tv The David Rubenstein Show Peer to Peer Conversations Bloomberg August 4, 2018 2:30am-3:00am EDT
alix: fuel standards under attack. the trump administration wants to wipe out california's electric vehicle mandate. companies from steel to hogs to grain, the impact on producers and industrials. u.s. to iran, it's your move. iran preps for renewal of economic sanctions. opec ramps up production. violence between yemen and saudi arabia. ♪ alix: i'm alex steele, welcome to bloomberg commodities edge, 30 minutes focused on companies, physical assets and the hottest commodities with the smartest voices in the business.
but start with spot on, and expert take. in the spotlight, earnings, commodities, and terrorists. -- and tarriffs. we have it covered for you. mario parker joining us from chicago, and joe joining us in new york. let's start with caterpillar, the stock down the last few days. the ceo tried to quantify it. >> those tariffs had minimal impact on the quarter but are expected to impact the second half material costs by $100 million to $200 million. we expect freight costs to remain elevated as we ramp production to meet higher demand. alix: what did you learn? joe: a company coming out and giving us hard numbers, $100 million to $200 million lost on the tariffs. the thing offsetting that is pretty good demand. i think the question analysts or investors are looking at with caterpillar and the broader discussion of terraces, one,
tariffs, one,of where are we on the global growth cycle? two, how much will the tariffs impact demand destruction? i think that's the question you're going to see from them, not only from them, but that analysts are asking after earnings from steel companies and aluminum companies and others. alix: i'm glad you brought up aluminum. you just got off the phone with the ceo of century aluminum. what did you learn from the quarter? joe: it was a good quarter. some of the analysts are saying maybe it is time to buy the stock because shares have not fallen off so much. it doesn't look like the stock was impacted by tariffs. i did ask him what you think of demand. he said we are pretty confident demand will be strong for a year and a half to two years out. this is a person who says, despite the tariffs, people are still buying and seeing more demand come up. i was told the same thing a couple of months ago. the ceo of nucor said we've got these tariffs in place. they are helping us and our customers are still buying more as we raise our prices.
people are worried about your demand destruction because of true demandbout destruction because of trade wars. but the guys in this say, hey, people are still buying. alix: what about u.s. steel? joe: the report came out last night and it looks pretty good. the third quarter was questionable. i just got off the phone with them today. why the stock is down today is because investors are looking for cash back. they got so much on the balance sheet and they are focused more on growth and then returning to shareholders who are concerned, again, about what if demand destruction comes and ultimately we don't get cash after a slowdown in growth. alix: sounds like oil companies can relate to the dilemma. first, let's get to a ceo talking about the whole exports. china would take 20 million tons of soybeans in the first
and third quarter. that will be a hole in u.s. exports that will be tough to fill. what do we learn about tariff impact? >> we got our first look this week on how tariffs and the trade wars are affecting agriculture. we find agriculture square the crosshairs. it is the midwest, and rural farmers are part of president trump's base. also, agriculture is one of the few areas where america has a trade surplus. what we found was that, essentially, the ceo saying there's no way american farmers can expect to have other countries to fill the void left by china. alix: a similar story with tyson, that company cutting its full-year forecast. the ceo saying they face pressure on chicken sales and volume and pricing due to the abundance of low priced beef and pork on the market. they are working to mitigate
pressures, but the fourth quarter is off to a slower start than expected. talk about the tariffs impact. >> absolutely. china, the tension with china, the tariffs with china have lowered demand for pork. you are also seeing tension with mexico playing out in that market as well. there's more pork than we can consume here. it is having an impact, a material impact, on some of these companies. alix: when you listen to all of the calls you did, did you get the impression that the worst is yet to come or this might be the low watermark? >> it is mixed. earlier this week, we had adm report. they said this presents an opportunity for a middleman like themselves to find other markets to source grains in one market and sell it for a profit in another. you saw some of the complexity bunge had with their trading decisions, while they hedge against whether there is a quick resolution. what we do know is this
environment will be a tricky one with commodities and agricultural companies. alix: thank you. really appreciate it. coming up, the clock is ticking toward economic sanctions on iran with all restrictions around the corner. oil restrictions around the corner. we will talk with the next word on what to expect. and it wasn't just trade commodities that suffered. gold and silver here. silver shaking off its longest weekly route since 2000. this is commodities that. -- edge. ♪
oil inventory numbers out this week, the good and the bad. cushing stocks at the lowest level in four years, but overall inventory numbers rose because oil exports are down to an april low. oil drillers for earnings, this is surprising because prices are 41% year on year, but you have devon, chesapeake, apache all lower on their earnings day. many of them failed stemming cash flow. the world is sweltering under a heat wave. check this out. the heat map is really intense, especially in africa. there is a kink in the jet stream, a ribbon of wind that circles the earth, causing wildfires across scandinavia and greece as well as california. all experiencing high temperatures, as well as texas, africa, and japan. let's get more insight about this heat wave. alan: hi. what we are looking at is the u.s. midwest. you see extreme drought conditions from missouri to the main region of the corn belt,
which will hurt soybeans at a time of pollination. key for the crop. iowa and illinois possibly seeing lower yields. that could drive up prices in the next few weeks. when you look in europe, over in the black sea region, you just saw wheat market jumped 6% today. ukraine will be limiting exports to keep domestic supplies there. ukrainian wheat crops have been affected by this weather. it is a band that goes from france to poland. there has been rain in recent weeks and days that may make the crop a little better, but they have a shortfall at this time. the final look is at china. when you look at chinese crops, they are getting more rain in recent days and weeks. that is helping corn and soybeans over there. that is key for the trade situation. for once now, we are talking about how the weather is driving markets. of course, the size of a crop affects trade. that means china may have more ability to whether some of its weather some of its own
trade issues as it does not have an expensive supply from brazil and the united states in the weeks and months to come. alix: thank you. the crop impacts of the heat wave we are seeing. now let's get into the ring. we have three things you need to know about upcoming economic sanctions on iran. joining me now is richard nephew. he is a senior research scholar at the center for global energy policy and he worked at the department of state negotiating with iran. great to see you. you basically have, as of monday, iran will have to stop buying dollars, gold, other precious metals, automotive and aircraft components. rbc calling this an inflection point. is it? >> on a political level, as how the trump administration will implement sanctions and conduct iran policy. the actual sanctions themselves are marginal. these are the things we did to address specific evasion schemes iranians had running,
what we thought the iranians were running. alix: also the oil sanctions may come on november 4. that is larger macro the industry. that means an insurance underwriting issue. transactions related to tankers in the energy industry. walk me through where we are in a state of play of oil sanctions. >> right now, we have a trump administration demand saying, all those buying iranian oil these need to go to zero or as close as possible. i don't think you can replace 2.2 million barrels per day without massive price increases. we will have a lot of companies and countries with u.s. interests looking to get out. we have started to see this in europe, japan and korea. we are waiting to see if we will see the same thing from china, india, and turkey. alix: under the obama administration, all you had to do is reduce your imports every six months by 20%. that is not the dynamic with president trump.
how will he determine a waiver? >> thus far, the state department has been squarely on this. they have said everything from we must see zero to we were willing to see exceptions. i think oil market demand dynamics will influence their decision. it will make them have to look at exceptions. and future commitment for reductions. which is a massive loophole that lets you do a little bit of reduction today, and promise to do more in the future. alix: the other lover the u.s. lever the u.s. has to pull is economic consideration. do you feel like the sanction waivers will be separate from bilateral economic considerations? >> absolutely not. alix: even if they say it's going to be. >> yeah. this administration is prepared to take from column a, column b, and column c to make a deal. if you are a china right now, you have to be looking at tariffs and how they can be leveraged with respect to sanctions, whether or not there
is trade. the same thing may be with regards to japan. i think it complicates things. in the obama administration, it was very consistent and clear, but in this administration, we could see anything in the next weeks and months. alix: how much will iranian exports be reduced? we have a chart showing where we are. there is a rhetoric in the market that we will get enough oil from saudi arabia and russia to offset. the other story, you will have china and india buying more and offsetting loss from europe. what is your story? >> that is where i err to, you will see europe and japan and korea make reductions. in aggregate, 600,000 to maybe a a million barrels per day. -- per day of lost running exports. but the big story will be china and india.
i think the chinese, if anything, will stiffen their spines. they are highly disinclined to work with the president right now. the money might be on india, whether they will make a play for better cooperation with trump, to deal with pakistan and economic issues, or they will keep the cheap oil flowing from iran as they look forward to elections. alix: the other part of this is how it will spill over into issues in the region. it feels like most people are putting that to the side. we have a good chart from rbc that shows the onslaught on saudi arabia. they really have jumped. is this going to be a proxy battle for iran and what is the danger for the oil market? >> the iranians have already said, don't pay attention or at lease all of your attention on the straits of armuz. i don't think we should assume everything the hutus do is directed from iran.
there is some agency that the hutis have that the iranians may aid, but not directed alix: the next three months, what are the critical things you will be watching for? >> the first thing will be where iran oil trade is come september. we will not really know who is reducing and who is not until we start to see the september data, which won't be until early october. that will give us a good sense of who is playing ball and who is not. second, it is what the europeans will do. they are trying to see if they can keep sanctions relief on tap and keep money going to iran to give iranians in the deal. whether they succeed is a big issue. the third thing, at this point, everyone should acknowledge that the trump administration will implement these sanctions. in the market, there has been a sense of maybe he will back down or change. i think we need to assume, as
our base case, the sanctions are coming back. alix: great stuff. let's get to the takeaways. watch oil flows in september, looking for europe to provide relief for iran, and sanctions are important. but they aren't major is the next three months. thank you, richard. coming up, swearing in the permian. a texas railroad commissioner weighs in on how he plans to regulate a controversial process. that is next. ♪
♪ alix: this is bloomberg commodities edge. now it is time for all you need to know in the world of alternative energy. the trump administration is looking to freeze the fuel economy mandate. here with us from washington is stephen monroe. thank you for joining us. what happens now? >> the proposal goes into public domain for comment. and the two sides arm up and get ready for a battle. alix: who has the leverage? >> the regime in place has been in place for many years. there is a lot of momentum behind it.
what the trump administration is attempting to do is upset the apple cart in a big way. the support it has is largely on the side of the automobile manufacturers who have been looking for this change, and the oil industry, that stands to sell more gasoline domestically should the efficiency standards be slashed. alix: drilling down on the electric vehicle component in california. if you look at the percentage of ev sales, you're looking at a huge jump. in 2015, it was 3%. now it is 8%. the industry is still reliant on the subsidies by state. many states have followed california's example. what does it mean for those states going forward? >> it is almost impossible to overstate the importance of california in the ev market. it constitutes about half of u.s. sales. a number of other states, mostly on the coast, have adopted california efficiency standards
and zero emissions vehicle mandate california is putting in place. make no mistake, this is aimed at california and would hit hardest in california. alix: thank you very much. let's turn to commodities in chief. today, it is a texas railroad commissioner. first, a look at the problem facing permian producers. getting oil out of the permian isn't the only problem producers have. the big elephant in the room, natural gas. production sits at a record and is a stones throw away from maxing out its pipeline capacity. companies have to make a choice. find another producer to buy gas, slow down production until more pipelines are built, or flare. enter the railroad commission of texas. it lets you flare gas while drilling a well and for 10 days
after completion. then you can get a 45-day permit and ask for an extension for 180 day sequentially. you can get that extension if there's a pending land negotiation. or you show proof of infrastructure buildout. texas is now flaring about 3% of the gas in the permian. but with companies running out of options, the worst could be yet to come. i recently caught up with ryan sitton. >> right now, it's 400 million cubic feet a day, give or take, that's what the entire permian basin region is flaring. when you look at how much gas people are anticipated coming on the market, as high as 2 billion cubic feet a day we can flare. i don't think that will ever happen. alix: what flaring is allowed now? how does the process go? >> you come to the texas railroad commission, which is the agency that regulates all oil and gas in the state of
texas. you get a 45 day permit to flare whatever you need to. in cases where people did not anticipate they would be flaring, they cannot wait for months to get a flaring permit. we have an administrative process. the concern is that we only allow those for sequentially 180 days total, after which you have to come to the commission for a hearing. that is a longer process. this could last up to two years, more likely a year and a half. people say, that is longer than my 180-day window. what do i do then? alix: what are the excuses you are hearing that people need to flare? >> people are saying i will need as much as two years of flaring time on some wells. alix: wow. you are making a distinction between the gas processing and the gas producers. walk me through the differences.
>> at a wellhead, you will have oil coming out and natural gas or dry gas, natural gas liquids. in liquid form, there are longer molecules but still not oil. everything that is not oil, which is the dry gas, natural gas liquids, all of that gets burned. you put that in a gathering system, at a gas plant. it gathers all the natural gas components and separates it into dry gas, liquid gas, heavier gas components, helium, methane. those components go in the pipelines. what they would like to do is allow the gas plants to flare only the methane, capture the natural gas from the other components, unlike what would happen at the well head, which would have to flare all that is considered natural gas. alix: granting a flaring permit for natural gas takeaway, is that unusual? >> yes, someone says, hey, we don't have enough takeaway capacity, can we flare? that is not one of the simplistic reasons you can get a permit.
but this is not happened like today. alix: have you as of yet granted any flaring permits in capacity issues? >> not in this timeframe. alix: but you expect those that apply, you will extend. >> they have to come up with other criteria to define it. we don't have a simplistic yes, takeaway capacity is not necessarily a reason we have historical precedence on. they will have to build a case more comprehensive than takeaway capacity. alix: this week, permian differentials blew out and flaring could rise as much as five times over the next year. here is what is on my commodity radar. monday, rio tinto and retail shareholders. tuesday, you have a lot of earnings coming out like continental. continental disappointed in their third-quarter guidance for production. and on wednesday, china releases trade data for july.