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We begin the week with the US and around having reached an interim deal to end hostilities and reopened the straits.
Of Hall news.
You sent oil prices lower and sparctor relief rally across Asian markets. Officials from both countries sit to MEETNA in Switzerland on June the nineteenth, where the agreement will be formally.
Everyone has discovered from the past six years that these big, one off, supposedly one off disruptions can happen with frequency.
That's Bloomberg's Tracy Allyway. Tracy co hosts the Odd Lats podcast and she spends a lot of time looking at the long term impacts of geopolitics on the global economy.
And so the lesson that everyone's been internalizing is that you need to build up stockpiles, you need to have independence in terms of your crucial supplies, You need to have additional capacity.
And few places have shown the new need for independence and extra capacity more clearly than in Asia. Over the past few months, after the US and Israel went to war with Iran, the straight Up her Moose grounded to a halt, choking off supplies of virtually every major commodity, including one fifth of the world's oil. But I think a lot of great things are going to happen in the Middle East right now, and very importantly, the oil
is plummeting down. At the G seven summit in France, President Trump touted a deal the US reached with Iran's regime over the weekend, which he says will reopen the Straight Up her Moose.
Essentially, ships are starting to go out now. On Friday, it'll be completely opened.
Across Asia, countries are welcoming the US Iran peace deal that would help to stabilize global energy prices and reopen a vital shipping route, but many are skeptical that will happen, and even if it does for Asia, that shift might be too little, too late.
There is this brewing but not yet impacting food issue that will arise in Southeast Asia specifically.
That's Bloomberg's Joe Wisenthal. He co hosts odd Lots with Tracy.
The closure of the Strait of Hormuz is going to create a food stress in much of the world during the next planting season. And if there's food stress, people will be buying food and not random manufactured goods in China come that time, and so there may be an element where China is choosing to reduce its imports so that its customers of manufacturers have more capacity come next year.
Welcome to the Big Take Asia from Bloomberg News. I'm wanh Today I'm sitting down with my colleagues Tracee Alloyway and Joe Wisenthal, co host of Bloomberg's Odd Lots podcast. We recorded this conversation just before news broke that Iran and the US may have struck a deal to reopen the Strait of Hormuse, and as you'll hear, this discussion is arguably just as relevant now as when we taped it.
While the reopening of the strait would be a welcome relief, the structural shifts caused by the conflict have fundamentally changed businesses across Asia, and the resulting pressure on food and energy supplies and prices isn't going away anytime soon. On today's show, we dive into why Asia is feeling more economic pain from this conflict than Western nations and what the new normal looks like for the region and the rest of the world. While the details of the proposed
new deal between the US and Iran remain unclear. Thing is certain. War in Iran and the virtual closure of the Strait of Vermouse have effectively slapped a war tax on vital products, and it's impacted every corner of the global economy. You've probably felt the pinch in one way or another, but its effects haven't been distributed evenly. Wealthy countries like the US and Japan have opted to drain
their stockpiles of crude oil. In other corners of the world, governments are turning to demand destruction by encouraging industries and consumers to use less, but that risks slowing economic growth and triggering recession. It's a glaring disparity, and Bloomberg's Tracey Allyway says it highlights a structural vulnerability.
They're often poorer countries. They don't have as big stockpiles of oil inventory. And the one thing we've seen developed countries do across the world is really start to dig into those stockpiles and release barrels in order to I guess cush and the higher prices and so for a poorer country, I think that's one of the reasons in Asia you're seeing the governments really focused on demand destruction rather than propping up prices. So you've had I think
India was encouraging people not to go on flights. People are being urged not to drive to work, things like that. China is doing pretty much all the heavy lifting in terms of demand destruction, or like the bulk of it. So I saw a JP Morgan estimate I think saying that demand for oil from China had fallen like nine percent. I think that's one point five million barrels a day. Yeah,
it's a pretty big deal. And again it stands in stark contrast to a lot of the developed nations like the US that are really digging into their stockpiles.
You know, I don't know if you guys have noticed in your time here the prices at gas stations. Do you know how much gas in Hong Kong costs? Yeah, about thirty three Hong Kong dollars leader, which is its equivalent of about sixteen dollars per gallon.
Wow.
Right, that's up about fifteen percent since the Ran War began, and diesel prices have actually jumped like near fifty percent. And I wonder how does this stack up to what we've seen in the US. And I guess more importantly, how does that feed into inflationary pressures?
I mean, if we had sixty dollars gasoline in the US, that we definitely that's.
For sure.
Clearly inflation is trending up in the US for a number of reasons.
One of them is oil. And so you might say, well.
You stripped that out because that goes into headline red and core inflation. But then when you think about like everything has oil or energy in it, especially because of transport costs, it just builds that upward pressure. Throw in all the data center spending, and the story is just like building heat and pressure on everything, and oil is just.
Part of it.
In some countries with limited resources, governments are left with little choice but to turn the lights off. But wealthier countries are playing a very different game. Instead of asking citizens to cut back, the countries who can afford it are spending heavily to absorb the sticker shock at the pump. Here in Hong Kong, the government is actually putting aside the equivalent of two hundred and thirty million US dollars in a subsidy program to help manage soaring fuel prices.
It does seem like there's this imbalance in how the burden of the conflict is being carried. Right, You've got developed economies like Hong Kong and Germany able to afford these subsidies, while you've got emerging countries who literally can't keep the lights on. What do you guys make of that disparity? And I guess the question is is this something the US policymakers even think about.
Probably not, to be honest. One of the interesting things here is to me is how long the US can actually offset the pain of higher prices. They've obviously been releasing a lot from the Strategic Petroleum Reserve. The question is how long can you actually keep doing it? And apparently the US is now getting pretty close to its operational minimum. So I think I think the minimum is like two hundred and fifty million barrels, and we're now at.
Three hundred and forty nine million. Yeah, it is the lowest. We're back to the post COVID lowers.
Yeah, that's right. So the issue in the US is like crunch time could come right, Like they're going to lose.
Up buffer pretty soon. Yeah, And I think Asia does seem caught in this trap that really is not of its own making right. You've got interest rates that are rising globally, of course, driven by the war shocks and the AI investment boom centered in the US and the West. You've got the US dollar really strong right now. What do you think is impact of the US dollar strengthening on emerging Asian economies?
Not good. So there's the outlook for economic growth, and there's the outlook for the fiscal side, let's say. And so if you're spending money to subsidize oil prices, and you're running through your stockpiles in some instances, then it becomes more expensive the longer it goes on. One of the theories I've seen for the falling gold price recently is that governments are selling our central banks are selling reserve assets in order to raise more foreign FX so that
they can buy more oil at the higher prices. So it exacerbates foreign currency exposure for emerging markets and probably weakens their fiscal position in the future, and then in terms of economic growth. So obviously, if you can't get oil, if you can't get feedstock for plastics, that's pretty much in everything, and so you'll see less economic activity. But on the other hand, if we see some countries respond to higher oil prices by actually building out more clean
energy capacity, selling more ev for instance. Then like that could be a little bit of an economic boost. And I'm not saying that it's enough to fully offset the impact, but like it's something at least.
So, like, let's get back to the context of the question. It doesn't matter what the price of the dollar is. People are going to spend a crazy amount of money on memory chips from Korea.
Period.
The long could go up, the long could go down, it doesn't matter. We're going to be shipping a lot of dollars to Korea and Taiwan for key infrastructure for the AI build out. And so I think, yes, absolutely,
like the strength of the dollar is real. But I think we're in this very odd moment where because the AI race feels existential, that the traditional macro signals that we would look at like rates and FX are being swamped by the spending that everyone has just chosen to make for existential reasons on so many aspects of AI.
Yeah, and to your point, Asia is the backbone of the global AI ecosystem. Factories here produce the chips that power the AI revolution. But those factories rely heavily on energy and raw materials. Right, So what happens if there's ongoing uncertainty or disruption at the Strait of hormoose should we do helium?
Yeah? I was gonna yeah, go for it.
Now you start, well, I was just gonna say, like, both of our minds went to helium at the same time. So it's like this is pretty important in advanced semiconductor manufacturing.
Helium. Please don't ask me exactly.
Why, but it has to do something with like it's a ability to go down to incredibly cold temperatures, which is helpful in all kinds of different ways. But there is not a lot of elasticity in helium supply, and so if there's going to be like one link where the persistent closure of the Strait of hormoz might actually intersect with that, it would be if they truly run out of helium, and then you just really have a much harder time making chips.
Now I want to shift to interest rates for a bit. Japan's wholesale inflation accelerated in May at its fastest pace in three years, and its producer price index also surged to six point three percent. Was quite high that puts a lot of pressure on the Bank of Japan to hike interest rates, and across Asia you are seeing countries raising their inflation projections and pushing interest rates higher. What do you think would be the broader impact of prolonged
inflation across Asia? And what does it mean for US consumers?
So the inflationary impact is there, right, and it's not even necessarily oil. It's also those petrochemicals which go into everything, And then the other thing in terms of inflation. Governments and companies around the world are learning that it's important to build up stockpiles, and it's important to build out your energy capacity, or your petrochemical capacity, or your chip's capacity,
things like that. If you have everyone all at once trying to do this, that consumes resources, right, that is de facto inflationary. And I think that's probably the lesson we have collectively learned from the past few years, is that you don't want to be left high and dry if there's a big disruption, it is really important to have extra stuff, and extra stuff, you know, means higher prices.
After the break. Why we may not yet have seen the full extent of damage caused by the closure of the Strait up Armouse, and how the fallout from the war is reshaping Asia's relationship with the rest of the world. The supply shock caused by the closure of the Strait of Hormuse is arguably the biggest ever, but by draining reserves, finding workarounds, and managing demand, governments have tried to shield their citizens from the pain or delaying it at least
even if the strait does open this weekend. Bloomberg's Joe Wisenthal and Tracy Alloway say that pain might still be coming. Richer countries will be able to spend to ease it, but poorer countries in Asia don't have those resources, and that could spell trouble for everyone. You guys spoke with a former farmer, Lorkin Kelly on one of your recent episodes.
The problem's going to arise in six months and twelve months time when their decisions be made today about do I plant that fiel Luis or do I reed more. Cattle pection and pharmac are gonna say no, we're not going to do that.
You know, across Southeast Asia right now, farmers are now skipping this planting season because they can't afford the diesel for the tractors. They can't afford the diesel for the water pumps, right that they need to cultivate the crops, and some are actually choosing to leave crops rotting in the ground because they can't afford to harvest. I mean, that's huge, right.
This is so, this is what I was saying earlier that perhaps one of the shoes that may be yet to drop is a food crisis in Asia.
And it's perhaps the hierarchy of needs.
Right, If you're struggling to buy food, you're not going to be buying electronics right from China whatever it else. And so perhaps one part of the logic for China to reduce its imports is to ease a little bit of that squeeze.
But what I've heard, which is.
That there is this brewing but not yet impacting food issue that will arise in Southeast Asia, specifically.
When it comes to the impact of fertilizer. We're talking about longer timeframes because there are planting seasons, as you just mentioned. One historical anecdote that I learned from Atom two's is that apparently in ancient Roman times, emperors would try to time wars so that they weren't during the planting season so they wouldn't disrupt food supplies, and also so that farmers could actually go off and be soldiers.
But clearly we seem to have forgotten that lesson. I want to stay on food for a bit.
You know, in Thailand, I was there in bank Cotious a couple of weeks ago and talked to our colleagues there. I mean, they've done some really great reporting on how fishermen in Thailand are keeping their boats anchored because fuel eats up more than half of the cost of every trip. So you know, they basically can't raise the price of their catch, right, so they they're deciding not to go out.
And I wonder to what extent should policymakers and leaders worry about this, you know, turning into a political problem, right, this ag issue.
Yeah, I mean, look, I don't know if I ever fully bought the theory, but you know, there was a There are many people who argued, for example, that the catalyst for the Arab spring was wheat prices that year. And you know, our leadership is other things on their mind. If we're talking about this is very classic type of
thing that creates real political disruption. And I don't think we should have the hubris to assume that these cycles, which will probably have data points going back thousands of years, have suddenly stopped.
And I guess with sanctions, I do wonder to what extent that the oil crunch would lead to the weakening of essentially one of the US's biggest non military weapons, right sanctions.
There was an interesting article in the Wallhet Journal that the North Korean economy is doing surprisingly well. They're actually building a lot of housing, and they're sort of quite a little evidence of like improving standard of living and so forth. And of course here is, you know, one of the most sanctioned countries on Earth for a very
long time. I just think, like the degree to which sanctions are a powerful tool, or that they could really be used to like crush any enemy, all of it's been called into question right now.
Now, let's say the war ends next week. How do you think the world has fundamentally been changed because of this war and how it's played out.
So I think it goes back to, I guess, the idea of the choke point economy. So everyone has discovered from the past six years that these big one off supposedly one off disruptions can happen with frequency, right, so each disruption is slightly different in what it actually is, but they're happening more often. I mean, I'm sure both of us, having been in Hong Kong during the pandemic, I will always keep an extra supply of toilet paper
from now until forever. Basically we all learn that, and so I think that impulse is going to stick around for a long time.
The world is very globalized.
I feel like for me coming here to Hong Kong, it's been very helpful reminder like how integrated the world still is. But these are the wheels are all spinning in the opposite direction of where they were in you know, the second half of the twentieth century, trade barriers are going up and countries don't trust each other, and that is going to have consequences for both productivity and prices.
This is The Big Take Asia from Bloomberg News. I'm wanha. To get more from The Big Take and unlimited access to all of Bloomberg dot Com, subscribe today at Bloomberg dot com slash Podcast Offer. If you liked the episode, make sure to subscribe and review The Big Take Asia wherever you listen to podcasts. It really helps people find the show. Thanks for listening, See you next time.
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