market folly

We're posting notes from the Sohn London investment conference 2016.  Next up is Robert Bishop of Impala Asset Management who pitched long Rio Tinto (LON: RIO).


Robert Bishop's Sohn London Conference Presentation

The macro backdrop is set fair for commodities:

-    Emerging market (EM) demand is improving. If you are going to invest in a mining company you need to believe that EM markets are getting economically stronger because they account for 65% of metals demand and 55% of oil demand. China is the key player and Bishop believes it hit bottom in January 2016.

-    The US and EU infrastructure replacement cycle is just starting. Trump will generate more ‘bang for your buck’ than any previous President.

-    More fiscal stimulus is coming worldwide


The micro background is also positive:

-    The 5 year downtrend in metal prices is over. The longest in 125 years.

-    Metals supply and demand is coming back into line. Copper and zinc already have a supply deficit. Small supply shocks will now lead to bottlenecks in the supply chain and push prices higher.


He believes we are at the start of a new commodity cycle. China will expand construction and infrastructure spending on roads, railways and other forms of transportation. Capital spending in the mining sector is at the bottom of the cycle.

Rio Tinto is the largest miner in the world. It is the large cap, high quality way to play the new commodity cycle. It is the low-cost producer. It lost its way in 2007-2013 with ill-timed acquisitions. Since then it has focused on cutting costs and improving efficiencies. It now has better operating leverage. Capital expenditure has been reigned in and the company is now in a harvesting phase.

Iron ore prices are the key to the Rio Tinto investment.  Prices need to keep going up. Demand has outstripped supply this year. There will be more demand for steel from India, China and the US. The demand for steel in the US and Europe will be driven by fiscal stimulus programmes that will be better for commodities than quantitative easing.

Be sure to check out the rest of the Sohn London conference presentations here.