Bershidsky's View From Europe
Here is today's look at some of the big stories on markets and politics in Europe:
"Fertilizer OPEC" falls apart.
One of the two international cartels controlling the market in potash, a key fertilizer ingredient, has collapsed, plunging the market into chaos. The Russian company Uralkali, the world's biggest potash producer, has pulled out of the Belarus Potash Corporation (BPC), saying that its partner in the cartel, Belaruskali, has been selling outside the BPC. The stocks of fertilizer companies throughout the world crashed, Uralkali losing 19 percent and its competitors sustaining similar losses, because the two cartels -- BPC and North America's Canpotex -- had been keeping supply low and profit margins high. Analysts likened the effect of the BPC's breakdown to what dissolving OPEC would have on the oil market. Uralkali's potash production cost is $62 a ton, with current spot prices topping $350. Uralkali executives are willing to absorb a price drop below $300 and the 20 percent cut in the company's market cap rather than continue their partnership with unpredictable Belarussian dictator Alexander Lukashenko, who decreed late last year that Belaruskali could bypass the BPC. The logic is obvious: Uralkali's costs are the lowest in the market and it is well-positioned to brave open competition.
Barclays and Deutsche Bank to boost equity-to-assets
Two large European banks, Barclays and Deutsche Bank, have announced plans to bring their equity-to-assets ratios to at least 3 percent. To that end, both banks will significantly cut assets: Deutsche by a whopping 20 percent, or by $265 billion to $400 billion in the next two years, and Barclays by 5 percent or by $100 billion to $125 billion. Barclays has also announced a $9 billion rights issue, one of the biggest in UK banking history. Both banks are trying to meet Basel III international regulations, which call on banks to bring their equity-to-assets ratios to 3.5 percent in 2013. The final target, to be achieved by 2015, is 4.5 percent. Even a 3 percent level, however, will not be easy to attain: banks need to shed enormous amounts of risk. The global regulators want a much more conservative banking industry, which means tighter liquidity in the financial markets in the years to come.
European carmakers post disappointing results.
Europe's biggest car manufacturer, Volkswagen, reported a 12 percent drop in operating profit, to $7.7 billion, in the first half of 2013. It blamed tough conditions on the domestic markets. Indeed, the sales of VW, Audi, Skoda and Seat cars dropped 3.4 percent to 1.54 million compared to the first half of 2012. Simultaneously, the French automaker PSA posted a loss of $565 million and a sales drop of 3.8 percent (to $36.7 billion) -- also because of falling European sales. Both companies' results, contrary to appearances, are positive. VW is investing heavily in a new model range, and PSA has halved its losses from last year. The carmakers are doing well in overseas markets, where demand is still growing. The financial results are not telling the companies' managers anything new, and they are already addressing their biggest problem by expanding emerging markets production.
EADS renames itself Airbus, concentrates defense business in Munich
The European aerospace group, EADS, announced that it was changing its name to Airbus. It is a strong symbolic gesture, extending the company's best-known brand to all its assets and signaling a major restructuring effort. The group, assembled from different European nations' aerospace assets, will have a clear three-division structure: Airbus, producing commercial planes, Airbus Defense and Space and Airbus Helicopters. The second division is the most controversial: it will be headquartered in Munich and headed by German Bernhard Gerwert, a sensitive situation for France and Spain. The division will include Astrium, which makes the French ballistic misiles, and Airbus Military, now based in Madrid. EADS' German chief executive, Tom Enders, is now concentrating all the defense assets on home turf. He has pulled this off by proving the necessity of running the group as a business rather than a grab bag of assets that are politically important to the shareholder nations. Airbus sorely needs this kind of approach: In the defense business, it is lagging behind archrival Boeing.
Spaniards sued by SEC for insider trading.
Two Spanish citizens, one of them an adviser to the CEO of Banco Santander, have fallen afoul of the U.S. Securities and Exchange Commission. It claims they made over $1 million trading on publicly unavailable information about the proposed 2010 acquisition of Potash Corporation, the Canadian fertilizer producer, by BHP Billiton. The Santander insider, Cedric Cañas Maillard, supposedly learned of the proposed deal when BHP approached the Spanish banking group for financing. The SEC says he sharted trading in contract for difference (CFDs), betting on Potash Corp. stock to rise, as soon as Santander's executive committee approved the funding. Potash Corp.'s primary listing is in Toronto, and CFDs are not traded in the United States, though they are widespread in other parts of the world, particularly in Europe. Yet the fertilizer company's shares also trade on NYSE, and that has allowed the SEC to go after the Spaniards. The financial markets are too global to hide dubious transactions from regulators' prying eyes anymore.
(Leonid Bershidsky, an editor and novelist, is a Bloomberg View contributor. Follow him on Twitter.)