fonseca, an Aite Group analyst who covers wealth management.

Entrenched players, like Vanguard and Charles Schwab, have already taken these defensive measures, offering low-fee automated plans alongside their human-broker services to attract young millennials, a move that draws guffaws from one stand-alone upstart as they begin to hire sales staff from the old guard firms.

“We’re hiring from the competition at Fidelity, Vanguard and Schwab, and training some of our own experts,” said Jon Stein, CEO of New York-based Betterment, the largest independent robo-adviser, with $7 billion in assets under management and a staff of 220.

The robo space also includes upstarts like Acorns and Wealthfront.

The lead in voter support for German Chancellor Angela Merkel's conservative alliance over the centre-left Social Democrats (SPD) shrank to a multi-year low of 4 percentage points, an opinion poll showed on Sunday.

The SPD, which a week ago appointed Martin Schulz as leader, scored 29 percent in the survey published in newspaper Bild am Sonntag - a six-point jump that Bild said was the biggest pollster Emnid had ever recorded for the party.

The jump took SPD support to its highest in over four years.

Support for Merkel's CDU and its Bavarian sister party, the CSU, fell 4 points to 33 percent - cutting the gap between the two blocs to its narrowest in records compiled by poll tracker wahlrecht.de going back to Sept 2013.

"Martin Schulz is managing above all to win back former SPD voters and to appeal to them emotionally," Emnid's Torsten Schneider-Haase told the newspaper, adding: "Such a strong shift in party preferences within a week is a one-off."

The SPD appointed Schulz, a former European Parliament president, as leader last Sunday, replacing Sigmar Gabriel who said he was standing aside to boost the party's chances.

The move has re-energised the SPD, junior partner in Merkel's 'grand coalition', ahead of September's federal election.

Schulz has vowed to unseat Merkel with a campaign aimed at overcoming "deep divisions" that he says have fuelled populism in Germany in recent years.

In a theoretical head-to-head contest for chancellor, the Emnid poll showed Merkel pipping the Social Democrat to victory with 41 percent support to his 38 percent.

The SPD has held exploratory talks with the environmentalist Greens and the far-left Linke party about forming a left-leaning coalition government after the election but they need more support if that is to become a viable option.

The Emnid poll - a survey of 2,233 voters conducted from Jan. 26 to Feb. 2 - showed support for both the Greens and the Linke falling 2 points to 8 percent.

The anti-immigration Alternative for Germany (AfD) was unchanged on 11 percent, with the liberal Free Democrats (FDP) on 6 percent, also unchanged.

Schulz has called for higher wage increases for workers, described U.S. President Donald Trump's policies as "un-American" and warned against lifting sanctions imposed against Russia over its role in the Ukraine crisis.

Merkel is meeting her Bavarian allies on Sunday for two days of talks aimed at rallying their troubled alliance ahead the Sept. 24 election, which she expects to be "tough like no other".