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tv   The David Rubenstein Show Peer to Peer Conversations  Bloomberg  March 3, 2019 5:30am-6:00am EST

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alix: the trump oil call. president trump tells opec to relax while saudis hint at extending production cuts. mining versus gold, a hostile bid. the ceo calls it desperate. the deal would unlock $7 billion worth of value. saudi's big gas bet. saudi aramco wants to become one of the world's largest players in natural gas with an appetite to buy assets from russia to africa to the u.s. ♪ alix: i'm alix steel, and welcome to bloomberg "commodities edge." 30 minutes focused on the companies, physical assets, and the trading behind commodities with
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the smartest voices in the business. we kick it off with spot on, an analyst and investor take on our big story. joining me in the studio is dan dicker, the founder of energy word, and phil verleger, the president of pk verleger joins us from denver. our spotlight is on president trump's oil call. prices sink monday after president trump tells opec to relax and he warns of higher prices. then the saudis ignore it on wednesday and said they are considering a production cut agreement in the back half of the year. when you look at this and the tweet monday, how significant was it? >> i think it was very significant. it follows a series of tweets that began last april. president trump has essentially chased one billion barrels out of the market from the long side. we saw last year a number of hedge funds closing, which were taking long positions in futures and what he has done is capped it. there is an analogy that goes back to what we call the greenspan put that followed the 1987 flash crash.
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the fed kept cutting interest rates every time the equities fell, so that kept a floor under the equities. what trump has done is put a cap on the price of oil and it pushed it down. it bounced back, but it would be much higher if trump had kept his mouth shut. alix: dan? dan: trump is good at stirring a lot of action in the marketplace, but the traders are getting wise to him as they are getting wise to his tweets everywhere else and ignoring them more and more. he had a lot of nfluence, obviously, in october of last year, but that was more about the khashoggi murder than about his tweets. alix: the world can go higher? dan: the saudis are going fool me twice, shame on me, and they bumped up production because of the khashoggi murder. that will not happen again, they have said that will not happen
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again, and there is a lot of reason to think the tweets will have a minimal effect. over the course of the long-term, the traders are ignoring them. alix: what we see is a pickup in volatility anywhere you look. what is the impact on the producer mindset when oil can be whipsawed so quickly in the market by a tweet? phil: i have to disagree with what dan said. i understand what he is saying about the traders, but if you look at the roughly 700 billion barrels of oil that are hedged by frackers and so on, what happened was, last fall the people who wrote the hedges had to sell, and there were no buyers. we got a slow flash crash. we should have gone from $85 to $70. we went to $50. this is the new market and the traders can talk all they want, but the analytics show there is a very significant effect from this and it will keep having an
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effect. there will be lots of volatility, which will send prices up and pull them down, but it is a lower trend and there will be less investment. five or 10 years from now, we are seeing it at ip week, people can't get investors to invest in oil and it will lead to higher prices in the future. alix: overshoot to the upside and downside leads to more vol. less investment going forward. dan: volatility going up is a definitely measure of some move downward. that is what you have been seeing in the market. there has been more protection to the downside, but i point out that banks have been getting all excited about derivatives again. their revenues went up last year by 45%, the first in three years revenues went up. there is clearly a new appetite for derivatives, that old-school appetite that i know from 2003 to 2008 when we had a huge crash and again from 2010 to 2014 when we had another crash. i think we are in for the opposite of what he is saying. it is not a down market.
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it is the makings of a new bull run in oil and the derivatives and the appetite for derivatives and the trading and traders are what will make all the difference. alix: so quickly on that, in some respect, you are saying the same thing longer-term. you see higher prices because of underinvestment? phil: exactly right. it may be 2022. the fed will limit the banks' ability to do this unlike 2003 and 2004, but by 2022, 2023, we will be dealing with higher prices because investment is being curtailed. we are seeing all the news from the independent oil companies. they are having to cut back because nobody will lend them more money. alix: quickly. dan: we don't have to wait till -- until 2022. alix: number one pick? dan: old-school with exxon because they have the money to take care of their permian assets finally. i'm going to stay away from the
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for nowrmian players and i will give one more on the lng side, because i think that is a pure play you have to have going forward. alix: we will talk about gas later in the hour. dan dicker and phil verleger, a great conversation. coming up, gold showdown. barrett gold launching a $17 billion bid to become the world's biggest miner. as we head to break, venezuela is running out of space for its oil. those dots are 16 ships holding over 8 million barrels worth upwards of $500 million. the nation can't find buyers after the u.s. implemented sanctions in january. this is bloomberg "commodities edge." ♪
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♪ alix: i'm alix steel, and this is bloomberg "commodities edge." time now for the data dig. we will delve into the market trend of the week. oil inventory numbers surprised.
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there was an unexpected drop in overall u.s. crude supply. 8.6 million barrels, and part of that was the lowest level of imports we have seen since 1996. you can see the drama on the u.s. gulf coast. perhaps there is such a thing as too much coffee. take a look at what happened in coffee prices. arabica coffee prices fell to the lowest prices on record, below $1 a pound. a global glut putting pressure on prices. talking about putting pressure on prices, dean foods, plunging this week. the white line is the debt, trading at $.75 on the dollar. the blue line are milk prices. the dairy giant wants to find a buyer, but analysts are skeptical. it has challenges like rising milk prices as well as weakening demand and people want to drink more things like soy and almond milk instead. let's dig deeper into the battle of the gold titans. barrick gold announcing a $17.8 billion hostile bid for
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newmont before newmont could complete its own merger with goldcorp. they traded barbs over the deal. >> our proposal has the ability to unlock $7 billion of value for both newmont and barrick shareholders. >> i don't know where they are coming from, thinking they can take on a third piece in complexity in things going forward. >> we don't believe the goldcorp and newmont deal creates value for anyone. >> it's a move, in my view, it is desperation on their part. >> we have been working on it for a long time and have engaged newmont beforehand. this is a very carefully considered process. alix: joining me, danielle from toronto. that's a difference of opinion. what is the state of that merger now? danielle: there are a lot of differences of opinion. both sides claim they have reached out in the past to the other one about not having to go this route, not having to go hostile. both sides deny that is true.
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it is coming down to personalities. both sides are reaching out, trying to get their big investors on side. i have spoken to both companies. mark bristow tells me he has spoken to most of the top investors in barrick. newmont says they have also spoken to most of their large investors. interestingly, for the most part, those are the same investors, so it will come down to which of the deals these guys with blackrock having a lot of the power, are going to decide on, and part of that will come down to personalities. they are really different teams. gary goldberg is a very understated guy. you can tell this has gotten under his skin. mark bristow no one would accuse , him of being understated. alix: he is definitely not subtle. danielle, some of the oddities of the deal, bristow said there could be $7 billion of synergies but they gave a really long timeframe. the flipside was there was no premium. how does that make sense? danielle: barrick is arguing the synergies are the premium and
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they are sticking to the $7 billion pretax prediction. newmont -- gary goldberg says he has no idea where they came up with that number. they are saying obviously it has to be lower. the precedent or the idea for this no premium deal started with john thorton's bid. that was the no premium deal that kind of captured the market's attention and both thornton and bristow are committed to that. they see themselves as restoring value and are sticking to their guns. investors who don't like the deal are already saying they need to pay up. alix: both stocks, down when the rumor broke. great reporting, danielle bochove. let's get into the ring. industrial metals crushed it this year, their best year in over a decade. gordon johnson at vertical group.
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all of this rally, led by copper, aluminum, zinc, nickel. does it last? gordon: we don't think so. we think there is slowing in china and the real issue is debt service in china is 1.5 trillion a month. back in 2015-2016, we had a great commodity scare, debt service in china was 800 billion a month. nearly double right now. china needs to issue a lot more credit to run in the same space and we think that is the problem. alix: when you take a look at the numbers of china pmi versus copper and there is a gap which makes no sense. you think the manufacturing data is telling the truth despite stimulus? gordon: everybody is talking about stimulus. what china wants to do is provide liquidity and not stimulate. li keqiang came out and said we are not going to be aggressive. one thing i think is important, if you look at net exports of steel out of china in january 2019, up 44%. the last time we had that level of growth, 2015, when you had the great commodity scare. clearly steel isn't everything, but we think it's a key commodity in china. alix: which of the metals is the most vulnerable to this?
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gordon: iron ore is important. iron ore has been robust because of the issue with valet, but you look at the underlying dynamics. they have ramped up this year. 16.5 incremental tons we think hits the market this year. exports of iron ore out of brazil -- brazil is supposed to be disappointing. through february 18, exports were up 13%. through february 25, exports are up 19% year-over-year. it looks like this is not having the impact people think. if that becomes consensus in the market, iron ore comes down. alix: the vale incident hasn't impacted it yet? but give it some time and it might? or you think it will still be offset. gordon: that's a great question. if you look at what happened samarco came go -- off-line. 2016, going in, everyone thought iron ore exports out of brazil would be down. the point is when prices go up inorganically, guys find more
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iron ore. rio tinto said that this morning. alix: based on that, they said they would be shorting vale going long rio tinto and glencore. what trade would you be making? gordon: we would be short iron ore producers in general and when you look at the backdrop in china, things like fixed asset investment, weak. you look at the credit numbers, the defaults that are happening. we think china has a real problem right now across a number of data points. everyone is expecting stimulus and we think the tsf number, the credit number in february will disappoint. we would be shorting the commodities sector on weakness in china. china consumes half the world's commodities. alix: great stuff. gordon johnson we appreciate it. , now it's time for the note of the week. it comes to us from pg&e's 8k. they say although the cause of the 2018 camp fire is still under investigation, pg&e corporation believes it is
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probable the utility's equipment will be determined to be an ignition point of the 2018 camp fire. a.k.a. more liabilities coming their way. coming up on this program betting the farm on fish food. becker thek to todd , ceo of green plains energy about why this protein could supercharge growth for the ethanol producer. we discussed that on bloomberg "commodities edge." ♪
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♪ alix: i'm alix steel, and this is bloomberg "commodities edge." it is time now for the bnet brief, which gives in-depth analysis on clean energy, advanced transfer commodities and emerging technologies. , saudis are betting on gas. of saudi aramco in london said gas is a major market and we want to be one of the largest players. there is appetite to invest in natural gas and lng. joining me now from london, anastacia dialynas. you were at the conference. what did that comment mean? anastacia: this is an ambitious target for saudi aramco. they want to be a world leader in global gas and lng markets. this is ambitious because saudi arabia is a big oil producer, but not a big gas producer. they have domestic gas reserves and they are hoping to increase their domestic production, but they will only produce about 1/5 of the what the u.s. produces, so the way they are hoping to
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become a gas player is buying their way in. they are looking to invest in gas and lng projects from russia to the united states to australia to west africa. alix: what buy-ins are most realistic? what kind of prices are we looking at? how much are they willing to spend? anastacia: good question. my guess is they are willing to spend quite a lot and they probably can. it would be fairly easy for them to invest in stakes in some of these projects. novatech in russia and u.s. producers are looking for the extra capital and support to get these projects off the ground. they probably have a lot of projects, export projects pursuing them for investment. alix: what i found interesting in his speech is he sounded like a victim. he said we should remind stakeholders that oil and gas is responsible for much of today's economic growth and future growth. really coming out against the anti-oil --
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saying that shareholders have really abandoned them. what do you make of that kind of comment? anastacia: it is interesting because this move into gas is emblematic of what a lot of the big integrated companies are doing. companies like exxon and shell and chevron and total, who are all already investing heavily in gas. those companies are also investing quite a lot in renewables as well, be it renewable energy projects or electric vehicle chargers and infrastructure. they are diversifying their assets. this is a step for saudi aramco to at least diversify away from oil as its sole business into gas. it is a big step for them, baby step for the market. alix: anastacia dialynas, thank you. now we turn to commodity in chief, where we focus on one executive in the commodity world. today, it is todd becker of green plains energy.
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first, a closer look at his company. ethanol producers have it rough right now. margins are negative and there is no relief in sight. here are the problems. there is too much supply, like three to four days too much, and producers aren't shutting down output fast enough. exports to china have dried up after the country levied a 70% tariff on u.s. imports. e-15 blending is on track for issuance in march. the industry still has doubts. every gallon of gasoline must be 15% ethanol. sliding oil and gas prices makes ethanol less competitive. green plains energy is shaking things up. the company sold three plants last year to valero and shut down one. its new strategy is to transform itself from ethanol into a protein producer. think of it as food for cows and chickens. it bought two cow feed lots and is now the fourth-largest feeder in the u.s. the company can process 11 million tons of corn, 3 million tons of livestock feed, and 275 million pounds of industrial
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corn. after a $61 million operating loss from q1 to q3 of last year from its ethanol business, it hopes for better revenue, a boost to margins, and quick return on invested capital. will it work? the company recently missed revenue estimates for the fourth quarter, and todd said the ethanol industry could have burned through about $1 billion in cash last year. i asked how much he would need to spend to diversify into that protein. todd: we're going to have to spend somewhere between $350 million and $500 million to retrofit our platform and we are starting to come up with a plan to do that. we have one under construction that will come online in the fourth quarter of this year. once we see that and see that it is working and giving us the value, we will move quickly to retrofit our platform. we have to get the money for it, but we think we can raise the capital we need. alix: equity market, debt market? todd: probably a little bit of both in the future. i would say hopefully it comes
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out of free cash flow as well. that the industry recovers and we are generating free cash flow again. we want to accelerate it and get some place within 2, 2 1/2 years, where we are not going to be subject to the swings of government, volatility, commodity volatility, all that. we will be subject to the world demand for protein, which is good. even in today's margin environment, which is negative, if we had all of this today, we would be profitable as a company. alix: even though your ethanol margins are negative? if you are where you want to be in four to five years, you would be profitable? todd: yeah, the economics is that basically this product could sell somewhere between 50 -- $50 and $100 over high protein soy meal, a hedgeable commodity. if we could sell it at $300 over distillers grains, that adds $.18 a gallon margin. right now margins are negative $.05 to $.10 in the industry because of what is going on. if you add $.18 a gallon and 3 to 4 cents on the oil, we would be profitable today as a
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company. ethanol would be a byproduct. alix: when you take a look at the protein you are doing now. what percentage is your revenue and what do you expect it to be once you retrofit these plants? todd: to feed cattle, it takes six pounds of feed for every one pound of grain. in fish, one pound of feed for one pound of gain. the efficiency in feeding fish and species around the world is so good. the growth in the next five to 10 years, we saw the last 20 years in chicken and meat, we will see in the next 10 years in aquaculture and fish around the world. alix: 20% now to the low value protein, say 20%? todd: low value protein is 20% of our revenue. alix: what does that get to? todd: another 10%, but that will be the margin. if you think about it, if you can get another $150 million to $200 million of ebitda on the same revenue, that takes you from being unprofitable to profitable.
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alix: that was my interview with todd becker, ceo of green plains energy. and now, to the lighter side. go ahead and pass the calf cheeks, please. americans are increasingly bellying up to the table for nontraditional cuts of meat. while the rest of the world has been doing this centuries, u.s. diners are just catching up when it comes to nose to tail eating. proponents say the movement is a good way to cut waste and restaurants see it as a way to cut on cost. check, please. here's what's on my commodity radar for next week, tuesday you have china's national people's congress will begin in beijing. lots of interest. you also get chevron's investor day. how much money in growth will they see out of the permian basin this year? wednesday, exxon's analysts in new york, development. friday, we are back on track. you get the usda monthly report
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on crops, the world agricultural supply and demand forecasts. don't miss that. that wraps it up for bloomberg "commodities edge." catch us thursday at 1:00 p.m. new york time, 6:00 in london. ♪ want more from your entertainment experience?
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♪ emily: i'm emily chang. this is the "best of bloomberg technology." we bring you all our top interviews from this week in tech. coming up in the next hour, the other tweet heard around the world, why elon musk is in hot water once again with the sec. plus, 5g was a hot topic, but the uncertain future of huawei continues to overshadow the industry. we bring you the latest out of barcelona. and privacy practice, california is not waiting on h


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