Thursday22 August 2019 ★ FINANCIAL TIMES 17MARKETS & INVESTING
HENRY SANDERSONIron ore prices have fallen by 30 per
cent this month and tumbled to their
lowest levels since March yesterday
after minerBHPwarned that bench-
mark prices were likely to be lower
over the next year.The benchmark price for iron ore from
Australia to China dropped by $5.50 a
tonne yesterday to hit $83, according to
S&P Global Platts.
Prices for the steelmaking ingredient
have tumbled from a five-year high
above $120 a tonne in July as concerns
have grown over demand for steel in
China following a surge in production in
the first half of the year.
Supplies of iron ore have also stabi-
lised after disruptions this year follow-
ing the collapse of a dam in Brazil at a
mine run by mining groupVale. In
March, a cyclone also hit Western Aus-
tralia, further impacting shipments.
“Headwinds to Chinese demand are
growing with industrial output growth
the weakest since 2002 and infrastruc-
ture investment growth weakening,”
analysts at Numis wrote, in a note. “Iron
ore inventories are rising and mills’profit margins are under pressure as
falling steel prices wipe out the benefit
of the drop in raw material costs.”
BHP, which generates most of its
earnings from iron ore, said on Tuesday
that it expected average benchmark
priceswould be lower over the next
year, though they would probably
remain above the group’s long-run mar-
ginal cost of production.
The world’s largest miner also said it
earned $11.1bn from selling iron ore in
the year ending in June compared with$8.9bn a year earlier. It aimed to pro-
duce between 273m to 286m tonnes of
ore over the next year, from 270m
tonnes in the last fiscal year, it said.
But the Melbourne-headquartered
company warned there could be “con-
siderable volatility in pricing” as the
market continues to adjust to disrup-
tion in supplies following the deadly
accidentin Brazil.
“We expect supply conditions will
return to a more normal path on a one-
to three-year timeframe and prices are
likely to be volatile as that adjustment
plays out,” BHP said.
Shares in the group slipped 1 per cent
yesterday to trade at £17.14. They have
fallen by about 14 per cent this month
amid concerns of a growth slowdown
around the world.
Steel mills in China are running down
their stocks of iron ore rather than buy-
ing on the seaborne market as they
remain bearish on the outlook for steel
demand, said Niki Wang, head of iron
ore pricing at S&P Global Platts.
“Although the steel margins inched
up from July, buying interest on sea-
borne iron ore remained lacklustre,” Ms
Wang said.Commodities
Iron ore prices slide to five-month low
after BHP warns on the year ahead
ADAM SAMSONA German lender has sold €1bn in
mortgage-backed bonds with the most
deeply negative yield on record,
highlighting the lengths that buyers
such as banks and asset managers need
to go in order to stash their cash in
world of sky-high bond prices.Berlin Hypon Tuesday priced its latest
bond — a special instrument known as a
covered bond — with a yield of minus
0.59 per cent.
The real estate lender said that it
received 38 orders worth €1.2bn for the
three-year sale, which reopened the
European covered bond market after
the summer break.
Such bonds are backed by both by the
issuer and pools of residential and com-
mercial mortgages — as such, they are
considered particularly safe.
The yield on the debt, sold by a lender
that was also the first non-state entity to
sell a euro-denominated bond with a
sub-zero yield, was the lowest in history,
said Joost Beaumont, a strategist at ABN
Amro.
Berlin Hyp said it received such
strong demand for the debt that it wasable to make the bond offering a
“jumbo”, at or above €1bn, for the first
time in six years.
The success of the sale underlines
how investors have had to adjust to a
market where trillions of euros in highly
rated debt now trades at levels such that
buyers are guaranteed to generate a loss
if they hold to maturity.
This trend has weighed on the profit
of big banks, in particular, which need tohold large amounts of easy to sell assets
such as government bonds to satisfy
tougher post-crisis rules on liquidity.
Such assets also typically come with a
much lower capital requirement — an
added attraction at a time when many
banks are under pressure to improve
their capital ratios.
About 60 per cent of the buyers on the
Berlin Hyp deal were other banks,
according to Crédit Agricole, which wasone of the banks that managed the deal.
Buyers in Germany and the Nordics —
two regions that have generated a large
share of the stock of negative-yielding
debt — accounted for the bulk of the
order book.
Mr Beaumont said the yield on the
Berlin Hyp bonds, which are rated at a
pristine triple A, compared favourably
to German three-year government
bonds, which currently yield minus
0.94 per cent.
That means that holding them
until they mature will lead to an even
deeper loss.
Holding cash for three years would
also incur a greater loss than that gener-
ated by the Berlin Hyp debt, based on
euro deposit rates currently projected
by trades in the European money mar-
ket, Mr Beaumont said.
“Some investors saw an element of
diversification in the deal,” said Vincent
Hoarau, head of financial institutions
group syndicate at Crédit Agricole.
“In our current triple A universe,
almost everything trades in negative
territory at the front end of the curve
and you can’t only sit on cash, which is
anyway very costly,” he said.Fixed income
German lender Berlin Hyp sells €1bn
covered bond with record negative yield
‘Some investors saw an
element of diversification
in the deal. You can’t onlysit on cash, which is costly’
BHP told investors to prepare for
iron ore market volatilityFastFT
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ft.com/fastftGREGORY MEYER— NEW YORKTrade wars have crushed US grain sales.
Tobacco is in terminal decline. How-
ever, for farmers in Kentucky, the future
may lie in a crop of the past — hemp.
The fibrous plant once prized for rope
and sailcloth is poised for a second life as
a source of cannabidiol, or CBD, a sub-
stance added toeverything from ham-
burgers to dog treats, whichenthusiasts
claim has therapeuticqualities.
Hemp is a variety ofCannabis sativa,
the same species as the marijuana plant.
The US Congress late last year legalised
the industrial form of hemp — defined
as cannabis with less than 0.3 per cent
by weight of THC, the chemical in pot
that provides its high.
Once a fringe cause championed in
Grateful Dead concert parking lots,
hemp has been embraced by lawmakers
including Senate majority leaderMitch
McConnellof Kentucky. “This product
is incredible. The food, the clothing, the
wellness products. What a diversified
product,” Mr McConnell said ata hear-
ingon hemp production last month.
But the path ahead is rocky. There is
no government-backedharvest insur-
ance for hemp asthere is for traditional
crops. And most banks will avoid the
sector until financial regulators can
“distinguish legal hemp from federally
illegal marijuana with extreme confi-
dence”, the American Bankers Associa-
tion said.
“There is a need for capital in this
space,” said Nicholas Mortimer, co-
founder of Sanitas Peak, a $50m privateequity group devoted to industrial
hemp. “Nobody knows how to lend
to it.”
Hemp, a tough stalk with spiky leaves,
is also labour-intensive to cultivate,
requiring hand work in the fields. Farm-
ers rely on foreign workers on tempo-
rary visas. The supply chain for hemp
seedlings is shaky, too.
Then there is the threat of overpro-
duction. PanXchange, a commodities
trading platform that this month
launched an industrial hemp exchange,
reported that Colorado crude hemp oil
that has been “winterised”, or purified,
averaged $1,750per kg in July, down
from $6,250 at the start of the year. This
dip reflects intensifying competition as
production costs fall, said Julie Lerner,
PanXchange chief executive.
But farmers in Kentucky, reeling from
low prices of other crops, view the
change in law as a potential bonanza.
With federal approval, hemp holds
more promise as a nationwide commod-
ity than marijuana, which has been
legalised for recreational use in a patch-
workof states but is still outlawed by the
US government.Mr McConnell said farms in 101 of
Kentucky’s 120 counties — the nation’s
leaders in hemp cultivation from the
early 19th century to the first world war
— were nowgrowing the crop.
The Coots farm, for example, culti-
vates corn, soyabeans, wheat and
tobacco on 4,700 acres in southern Ken-
tucky, and this year added seven acres
of hemp, according to Bridget Coots,
a family member. “We’re hoping that
the hemp market could take the place of
the tobacco income,” which has plum-
meted as people turn away from smok-
ing, she said.
Hemp’s supporters describe it as
a miracle plant: its seeds are nutritious
and the crop can be used to strengthen
construction materials, they say.
Steve Bannon, former adviser to
President Donald Trump, told Vice
News earlier this year that he wanted to
build a wall out of “hempcrete” on the
Mexican border.
But the main source of demand is for
CBD — a market estimated by BDS Ana-
lytics at about $1.9bn last year. The
research company forecasts it could
expand to $20bnin five years if hempfollows the trend for marijuana sales in
states that have legalised it.
In New York’s Greenwich Village
neighbourhood, Jack Scaba opened
Hemped NYC this March. Around the
corner is a rival store, Hemp Garden.
Hemped’s white shelves are lined
with CBD-infused products: gummy
worms, dried fruit, popcorn, dog bis-
cuits, skin creams and liquid-filled vials
priced at $79.99.
“This is chemist-formulated, specific
for PMS [premenstrual syndrome],”
Mr Scaba said, taking a pink one off
a shelf. He pointed at others: “This
will help with libido. Relaxation and
anxiety. Inflammation and pain. Sleep
and insomnia: this one will put you right
to bed.”
The federal Food and Drug Adminis-
tration has so far approved only one
drug containing CBD, to treat seizures in
young children.
It is “unlawful” to sell a food or a die-
tary supplement with CBD across state
lines, Lowell Schiller, the FDA’s
principal associate commissioner for
policy, tolda hemp conference in
Oregon last week.
Too many hemp-based products are
sold with claims they treatmedical con-
ditions such as pain, Mr Schiller added:
“These products are unapproved new
drugs, and they are illegal.”
This year, more than 128,000 acres of
hemp were planted across the US,
according to the US Farm Service
Agency, compared with 32,000 last year
when it was still grown under highly
restricted research programmes.
“I’m hopeful, but I’m very sceptical,”
said Ms Coots. While encouraged by the
new market, she said hemp product
prices appeared too high. “Who’s going
to keep buying that long term if you
don’t have magic results?”Growers view changein law
as potential bonanza for crop
boasting therapeutic powers
‘This
product isincredible.
The food,the
clothing,the wellness
products’Congress last
year legalised
the industrial
form of hemp
Luke Sharrett/BloombergCommodities.Agriculture
Kentucky farmers have high
hopes for their prized hemp
Hemp oil slides as competition intensifies
Average price for Colorado ‘winterised’ crude ( per kg) Jan Jul
Source: PanXchange RICHARD HENDERSON— NEW YORKInvestors pulled $2.9bn from funds that
invest in China’s stock market in the
month ending last Wednesday as
concerns over economic growth and
tariffs weighed on Chinese shares.
The outflows from mutual funds and
exchange traded funds that invest in
China’s A shares market were the sharp-
est since the start of 2017.
Investors have pulled $5.9bn from the
funds since the start of the year, accord-
ing to EPFR Global data.
The spectre of fresh tariffs on Chinese
goods, underwhelming economic data
and a weaker renminbi have pressured
Chinese stocks and compounded con-
cerns about a global slowdown, trigger-
ing a rush to safe assets such as US
government bonds.
“Markets have had a panic attack in
August,” said Michael Kelly, global head
of multi-asset for PineBridge Invest-
ments.
“There is a confluence of uncertainty
and it’s rattling all markets and you can
see it’s impacting the China A shares
market, which has led to outflows,” he
added.
Growth in Chinese industrial output
slowed to thelowest pace in 17 yearsaccording to July data released last week
from China’s National Bureau of
Statistics.
The renminbi also weakened, falling
through a key threshold of Rmb7 to the
US dollar.
Meanwhile, trade tension between
the US and China has intensified. Earlier
this month, President Donald Trump
announced that anew 10 per cent levy
on $300bn of Chinese goods would take
effect in September — beforedelaying
the tariff.
The outflows from China stock funds
do not capture recent selling from
emerging markets funds, many of which
have a heavy weighting to China.
In March, MSCI, the index pro-
vider, included Chinese stocksin its
popular emerging markets benchmark,
which is followed by about $1.9tn in
assets.
BlackRock’s iShares Core MSCI
Emerging Markets ETF, which is the
largest fund of its type that tracks the
popular index and represents $52.4bn
in assets, has shed $2.6bn in assets over
the past four weeks, according to
Bloomberg data.
“Outflows from Chinese stocks are
definitely on our radar,” said Dave
Chapman, head of multi-asset portfolio
management for Legal & General
Investment Management America.
“The depreciating currency, capital
controls, the effects on profitability of
Chinese companies — these issues are
interrelated and can be a true tail risk,”
he added.Equities
China funds
hit by $2.9bn
outflows on
growth and
tariff fears
‘Markets have had a
panic attack in August.
It’s impacting the ChinaA shares market’
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