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Sanjeev Gupta in spotlight after swoop on Thyssenkrupp steel unit



From a makeshift command centre deep in Germany’s rustbelt region, Sanjeev Gupta sketched out a plot to seize control of one of the country’s oldest — and most symbolic — industrial concerns.

The controversial British tycoon this month tabled an offer of an undisclosed price for Thyssenkrupp’s ailing steel division, which traces its roots to a foundry built by Friedrich Krupp in the Ruhr valley in 1811.

The surprise approach by Liberty Steel, a privately owned company that only five years ago was virtually unknown and has no real presence in Europe’s leading economy, kickstarted a process that could see the unit fall into foreign hands for the first time.

If the audacious bid underlined the faded fortunes of the German conglomerate, which once produced everything from submarines to lifts and is being dismantled under chief executive Martina Merz after years of underperformance, it showed the opposite trajectory of Liberty’s founder.

The former commodities trader has rapidly assembled a $20bn metals-to-energy powerhouse through acquisitions around the world. Clinching Europe’s second-largest steelmaker would be a crowning moment — and his biggest deal yet.

But for that to happen, the 49-year-old entrepreneur must overcome a number of obstacles — even if Thyssenkrupp’s management proves amenable and other steelmakers fail to outbid him — including a possible backlash from unionised workers and doubts over his credibility. 

A worker at Thyssenkrupp’s steel factory in Duisberg. The unit is set to lose €1bn this year © REUTERS

“We see value where others don’t,” Mr Gupta said of his latest target, which is set to lose €1bn this year. “And when we do, we invest and change what needs to be changed.”

He added that he was “in it for the long run” and would be able to plough enough money into the new entity to transform it into a low-carbon steelmaker. Others are less convinced of the rationale.

“It’s his ego talking here,” said one industry adviser. “Why would you take on a big company with massive overheads and a significant challenge in the future in the transition to decarbonisation?”

Among the obstacles is how a self-styled industrialist whose spectacular rise has attracted scepticism will fund a business, worth almost €3bn according to some analysts, that is bleeding cash and will require huge investments to remain competitive. 

A lack of transparency over Liberty’s finances has provoked questions over the sustainability of its growth and strategy, while its owner’s borrowing arrangements have piqued the attention of regulators.

A tie-up would result in a producer with about $25bn in turnover and a workforce of more than 50,000, encompassing both companies’ European sites and Liberty’s facilities in Australia, the US and India.

Thyssenkrupp’s decline

However, this could dilute the importance of Thyssenkrupp’s steel operations, which are largely based in the state of North Rhine-Westphalia, home to all three candidates to succeed Angela Merkel as head of the ruling Christian Democrat party.

“Thyssenkrupp is a very important employer in the region and it also emits some two per cent of all sorts of German carbon emissions, so in many areas, it’s very political,” said Ingo Schachel, an analyst at Commerzbank.

The powerful IG Metall union is implacably opposed to a foreign takeover and is lobbying for the German state to take a stake, fearing a merger might lead to further job losses on top of 6,000 announced across the group.

“To solve its many problems, Thyssenkrupp steel needs capital, not a new owner,” said Jürgen Kerner, head treasurer of IG Metall and a member of the company’s supervisory board. 

Liberty will also be mindful of the Krupp Foundation, Thyssenkrupp’s biggest shareholder with almost 21 per cent, which has the task of “preserving the integrity” of the historic enterprise but maintains it will not interfere with the day-to-day management of the company.

Thyssenkrupp workers demonstrating at an IG Metall rally calling for partial nationalisation © AFP via Getty Images

With excess production capacity dragging down prices and profits, experts say consolidation is key to strengthening the steel sector. The industry in Europe in particular faces existential challenges from the impact of Covid-19, high volumes of imports and pressure to meet EU climate change targets.

Yet rather than rationalise, Mr Gupta plans to increase output. Liberty says its assets complement Thyssenkrupp’s with little overlap, making it less likely that Brussels would reject the deal on competition grounds.

But that also limits the scope for reducing costs. About half Thyssenkrupp’s steel sales are linked to the automotive industry, which is not expected to recover to pre-Covid levels for several years.

Even if there is a logic to the combination, Mr Gupta’s record is likely to receive close examination in Germany, which prides itself on the responsible stewardship of industrial assets. 

Since reopening a Welsh steel rolling mill in 2015, the Indian-born UK national has snapped up struggling furnaces, aluminium smelters, engineering plants and mines under the banner of GFG Alliance, a loose collection of Gupta family interests that include Liberty.

For all his braggadocio and promises of revitalisation, though, Mr Gupta’s turnround tactics have included seeking support from public authorities eager to secure jobs. As GFG Alliance is not a legal entity itself but rather a loose collection of dozens of individual businesses, there is little insight into its overall finances and performance. 

Thyssenkrupp Steel and Liberty Steel: Combination would create a European steel powerhouse

A year after pledging to incorporate its numerous steel ventures into a single company and publish consolidated financial statements, Liberty has blamed the pandemic for delays and is promising the accounts by the end of 2020.

Attention will inevitably turn to how Mr Gupta will muster the financial firepower required. Liberty said its non-binding indicative bid included “a number of letters from financial institutions” on the potential provision of funds “with no commitments at this stage as is typical for this phase of the offer process”. It named only Credit Suisse, which declined to comment.

Until now, GFG’s expansion has largely relied on forms of finance linked to customer payments that are typically more expensive than standard corporate debt.

Billions of euros have come this way from Greensill Capital, a start-up backed by Japanese technology investor SoftBank that specialises in supply-chain finance. In effect, this means paying suppliers early for a fee, or else providing upfront cash for client invoices not due to be paid for months. 

A German bank owned by Greensill has been probed by the country’s financial regulator, BaFin, over its level of exposure to companies connected to GFG, as first reported by Bloomberg.

Greensill said it did not comment on work for clients, adding that it was in compliance with all regulatory requirements in the jurisdictions where it operates.

And a lender owned by Mr Gupta himself, Wyelands Bank, has come under scrutiny from the UK’s banking watchdog over its loans to shell companies that finance GFG entities.

Martina Merz, Thyssenkrupp chief executive, promises to examine all options for steel before deciding on any sale © Bloomberg

If instead Liberty tries to raise conventional acquisition finance secured against the Thyssenkrupp assets, it will have to convince lenders there will be no repeat of its first big foray into traditional corporate borrowing.

Within a year of securing a $350m term loan from a club of lenders to fund its purchase of a large aluminium smelter in France in 2018, the borrower fell into technical default. While no scheduled payments were missed, the issues included delayed filing of audited accounts and a requirement for Mr Gupta to inject more cash into the venture. 

However he funds the bid, there is no reason to believe that Mr Gupta will benefit from being a frontrunner, according to people close to Thyssenkrupp.

His approach could encourage other potential suitors, such as Sweden’s SSAB or Germany’s Salzgitter, as well as Tata Steel Europe, whose proposed merger with Thyssenkrupp’s unit was blocked by Brussels last year.

Following the blockbuster €17bn sale of its elevators division this year, Thyssenkrupp is “not under immediate pressure from a liquidity perspective because they’re sitting on more than €5bn in net cash”, said Mr Schachel. Ms Merz has vowed to examine all options for steel before making a final decision.

But the single-minded boss will know that finding a solution for the storied business will become much harder once campaigning for Germany’s general election begins next year. 

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BNP under fire from Europe’s top wine exporter over lossmaking forex trades




BNP Paribas is facing allegations that its traders mis-sold billions of euros of lossmaking foreign exchange products to Europe’s largest wine exporter, the latest accusations in a widening controversy that has also enveloped Goldman Sachs and Deutsche Bank.

J. García Carrión, founded in Jumilla in south-east Spain in 1890, is in dispute with the French lender over currency transactions with a cumulative notional amount of tens of billions of euros. It claims the lossmaking trades were inappropriately made with one of its former senior managers between 2015 and 2020, according to people familiar with the matter.

BNP is one of several banks facing complaints from corporate clients in Spain over the alleged mis-selling of foreign exchange derivatives, which pushed some companies into financial difficulties.

Deutsche Bank has launched an internal investigation of the alleged mis-selling that this week led to the departure of two senior executives, Louise Kitchen and Jonathan Tinker.

An internal investigation at JGC found that BNP conducted more than 8,400 foreign exchange transactions with the company over the five-year period, equivalent to about six each working day.

That level of activity was far higher than what the company would have needed for normal hedging of exchange-rate risk on international wine exports, the people said, adding that the Spanish company had shared the results of its internal probe with BNP.

While the vast majority of the lossmaking trades related to euro-dollar swaps that moved against the bank, some were in currency pairs where JGC has little or no operations, such as the euro-Swedish krona.

As a direct result, the €850m-revenue company made about €75m of cash losses in those five years, while BNP could have made more than €100m of revenue from transactions, the people added. Many of the deals were made through trading desks in London.

Executives have demanded compensation for at least some of the losses, arguing that BNP’s traders or compliance department should have spotted and reported the disproportionately high level of transactions and profits from a single client, according to multiple people with knowledge of events.

JGC says the deals were designed as bets on currency markets, rather than for hedging, and is considering a lawsuit to try to recover some of the money, one of the people said.

“BNP Paribas complies very strictly with all regulatory obligations relating to the sale of derivatives and foreign exchange instruments,” the bank said in a statement. “We do not comment on client relationships.”

JGC declined to comment.

Separately, the Spanish wine producer is suing Goldman Sachs in London’s High Court for a partial refund of $6.2m of losses caused by exotic currency derivatives. Goldman has maintained the products were not overly complex for a multinational company with hedging needs and were entered into with full disclosure of the risks.

In Madrid, the wine company has also brought a case against a former senior executive who was responsible for signing off the lossmaking deals. JGC alleges this person conducted the deals in secret and covered them up internally by falsifying documents and misleading auditors.

In the London lawsuit, JGC alleges its executive was acting “with the encouragement and/or pursuant to the recommendations” of Goldman staff “for the purposes of speculation rather than investment or hedging”.

Deutsche Bank has been investigating for months whether its traders in London and Madrid sidestepped EU rules and convinced hundreds of Spanish companies to buy sophisticated foreign exchange derivatives they did not need or understand.

The Financial Times has reported that the German bank has settled many complaints brought against it in private and avoided going to court.

People familiar with the matter told the FT that the departures of Kitchen and Tinker were linked to the probe into the alleged mis-selling, which appears to have occurred in units that at the time were overseen by the two.

The bank declined to comment. Kitchen and Tinker did not respond to requests for comment.

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Will the Fed dare to mention tapering?




Will the Fed dare to mention tapering?

When Federal Reserve officials convene on Tuesday for their latest two-day monetary policy meeting, questions over whether the central bank should start talking about tapering its $120bn monthly bond-buying programme will lead the agenda.

Since the US central bank last met in late April, several senior Fed policymakers, including vice-chair Richard Clarida, have cracked the door more widely open for a discussion about eventually winding down the pace of those purchases, which include US Treasuries and agency mortgage-backed securities.

The recent comments align with those referenced in the latest Fed meeting minutes, which indicated that “a number of participants” believed it might be “appropriate at some point in upcoming meetings” to begin thinking about those plans if progress continued towards the central bank’s goals of a more inclusive recovery from the pandemic.

Recent economic data support this timeline. Consumer prices in the US are rising fast, with 5 per cent year-on-year gains in May revealed in last Thursday’s CPI report — the steepest increase in nearly 13 years. Additionally, last month’s jobs numbers, while weaker than expected, still showed signs of an improving labour market.

Most investors still expect the Fed to only begin tapering in early 2022, with guidance on the exact approach delivered in more detail around September this year at the latest. Goldman Sachs predicts a more formal announcement will come in December, with interest rate increases not pencilled in until early 2024.

“The Fed is signalling they are going to start talking about it,” said Alicia Levine, chief strategist at BNY Mellon Investment Management. “They are softening up the market to expect [something] this summer.” Colby Smith

Are inflation risks rising for the UK?

Consumer prices in the UK have risen at an annual rate of less than 1 per cent for most of the pandemic due to low demand for goods and services and weak wage pressure.

However, with the recent easing of Covid-19 restrictions releasing pent-up consumer demand, the nation’s headline inflation figure doubled in April from the previous month.

When core consumer price inflation data for May are released on Wednesday, some analysts expect an even bigger leap, predicting that annual CPI growth will jump to the Bank of England’s target of 2 per cent.

Robert Wood, chief UK economist at the Bank of America, said such an inflation surge would add to the BoE’s hawkishness. He also forecast further rises later this year as commodity price increases continued to elevate energy and food costs.

Additional price pressure would come from supply chain disruptions and higher transport costs that push up input costs.

“The upside risks to our inflation forecast are growing from all angles,” said Paul Dales, chief UK economist at Capital Economics, who expected consumer price levels to peak at 2.6 per cent in November.

“The reopening may result in prices in pubs and restaurants climbing quicker than we have assumed,” Dales added, while labour shortages in some sectors, such as construction and hospitality, were also starting to push up wages and prices.

However, both analysts expect the increased price strain to be temporary.

“Once higher commodity prices have fed through to consumer prices, inflation will fall back again,” said Wood, forecasting that UK inflation would drop back below the BoE’s target in late 2022. Valentina Romei

Line chart of Annual % change on consumer price index showing UK consumer price inflation is set to rise above target

Will the BoJ keep its rates policy on hold?

Japan’s economic recovery has diverged from Europe and the US this year as it struggles with its Covid vaccination campaign and big cities such as Tokyo continue to be partially locked down under states of emergency due to the pandemic.

Although the nation’s wholesale prices rose at their fastest annual pace in 13 years last Thursday on surging commodity costs, Japan has otherwise faced a lack of price pressures compared with the US.

That means that when the Bank of Japan concludes its two-day meeting on Friday, analysts believe it will not alter monetary policy.

“I don’t expect any change in policy,” said Harumi Taguchi, principal economist at IHS Markit in Tokyo. “They increased flexibility in March and I expect they will continue to watch that.”

After a policy review, Japan’s central bank in March scrapped its pledge to buy an average of ¥6tn ($54.8bn) a year in equities, and the pace of its exchange traded fund purchases dropped sharply in April and May. The moves signalled a shift away from aggressive monetary stimulus in favour of what the BoJ termed a more “sustainable” policy.

“Japan is one of the few countries whose property prices have not risen, and since rent is a major component of the consumer price index, it is not likely to see much inflation ahead,” said John Vail, chief global strategist at Nikko Asset Management in Tokyo.

“Interest rates can remain extremely low, which in turn keeps the yen on a weak trend,” Vail added. Robin Harding

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Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday

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Dollar traders chill after the tantrum




It was a classic case of buy the rumour, sell the fact.

In February this year, investors and analysts were concerned that the US economy was beginning to hot up, sparking fears that inflation would pick up and force the Federal Reserve to quicken its policy tightening. This, in turn, led to a surge in US government yields, which propelled the dollar to the year’s high against its peers a month later.

Fast-forward to the end of the first half of the year and inflation in the US is running at its fastest pace since the global financial crisis, but the dollar has weakened for two straight months after appreciating in the first quarter.

Most of the shift is down to US central bankers who rushed to reassure investors that they would keep conditions extremely accommodating, soothing the flare-up in Treasury yields and the dollar’s exchange rate.

As a result, analysts are pretty confident that Fed chair Jay Powell and his board will “look through” the rise in prices at the central bank’s rate-setting meeting next week, keeping the dollar on its current weakening path.

“The combination of steady Fed expectations and a broadening global economic recovery should allow recent dollar weakness [to] continue,” said Zach Pandl, co-head of foreign exchange strategy at Goldman Sachs, in a research note. He expected the euro to benefit the most against the US currency.

Still, some strategists cannot help but wonder whether they should stick to selling the fact, or if it is time to start buying the rumour — and the dollar — again. Despite inflation powering to above 5 per cent year on year, yields on 10-year Treasuries fell to their lowest in three months, in a counterintuitive reaction fuelled by the anticipation that policymakers will shrug off the building heat in the economy.

“Getting US inflation right may be the most important market call for the rest of the year,” said Athanasios Vamvakidis, global head of currency strategy at Bank of America in London.

A decision from the US central bank to keep its policy unchanged would allow the dollar to continue with its weakening path, but maybe not as much as traders anticipated at the beginning of 2021. Vamvakidis notes that currency markets are quietly pricing in less dollar weakness than at the start of the year, with the consensus view now calling for the euro to trade at around current levels $1.21 by the end of December rather than at $1.25.

“For now, high US inflation and a still dovish Fed keep real US rates highly negative and this supports the euro. The question is for how long this is sustainable if US inflation proves persistent,” he said, adding that the bank expected the euro to finish the year at $1.15.

Line chart of Dollar index (DXY) showing The dollar has weakened after first-quarter gains

There are signs that investors might be getting too relaxed. Options markets display little nervousness about the Fed meeting, and Mark McCormick, global head of currency strategy at TD Securities said negative bets on the dollar had begun to build up heavily again in recent weeks.

This adds to the risk of a sharp snapback in the currency’s exchange rate if the Fed does hint at tapering its asset purchases on Wednesday or before analysts expect.

“Don’t expect much more dollar weakness into the summer,” said McCormick.

There are also some offbeat signs that there is a risk of traders betting too heavily on the Fed’s commitment to keeping liquidity ample. Analysts at Standard Chartered noted that Treasury secretary Janet Yellen, a former Fed chair, mentioned the potential benefits of a higher interest rate environment twice in recent weeks.

John Davies, a US rates strategist at Standard Chartered, said that it was most likely that the Treasury chief was defending the Biden administration’s fiscal plans rather than criticising Fed policy, but it was highly unusual.

“It is still striking when the Treasurer of a public or private entity argues for higher borrowing costs,” said Davies.

Investors now expect the US central bank to start cutting its asset purchase amounts in the first quarter of next year, with an announcement pencilled in for potentially September, when the Fed meets for its annual symposium at Jackson Hole, according to Oliver Brennan, head of research at TS Lombard.

But while an earlier than expected announcement would cause some ructions, the real risk is that investors will have to start anticipating the timing of rate increases in the US, which could come sooner and harder than they anticipated.

“The taper sets the clock ticking for the first rate hike and real rates rise [and] big changes in Fed policy are rarely smooth-sailing,” said Brennan.

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday

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