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Eric Mandelblatt

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2022-03-01
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2022-03-01
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  1. “Percent of that pie is fossil fuels today. That's coal, that's gas, and that's oil. Two percent of that pie is wind and solar. Now the remainder is largely hydro and nuclear. We're not really adding capacity in a big way today. So this notion that we're going to just all become greenies and start putting solar panels on our roofs and building offshore wind farms, that is going to happen to be clear. And we estimate that wind and solar penetration in order to hit the type of net zero targets that the IEA and the United Nations are talking about, wind and solar penetration needs to go from 2% today to roughly 25% over the next 30 years. So the penetration levels are going to go up dramatically. But wind and solar generation are incredibly capital intensive, putting solar panels on your house. It's like you're prepaying for power for 30 years and you're paying for all that day one and then you don't”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  2. “The world has determined that the two big methods for decarbonizing are wind and solar generation and electric vehicles. Now, there's other paths we can go down, but I'd say the big two today, the big two tools for decarbonizing the world are really change out the power generation mix and lean heavier on wind and solar. And then let's ramp electric vehicle penetration from the current 5%. On the wind and solar side, What I think investors are misunderstanding, misinterpreting is the ramp capacity in wind and solar and the starting point, the stat we like to use around here is the world is consuming 40 times more fossil fuels than they are consuming wind and solar generation. So if I take all the fuel sources in the world and I throw them into a pie, 82%.”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  3. “Think you're giving us way too much credit to be candid? It depends. In copper, I don't think we're finding a substitute for copper. Copper is the base of electrification in the world. Now, nickels a different story because the demand for nickel is coming largely from batteries. And what the ultimate composition of batteries and electric vehicles looks like, that's TBD. What we know is nickel's the best electricity conductor. In other words, the more nickel you have in your battery, the better the range is on your electric vehicle. So it should be the winner, but ultimately if the price of nickel goes up enough, we might be substituting other commodities like lithium, like phosphate into battery. So I don't want to lead you to believe we're the world's experts on battery composition. We're much more comfortable making the base bet around electrification. And I think copper is probably the best way to play that. But nickel is a really foundational electrical commodity as well.”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  4. “A very, very challenging and largely inelastic supply base. And that's meeting a demand growth that's 2% a year in the base case. I'm not sure that the supply is there to even do that. And now we're going to spike demand because of electrification on top of that. One other data point, Patrick, just using nickel as an example. The numbers are probably two to three x larger than they are in copper. The electrification demand, the spiking, the”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  5. “Ago. There's been only one of the 10 largest copper mines in the world that's been developed this century since 2020. So you have this situation where supply in the near term is highly inelastic. We're taking a demand equation globally for copper that typically is like two, maybe three percent a year. We're going to add probably a point, maybe two points on top of that due to decarbonization. So we're going to take a commodity that normally demand grew 2% a year. We're now going to ask demand to grow three to four percent a year because of electrification. And then we have a backdrop that we've been underinvesting in copper mines for the last 25 years. The resource base is getting more barren. The regions that we're going to develop new copper mines are largely Africa, Peru, and Chile, which have a lot of geopolitical unrest around them. Look at what's happening in Chile right now with their new leftist government.”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  6. “The car. So basically, we're going to have a situation roll it out to 2040 that we estimate about five to six million tons annually of copper are going to go into the development of 60, 70 million electric vehicles per year. Just to frame it, the global copper market today, I think, is about 24 million tons. So you're talking about a demand spike per decade that's probably somewhere in the low teens percent of current copper demand. Cumulatively over two decades, you're talking about a 20, maybe 25% spike in demand just coming from electric vehicles. Now we're doing a lot of other electrification. Battery stations, the whole grid needs to be rewired. So the real true electrification demand for copper is more than just cars. But cars alone could be consuming a quarter of the world's copper. And then the flip side is I mentioned this, three of the largest copper mines in the world were developed over 100 years.”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  7. “70, 80 percent in the 2040 type time period. So we're going to basically take electric vehicle penetration. The theoretical demand you're outlining, let's say the unconstrained demand. And I would argue it's probably even higher than this. But unconstrained demand means we're going from 5% penetration to 30% by the end of the decade to say 70 by the end of 2040. Now, what does that mean for copper? To go from five million cars, four or five million cars per year to roughly 30 and then ultimately 60 as just a general rule of thumb based on our estimates that demand for copper is going to grow just from electrification by about three million metric tons per decade. That's electric vehicle demand. And what that's driven by is the average electric vehicle consumes five to six times more copper than an ice vehicle. And that's largely to do with the battery and the electrification within.”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  8. “So, to me, the simplest way to package an answer back to you is electric vehicles and demand for copper. It's the tip of the sword example here. And frankly, there's almost more exciting examples of this. There's examples where the decarbonization demand could be substantially greater, nickel, cobalt would be examples. But let's stay in copper. Last year, the world sold between four and five million pure electric vehicles. And in a normalized year, we underproduced real end demand for automobiles last year. We only produced 78 million cars in the world. We probably should have produced 90. So in a normalized basis, electric vehicles had about 5% penetration in 2021. Now, most of the aggressive decarbonization forecasts have electric vehicle penetration reaching 30 plus percent by the end of this decade and ultimately plateauing at a number that 60%.”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  9. “Rate of supply growth, how aggressively do they want to attack supply. So the net of all of this is we're in an environment right now where the global economy is booming. We're hopeful China's coming back after a really weak 2021. We have a very favorable demand backdrop. We think for certain commodities, that demand backdrop is going to get exceptionally good because of this decarbonization trend. Think of the green commodities, the coppers and the nickels, the aluminums that are going to see demand spike because we're pushing decarbonization initiatives. But generally, it's a very favorable demand backdrop, and yet we're having major supply challenges here. And our view at Sorobon, each commodity is different, but we don't think these supply challenges are going to be rectified in the near term. We think these are potentially decade-plus supply challenges in front of us.”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  10. “So, I think there's an element of it there. I think part of it is just economics. We lived in a major downcycle for the last decade. Use oil as a great example. Less than two years ago, WTI oil was at negative $37 a barrel. Today we're at $93. So there's been $130 move in the oil price in less than two years. Now, let's pretend, Patrick, you and I are on the board of ExxonMobil or Chevron. We're debating, should we take to FID? Should we commission a project in the deep water Nigeria, Angola, Guyana? Well, we're not going to get our capital back on that project for probably 10 years. We're going to get no cash flow for five years. So what commodity price should we be budgeting? Should we budget negative 37 or should we be budgeting 93? So part of it is returns on capital were depressed. The commodities themselves are incredibly volatile. And that's creating angst in the shareholder base, in the management teams, and in the boards as they're determining what”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  11. “In energy that we're going to add new fossil fuel resources. So shareholders are saying we don't want to invest in energy companies. We want to starve the supply base. That is having real implications. Banks not lending against E&P companies. And therefore, the energy sector is probably the best example of this inelasticity is it's creating supply tightness where normally when the”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  12. “Bring new supply in. When that supply comes into the market, ultimately it creates an equilibrium and the price comes down. And what we're seeing this cycle is something that is very different, where not only are the big markets we're investing behind, aluminum, copper, nickel, oil as examples, in deep structural undersupply today, meaning inventories are drawn. There's already shortages emerging of these commodities. But we're also seeing a lack of a supply response. And why is that? I think there's a few factors that are playing into the inelasticity of supply. One, the most important one is, I think, the decarbonization and ESG backdrop, where governments, politicians, key stakeholders, including shareholders, and society at large is uncomfortable with the notion, particularly”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  13. “That were developed over the last 10 years. So that is a roughly 10 to 15 year investment cycle, meaning we're going to take this project to FID and it's going to take us a decade plus in order to bring supply online. So the punchline here is these tend to be relatively long lead time industries, again, depends upon your sub-industry. It's tough to be too generic. What's different this cycle versus previous cycles is what I would call the relative inelasticity of supply growth. This is a key investment theme for us here at Sorobon. There's a saying in commodity land. What that means is that in a traditional commodity cycle, when the price of the commodity goes up, you've created an economic incentive for producers to drill new wells, build new mines.”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  14. “We're not going to reprogram the software. It's a lot more complicated than that. Let's use numbers to kind of frame global oil and gas capex in the middle part of the last decade was running a half a trillion dollars a year. Global metals and mining capex was running $140 billion a year. So these are big capital intensive businesses. Frankly, it's why investors don't like them. They're cyclical and they're capital intensive. But it depends upon the industry. All industries within commodities are not the same. But these tend to be pretty long lead time, long capital cycle commodities. Again, US shale would be an exception to that, but I'll use copper as an example. First of all, three of the largest 10 copper mines in the world today were discovered over 100 years ago. And we estimate that from start to completion, if you and I, Patrick, wanted to go build a copper mine in the Andes Mountains today, we estimate based on the mine”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  15. “Basis inception to date over almost 11 and a half years, the Goldman Sachs commodity index is flat in 11 and a half years. During that time period, the NASDAQ 100 index is compounded 20% a year. So we have this massive dichotomy that's built up, where on one hand tech levered industries, growth levered industries have been fabulous performers in the market and largely driven by earnings and revenue growth. And then on the other hand, the commodity world's been flattened like a pancake because of excess supply that built up and a relatively weak demand backdrop. And the intersection of those two has led to really depressed commodity prices today.”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  16. “Thing for the United States was massively deflationary for the energy patch. So you had a lot of capacity added in China 10 plus years ago. The metals and mining companies, the energy companies were adding significant new capacity through CapEx in the first half of the last decade. And basically we entered a period of relatively slow industrial production growth in the last decade. So all this supply was added. US shale is the best example of that. All this supply was added in a backdrop where demand was a lot softer in industrial production levered industries relative to the prior decade. And the intersection of lots of supply and a weak demand backdrop has meant commodity prices have been substantially depressed, particularly in the last five years. And I think maybe one way to frame it for you is we launched our firm November 1st, 2010 at Sorabon.”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  17. “Me just frame energy and materials, which is the two biggest buckets in addition to industrials within the industrial economy, energy and materials when we launched our firm were 17% wake in the S&P 500. Today they're five. The energy sector weight is down 80% in the last decade, just as a framing comment. So what happened? Why has there been this massive derating? One obvious point tech growth have massively outperformed. They've grown as a percentage of the index. And then the inverse energy and materials have massively underperformed. In a decade-long, particularly the last five plus years, decade-long downcycle in commodities that was driven by excess capacity that built up in China in industries like steel and aluminum. It was, and we can talk more about it, partly driven by the shale boom in North America, which while an amazing”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  18. “2% of their portfolio allocated to materials and energy Sorobon, on the other hand, today has 30% Of its portfolio invested in energy and materials. And then we have this big wedge.”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  19. “Firm is at peak industrial economy exposure. We've been at it for 12 years. We have 55% of the firm's capital invested in the industrial economy. When I was thinking about our thematic positioning back in 4Q, I just ran a screen and I pulled the 30 largest hedge funds that do what we do, classic long short concentrated hedge funds. Those 30 funds had 410 billion dollars of invested capital as of the end of the third quarter. I don't have the updated numbers yet. Of the $410 billion of invested capital less than $1 billion was invested in the energy sector, 20 basis points, 130 basis points was invested in the materials industry, although I would argue that was misleading because they were largely specialty chemical businesses that are really not commodity exposed, really cyclical businesses. So our peers had less than”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  20. “Framing comment. We love to own good structural compounding monopoly oligopoly businesses at good prices, just like everybody else. Our portfolio is actually quite simple today. Over 80% of the firm's risk is in three sectors. One, big tech, our biggest position by a mile is Microsoft. It's been our biggest position for the last few years, but our big tech positions are about a third of capital. That's Microsoft, Amazon, and Alphabet. We have 25% of the firm's capital in two of the leading Class 1 railroads in the United States, CSX Corp and Union Pacific. And then we have about 30% of the firms' capital today in commodity levered equities in a variety of sub-industries, metals and mining, energy, chemicals being the big ones. So you kind of take a third plus 25 plus 30, and you have the vast majority of our portfolio exposure today.”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  21. “To the firm originally were really on the commodities and industrial side, which is just my background given where I started my career at Goldman.”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source

  22. “Sure. Well, first of all, I appreciate you having me on the podcast, honored to be here, Patrick. Maybe let me take you one step back further, which is where I started my career. I was hired in 1998 at Goldman Sachs as a natural gas analyst. Ironically, the biggest company we covered at the time was Enron. We covered natural gas pipelines, utilities. I learned about the commodity business at Goldman in 1998 to 2002, ultimately transferred into one of the proprietary investing groups at Goldman and then left to help start a hedge fund by the name of TPG Axon Capital in 2005 and then landed at Soromon and launched the firm in 2010. I tell a funny story. When we launched our firm, folks thought of our firm as being an energy-focused hedge fund. And we had to kind of wave our hands in the air and say, no, no, no, we're investing in consumer. We're investing in tech. We're investing in business services industries as well. But the core.”

    2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source