The Iran War’s Lasting Scars Across Asia

0:02Bloomberg Audio Studios. Podcasts. Radio. News. We begin the week with the U.S. and Iran having reached an interim deal to end hostilities and reopen the Strait of Hormuz.

0:14Tracy Alloway:Oil prices lower and sparked a relief rally across Asian markets. Officials from both countries set to meet now in Switzerland on June the 19th, 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 Alloway. Tracy co-hosts the Odd Lots 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.

0:55You need to have additional capacity. And few places have shown the need for independence and extra capacity more clearly than in Asia over the past few months. After the U.S. and Israel went to war with Iran, the Strait of Hormuz grounded to a halt, choking off supplies of virtually every major commodity, including one-fifth of the world's oil.

1:18Tracy Alloway: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 G7 summit in France, President Trump touted a deal the U.S. reached with Iran's regime over the weekend, which he says will reopen the Strait of Hormuz. Essentially, ships are starting to go out now on Friday. It'll be completely opened. And we got a little... Across Asia, countries are welcoming the U.S.-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.

2:03Tracy Alloway:There is this brewing but not yet impacting food issue that will arise in Southeast Asia specifically. That's Bloomberg's Joe Wiesenthal. 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.

2:53Welcome to the Big Tech Asia from Bloomberg News. I'm Wan Ha. Today, I'm sitting down with my colleagues, Tracy Alloway and Joe Weisenthal, co-hosts of Bloomberg's Odd Lots podcast. We recorded this conversation just before news broke that Iran and the U.S. may have struck a deal to reopen the Strait of Hormuz. 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.

3:34On 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.

3:54While the details of the proposed new deal between the U.S. and Iran remain unclear, one thing is certain. War in Iran and the virtual closure of the Strait of Hormuz 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 U.S. 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.

4:31But that risks slowing economic growth and triggering recession. It's a glaring disparity, and Bloomberg's Tracy Alloway 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 cushion 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.

5:19People 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 9%. I think that's 1.5 million barrels a day. It's huge. 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?

5:57No. About 33 Hong Kong dollars per liter, which is its equivalent of about$16 per gallon. Wow. Right? That's up about 15 percent since the Iran war began. And diesel prices have actually jumped like near 50 percent. And I wonder, how does this stack up to what we've seen in the U.S.? And I guess more importantly, how does that feed into inflationary pressures?

6:20Tracy Alloway:I mean, if we had$16 gasoline in the U.S., there would definitely be a revolution for sure. Clearly, inflation is trending up in the U.S. for a number of reasons. One of them is oil. And so you might say, well, you strip that out because that goes into headline rather than 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.

7:01But 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. You know, here in Hong Kong, the government is actually putting aside the equivalent of$230 million U.S. 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. 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.

7:38What do you guys make of that disparity? And I guess the question is, is this something U.S. policymakers even think about? Probably not, to be honest. One of the interesting things here is, to me, is how long the U.S. 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 U.S. is now getting pretty close to its operational minimum. So I think the minimum is like 250 million barrels. And we're now at...

8:15Tracy Alloway:349 million, yeah, and it's the lowest. We're back to the post-COVID lows. Yeah, that's right. So the issue in the U.S. is like crunch time could come, right? Like they're going to lose that buffer pretty soon. 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 U.S. and the West. You've got the U.S. dollar really strong right now. What do you think is impact of the U.S. dollar strengthening on emerging Asian economies? Not good.

8:51So 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 or 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.

9:35And then in terms of economic growth, so obviously, if you can't get oil, if you can't get feed stock 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 EVs, 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.

10:11Tracy Alloway: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 yuan could go up. The yuan 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 buildout. 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.

10:58Yeah. 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 Hormuz? Should we do helium?

11:18Tracy Alloway:Yeah, I was going to, yeah, go for it. No, you start. Well, I was just going to 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, its 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 Hormuz might actually intersect with that, it would be if they truly run out of helium.

11:59Tracy Alloway: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 6.3 percent. It 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 U.S. consumers? So the inflationary impact is there, right?

12:40And 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 chips 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.

13:24It is really important to have extra stuff. And extra stuff, you know, means higher prices.

13:38After the break, why we may not yet have seen the full extent of damage caused by the closure of the Strait of Hormuz, and how the fallout from the war is reshaping Asia's relationship with the rest of the world.

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16:03The supply shock caused by the closure of the Strait of Hormuz 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 Weisenthal 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, Lorcan Kelly, on one of your recent episodes.

16:42Tracy Alloway:The problem's going to arise in six months and 12 months time when the decisions we made today about, Do I plant that field of wheat or do I breed more cattle for next year? And farmers are going to say, no, we're not going to do that. You know, across Southeast Asia right now, farmers are now skipping this planting season. Yes. Right. 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.

17:14Tracy Alloway: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 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.

17:54One historical anecdote that I learned from Adam Tooze is that apparently in ancient Roman times, emperors would try to time wars so that they weren't during the planting season. So that it 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 Bangkok just 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.

18:32So, you know, they basically can't raise the price of their catch. Right. So 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.

18:47Tracy Alloway:Yeah, I mean, look, I don't know if I ever fully bought the theory, but, you know, 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. 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 have probably have data points going back thousands of years, have suddenly stopped. And I guess with sanctions, I mean, I do wonder to what extent that the oil crunch would lead to the weakening of essentially one of the U.S.'s biggest non-military weapons, right?

19:29Sanctions.

19:30Tracy Alloway:There was an interesting article in The Wall Street Journal that the North Korean economy is doing surprisingly well. They're actually building a lot of housing and there's 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 can really be used to like crush any enemy, all of it's being 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?

20:14So 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.

20:54Tracy Alloway: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 20th 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.

21:33This is The Big Take Asia from Bloomberg News. I'm Wan Ha. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at bloomberg.com slash podcast offer. If you liked the episode, make sure to subscribe and review The Big Tick Asia wherever you listen to podcasts. It really helps people find the show. Thanks for listening. See you next time.

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