EU-Mercosur trade deal hangs in the balance

0:02Good morning from the Financial Times. Today is Tuesday, December 16th, and this is your FT News briefing. Looks like Shell's not so interested in BP and a European trade deal decades in the making could be in jeopardy. Plus, hedge funds are diving into a new market, physical commodities. I'm Sonia Hudson, and here's the news you need to start your day.

0:37Shell's CEO shot down an internal proposal to buy the company's rival BP this year. And after that, Shell's head of mergers and acquisitions left the company. This is according to several people familiar with the situation. Its M &A team argued that BP's falling share price and management turmoil opened up an opportunity. The thought was that a deal would help Shell solve its growth problems. But CEO Wael Sawan believed it would be challenging to combine two of Britain's biggest companies. The internal opposition means Shell probably won't try to make a deal for BP when restrictions on bidding end later this month.

1:17Shell told the FT it had, quote, previously made a clear statement on its lack of interest in BP and had nothing to add to it.

1:31The European Union is supposed to vote on a trade deal this week with the South American Mercosur countries. France wants to delay the vote, and now the EU's top trade official has issued a stark warning. Postponing could sink the deal and cause the bloc to lose its global credibility. The FT's Andy Bounds covers European trade, and he joins me now. Hi, Andy. Hey, Sonia. So I remember about this time last year, there was a ton of high-stakes drama around agreeing to this deal. Could you give us some background on the deal and what's in it? Yeah, so Donald Trump's return to office really pushed the two sides to finally commit to doing a deal which had been 24 years in the negotiating.

2:18And it's a pretty significant deal. The Mercosur group includes Brazil, Argentina, Paraguay and Uruguay, which are pretty big economies. The EU will be wanting to sell its advanced machinery, cars, chemicals to the Mercosur bloc, where they're very high tariffs on these things at the moment. and the Mercosur countries will be looking to sell raw materials, beef, chicken, their farming and agricultural projects, and also looking to move up the value chain and attract investment from the EU. So I mentioned that France is trying to delay the ratification vote this week. Why is that? Well, French farmers have been mobilizing against this deal for a long, long time.

2:59and they are worried that imports from the Mercosur countries will undercut their own production, especially in beef and chicken and some cereals. The text of the treaty includes, you know, safeguards for if the market becomes swamped with produce from Latin America or indeed the other way around. Now, the commission has gone further than ever before to do a legal instrument, say this is how we're going to use these safeguards, But France needs more time to see what these finally are, to get the final approval in the European Parliament. And frankly, the government is, as ever, very intimidated and to some extent running scared of the farmers.

3:39Well, is there anything that could get this vote back on track? Well, I think the Commission and the Denmark, which is in the chair of the EU at the moment, so far is saying this vote will happen. They're gambling that there's a majority of member states who will approve this deal, even if France does not. Really, the swing state here is Italy, if the Italians are not happy as well as the French. This would then push it into January. And the question then is, will the Mercosur countries hang around and wait to sign this deal? Or will they decide that 25 years is long enough and they're going to find somebody else to do trade deals with?

4:17Well, and it seems like the EU trade commissioner thinks that they might, in fact, walk away from the deal if this gets pushed any further. Yeah, we interviewed him and he definitely said there's a danger of that. You know, he said the deal has to be meaningful for both sides. They both have to see an upside in the trade deal. And he made the point that, you know, this could risk the credibility of the EU. They've had a lot of approaches since Donald Trump came into office for countries around the world that want to do trade deals because they see the EU as a dependable partner. Now, if they can't deliver these trade deals when they've spent years negotiating them, countries will feel, what's the point?

4:54And what kind of impact do you think that that change in perception could ultimately have on the European economy if the EU has a harder time making trade deals? Yeah, well, the European economy is a very open one, and it's been struggling, frankly, because it's been outcompeted by China. It's been bullied a bit by the US. It's obviously had to kick cheap Russian gas and oil, and costs have gone up. So companies are desperately looking for growth. And they see Mercosur, which is a market of 270 million consumers, you know, reasonably well off, as a growth market. And if you don't get it, then, you know, it's going to be more struggle for the European economy.

5:34And if it has a knock-on effect on other trade deals, then frankly, with markets shrinking in China and shrinking in the US, It's very hard to see where European industry will manage to get its exports to. Andy Bounds covers EU trade for the FT. Thanks, Andy. Thanks very much.

5:58The European Union wants to scrap its 2035 combustion engine ban. It will allow carmakers to continue making a limited number of gas and diesel cars after the ban was set to go into effect. The European Commission is expected to propose the change today. The ban was seen as a critical part of the bloc's Green Deal climate law. Carmakers heavily lobbied against it. They argued it would be impossible because of the slow adoption of electric vehicles. Environmental groups say scrapping the ban would widen the gap between the West and China, which has been leading the EV transition. Any change to the climate law would have to be approved by EU governments and the European Parliament.

6:49Hedge funds are piling into physical commodities. They're looking for new sources of returns, but that can be tricky since they don't have the decades of experience that established players have. Here to tell us more is Amelia Pollard. She's the FT's U.S. investment correspondent. Hi, Amelia. Hi. Thanks so much for having me. Thanks for being on the show. So what exactly are these hedge funds investing in? Yeah, so hedge funds for a long time have invested in commodities. So, you know, that involves investing in power and natural gas and oil. But typically, this has been in the form of paper trading.

7:26So you're making bets on oil futures or different kinds of derivatives that basically are an indicator of where the price of certain commodities might go. But now there's new interest in actually gaining exposure to the supply chain itself. So that might involve buying the rights to transport natural gas, for instance, over a pipeline or buying up storage for crude oil. And then the goal is to sell or offload those commodities or energy at kind of peak prices or peak demand times. And what's the strategy here? Why are these hedge funds so focused on this? So they basically were hugely inspired by the returns and fortunes made in 2022.

8:10So 2022, if you remember, was an insane time in the commodity and energy space. It was largely set off by Russia invading Ukraine that year. So firms like Trafigura and VTOL, which are known as the big energy commodity trading giants in the space, made a lot. But so did Citadel, which is a hedge fund run by Ken Griffin and has been one of the pioneers in physical commodities trading. And so hedge funds like Ballyasni and Jane Global, for instance, have looked on and realized that maybe it's time to gain some exposure to this part of the market too. Since this is new for these hedge funds, they obviously don't have a wealth of knowledge and experience in the industry yet.

8:56How much do you think that will complicate this push into physical commodities? It will be a huge lift. Being involved in trading and investing in physical commodities is very expensive. It's not for the faint of heart. And so these funds are basically making a bet that they think that it's worth their investment and worth devoting a huge amount of resources. And we'll see if it pays off. I think it depends on what the markets do in energy and oil and gas in the next few years. And, you know, if there are a few really tough years for these funds, I'm sure we'll see, you know, some of them get out of the market.

9:33But if there is another year soon, like 2022, you know, it could make it all worth it. And what will the introduction of all these hedge funds in physical commodities mean in the long term for these markets? Yeah, it's a bit too soon to tell. I mean, there have not been a lot of these players. And so Citadel has been a big force in these markets for about a decade. But I think that the projection is basically there's going to be increased competition for assets, for storage. What that means for consumers is a bit hard to determine at this point. But it does mean that you'll have more players and firms basically going after the same assets.

10:13So that could drive up prices, you know, and how much they would be willing to pay for storage or whatnot. But in terms of the trickle-down effect to consumers and what, you know, that means for your gas prices or gas bill, it's not clear yet. Amelia Pollard is the FT's U.S. investment correspondent. Thanks, Amelia. Thanks so much. You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news. Thank you.