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Is the Metals Industry Prepared for Regulatory Change?

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Is the Metals Industry Prepared for Regulatory Change?

By Brian Collins, Managing Director, Metals, Allegro Development

Volatility, complexity and uncertainty. Increasingly, these are defining characteristics of the international metals industry as it experiences a period of intense change.

Stricter environmental regulation and demands for responsible sourcing are key drivers of these changes. Carbon emissions standards are placing additional pressures on mining practices, for example, while NOx-emissions standards in shipping influence the routes and logistics of marine transport. Waste management, provenance and modern employment practices throughout the value chain are all under the spotlight.

Brian Collins

Brian Collins

The question is: are metals firms prepared to respond to these regulatory changes effectively and mitigate new risks that emerge?

The metals sector may not be unique when it comes to greater regulatory risk, but the challenge is nonetheless an acute one. Prices have traditionally been heavily influenced by external factors, such as imbalances in global supply and demand,as well as geopolitical uncertainty in primary metal regions. But as more stringent and more diverse regulation increases the compliance burden, internal factors like management capability, operational efficiency and internal control mechanisms become more influential.

Managing the move to a low-carbon economy
The general shift towards a low-carbon economy is forcing metals market participants to think differently. Every aspect of the metals value chain faces more stringent environmental standards and more intense scrutiny.

Carbon pricing is just one example of this broader trend. According to the World Bank[i], some form of carbon pricing mechanism has already been established in more than 40 countries and more than 25 sub-national jurisdictions (cities, states and provinces, for example).

That still leaves plenty of room for the concept to spread, particularly given the attractive revenue-generating opportunities and reputational enhancements it offers to local and national authorities. In the process, more metals and mining firms will be exposed to this particular form of regulatory risk, as well as the financial penalties and drop in shareholder value that comes with compliance breaches.

As more metals and mining businesses come under the auspices of external pricing – or indeed adopt their own internal pricing mechanisms – they will need the ability to track prices effectively, hedge their exposures and calculate the true financial impact of any operational trade-offs. Without this capacity, quarterly earnings become more erratic, accounting becomes more complex and stakeholder value becomes less predictable.

Waste management becomes a global concern
Of course, carbon is not the only waste product that is under scrutiny. Deleterious waste generated at each stage in the production process is also subject to increasingly strict standards and regulations. Many industries have been grappling with this problem for some time. However, it is particularly egregious in the metals sector – where the average amount of waste produced by the 12 major metals and commodities is around four times the weight of the total metal extracted.What’s more, as ore grades decline and firms tap into deeper ore deposits to compensate, the ratio of waste to produced metal is only set to increase.

In previous decades, the metals industry was able to circumvent the initial forays into environmental legislation by moving their mining operations or refining facilities emerging economies with lower regulation standards. Increased demand has inevitably led to increased production in these countries; and more product increases revenues – at least initially.

However, the resulting increase in waste material has upped the pressure from government bodies to develop appropriate mitigation strategies. As a result, operational costs have also increased around the world and will continue to do so as more areas reject all but stringently monitored, managed and audited waste management procedures.

Traceability is key to future success
Increasingly, customers and end consumers demand assurance that each stage of a supply chain for finished or semi-finished products meets these stringent environmental and ethical standards. At the same time, sanctions regimes and other political measures for prohibiting trade create a different kind of jeopardy for international metals businesses – often in a very short time frame.

In this environment, regulatory arbitrage is a much more difficult game to play.The rippling consequences of compliance breaches have a longer-term impact than indicated by a blip in the share price, and metals businesses may have to adopt new strategies in order to stay on the right side of both the law and public opinion.

Meeting stricter traceability standards requires the right tools: firstly, to ensure that responsible sourcing is taking place and, secondly, to prove it to the competent authorities.

Traditionally, metals and mining have been under-served by the right kinds of tools.Even when commodity trading and risk management (CTRM) solutions with the necessary functionality to manage regulatory risk are in place, they have often fallen short on functionality specifically designed for metals. Rigged-up generic systems and business software are even more unsatisfactory.

The ongoing success of metals and mining businesses will depend on having these tools in place – and ensuring that the right people within the organization have access to them at the right time. When uncertainty is the only thing businesses can be sure of, they need the technological support to deliver efficient operations, insight, analysis, agility and control.These are the characteristics of successful businesses that are both responsive and compliant in a fast-paced world.

Metals industry participants need a solution that can be easily adapted to individual processes and prepare them for industry changes and business growth; CTRM solutions, such as Allegro Horizon developed by and for the metals industry,should increasingly be seen as a critical success factor.Managing regulatory risk as it changes shape and creates more volatility is as essential to good business as managing price risk.

The future for the metals industry will be both exciting and challenging. Having the best technology platforms could very well determine the winners and the losers.

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Cryptocurrencies: the new gold?

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Cryptocurrencies: the new gold? 1

By Gerald Moser, Chief Market Strategist, Barclays Private Bank

Time to add to a portfolio?

There has been a lot of talk about bitcoin, and cryptocurrencies in general, being a “digital” gold. Similar to gold, there is a finite amount, it is not backed by any sovereign and no single-entity controls its production. But for bitcoin to be considered in a portfolio and to become an investable asset, similar to gold, the asset would need to improve the risk/return profile of that portfolio. This seems a tall order.

While it is nigh on impossible to forecast an expected return for bitcoin, its volatility makes the asset almost “uninvestable” from a portfolio perspective. With spikes in volatility that are multiples of that typically experienced by risk assets such as equities or oil, many would probably throw the cryptocurrency out of any portfolio in a typical mean-variance optimisation.

Cryptocurrencies: the new gold? 2

Poor diversifier

And while bitcoin’s correlation measures are relatively supportive, it seems to falter when diversification is most needed, such as during sharp downturns in financial markets. Looking at weekly return correlations since 2016 shows that bitcoin is not strongly correlated with any assets (see below). It is however only second to US high yield in its correlation with equities. US Treasuries, gold and US investment grade were better diversifiers than bitcoin when it comes to equities.

Source: Bloomberg, Barclays Private Bank

Source: Bloomberg, Barclays Private Bank

Furthermore, looking at global equity corrections since 2015 (see below), it is noticeable that bitcoin has performed even worse than equities over the last three corrections. And while gold and fixed income provided some relief during those corrections, bitcoin compounded the loss that investors would have incurred from equities exposure.

Source: Bloomberg, Barclays Private Bank

Source: Bloomberg, Barclays Private Bank

The fact that cryptocurrencies also fluctuate alongside equities suggests that investment in bitcoin is more akin to a bubble phenomenon rather than a rational, long-term investment decision. The performance of the cryptocurrency has been mostly driven by retail investors joining a seemingly unsustainable rally rather than institutional money investing on a long-term basis.

Several studies around market structure have shown that emerging markets with high retail/low institutional participation are more unstable and more likely subject to financial bubbles than mature markets with institutional participation. And while more leading financial houses seem to be taking an interest in cryptocurrencies, the market’s behaviour suggests that the level of institutional involvement is still limited. Another issue is around its concentration: about 2% of bitcoin accounts control 95% of all bitcoins.

In summary, difficulty to forecast return, lack of diversification and high volatility makes it hard to consider bitcoin as a standalone asset in a diversified portfolio for long-term investors.

An inflation hedge?

Another point widely quoted in favour of cryptocurrencies is that they provide an inflation hedge. This might be a valid point, if inflation stems from fiat currency debasement. As mentioned above, a currency’s worth comes from the trust economic agents have in it. If unsustainable amounts of debt and large money creation shatter belief in sovereign-backed currencies through spiralling inflation, cryptocurrencies could be seen as an alternative.

Regardless of its price, bitcoin’s production is set on a precise schedule and cannot be changed. If oil or copper prices go up, there is an incentive to produce more. This is not the case for cryptocurrencies. In a very specific and highly hypothetical scenario of all fiat currency collapsing, this could be positive. But other real assets such as precious metals, inflation-linked bonds or real estate usually provide a hedge against inflation.

Other considerations

Bitcoin’s technology should theoretically make it extremely secure. As there is no intermediary, each transaction is reviewed by a large number of participants which can all certify the transaction. However, there have been frauds and thefts from exchanges. Another point to consider is the risk of “losing” bitcoins. According to the cryptocurrency data firm Chainanalysis, around 20% of the existing 18.5m bitcoins are lost or stranded in wallets, with no mean of being recovered. As there is no intermediary, there is no backup for a lost bitcoin.

From a sustainability point of view, adding cryptocurrencies to a portfolio will make it less green. Mining and exchanging them is highly energy intensive. According to estimates published by Alex de Vries, data scientist at the Dutch Central Bank, the bitcoin mining network possibly consumed as much in 2018 as the electricity consumed by a country like Switzerland. This translates to an average carbon footprint per transaction in the range of 230-360kg of CO2. In comparison, the average carbon footprint of a VISA transaction is 0.4g of CO2.

Beyond energy use, the mining process generates a large amount of electronic waste (e-waste). As mining requires a growing amount of computational power, the study estimates that mining equipment becomes obsolete every 18 months. The study suggests that the bitcoin industry generates an annual amount of e-waste similar to a country like Luxembourg.

Cryptocurrencies are here to stay

Innovation in digital assets continues rapidly and will likely drive increased participation, both from retail and institutional investors. The underlying blockchain technology behind bitcoin was meant to disrupt a few different industries. While results have not lived up to the initial hype, more sectors are investigating the use of the technology.

And with Facebook announcing a stablecoin, or a cryptocurrency pegged to a basket of different fiat currencies, central banks have accelerated the movement towards central bank digital currencies. Those could improve payment systems resilience and facilitate cross-border payments.

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Energy stocks drag down FTSE 100, IG Group slides

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Energy stocks drag down FTSE 100, IG Group slides 3

By Shivani Kumaresan

(Reuters) – London’s FTSE 100 slipped on Thursday, weighed down by falls in energy stocks as oil prices slid after a surprise increase in U.S. crude inventories, while IG Group tumbled on plans to buy U.S. trading platform tastytrade for $1 billion.

The blue-chip FTSE 100 index lost 0.4%, while the domestically focussed mid-cap FTSE 250 index also slid 0.4%.

Energy majors BP and Royal Dutch Shell fell 3.2% and 2.5%, respectively, and were the biggest drags on the FTSE-100 index. [O/R]

“What is holding back the UK is a lack of tech stocks to capture the ‘rotation’ back into tech seen since Netflix results,” said Chris Beauchamp, chief market analyst at IG.

“Stock markets overall are much quieter today, looking so far in vain for a new catalyst for further upside.”

The FTSE 100 shed 14.3% in value last year, its worst performance since a 31% plunge in 2008 and underperforming its European peers by a wide margin, as pandemic-driven lockdowns battered the economy and led to mass layoffs.

British Prime Minister Boris Johnson said it was too early to say when the national coronavirus lockdown in England would end, as daily deaths from COVID-19 reach new highs and hospitals become increasingly stretched.

IG Group tumbled 8.5% after announcing plans to buy tastytrade, venturing into North America after a stellar year for the new breed of retail investment brokerages.

Ibstock jumped 7.3% to the top of the FTSE 250 after the company said fourth-quarter activity benefited from better-than-expected demand for new houses and repairs.

Pets at Home Group Plc rose 2.2% after reporting an 18% jump in third-quarter revenue, boosted by higher demand for its accessories and veterinary services as more people adopted pets during lockdowns.

(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V and Mark Potter)

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Wall Street bounce, upbeat earnings lift European stocks

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Wall Street bounce, upbeat earnings lift European stocks 4

By Amal S and Sruthi Shankar

(Reuters) – European stocks rose on Wednesday after Dutch chip equipment maker ASML and Swiss luxury group Richemont gave encouraging earnings updates, while investors hoped for a large U.S. stimulus plan as Joe Biden was sworn in as president.

The pan-European STOXX 600 index closed 0.7% higher, getting an extra boost as Wall Street marked record highs.

All eyes were on Biden’s inauguration as the 46th U.S. President, with traders betting on a bigger pandemic relief plan and higher infrastructure spending under the new administration to boost the pandemic-stricken economy.

Tech stocks rallied to a two-decade peak in Europe after ASML Holding NV rose 3.0% to all-time highs on better-than-expected quarterly sales and a strong order intake for 2021.

Meanwhile, Richemont rose 2.8%, after posting a 5% increase in quarterly sales as Chinese splashed out on Cartier, its flagship jewellery brand.

Britain’s Burberry jumped 3.9% after it stuck to its full-year goals, saying higher full-price sales would boost annual margins, while Asian demand remained strong.

The pair boosted European luxury goods makers that are heavily reliant on China, with LVMH and Kering gaining between 1% and 3%.

“Any sign that retail spending is picking up in China is going to be a boost to the Western markets and those heavily exposed to it,” said Connor Campbell, financial analyst at SpreadEx.

The European Central Bank is set to meet on Thursday. While no policy changes are expected, the bank could face more questions about an increasingly challenging outlook only a month after it unleashed fresh stimulus to bolster the euro zone economy.

“With the new round of easing measures fully in place and no new forecasts to be presented tomorrow, it should be a fairly uneventful day for the euro,” ING analysts said in a note.

Italy’s FTSE MIB gained 0.9% and lenders rose 1.6% after Prime Minister Giuseppe Conte won a confidence vote in the upper house Senate and averted a government collapse.

Conte narrowly secured the vote on Tuesday, allowing him to remain in office after a junior partner quit his coalition last week in the midst of the COVID-19 pandemic.

Daimler AG jumped 4.2% after its Mercedes-Benz brand unveiled a new electric compact SUV, the EQA, as part of plans to take on rival Tesla Inc.

Germany’s Hugo Boss added 4.4% after Mike Ashley-led Frasers said it boosted its stake in the company.

(Reporting by Sruthi Shankar and Amal S in Bengaluru; Editing by Shailesh Kuber and Arun Koyyur and Kirsten Donovan)

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