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In a conversation with Eric Mandelblack, co-founder of Sorbon Capital, a ten billion dollar investment firm, the focus shifts to investments in industrial sectors amidst global decarbonization initiatives. The discussion explores the significance of energy and materials in the current market landscape, detailing the potential impacts of decarbonization on industrial economies. Mandelblack evaluates the dynamic opportunities present in this evolving scenario, highlighting the industrial economy's role in the investment process.
Railroads and commodity businesses present distinct investment considerations. While railroads, like CSX and Union Pacific, operate as oligopolies with stable returns and high capital efficiency, commodity industries exhibit varying barriers to entry and supply dynamics. The podcast delves into the contrasting nature of commodities such as copper, shale gas, aluminum, and fertilizers, emphasizing factors like demand growth, supply elasticity, and the impact of carbon taxes on businesses like Alcoa.
Alcoa's position in the aluminum industry is analyzed in light of evolving market dynamics and decarbonization trends. With China capping aluminum supply and global demand outpacing current production, Alcoa stands poised for growth. As aluminum prices rise and carbon taxes loom, Alcoa's carbon-efficient practices position them favorably, potentially leading to significant free cash flow generation. The podcast underscores the stock's potential, especially with forecasts of a higher aluminum price trajectory.
Investing in the commodity sector involves considering directional movements in prices and supply and demand dynamics. The podcast highlights the important factors like structural supply, demand growth driven by decarbonization, and the impact of carbon taxes on earnings in the sector. Understanding the uncertainty in commodity forecasting requires a larger margin of safety in investments and a focus on entry prices to manage risks effectively.
European reliance on renewable energy and the challenges faced highlight the complexities of transitioning away from fossil fuels. The episode discusses the consequences of high renewable penetration in Europe leading to power supply shortages and increased reliance on imports. The example of the European energy market showcases the need for careful planning and capital-intensive investment in decarbonization, emphasizing the longer-than-anticipated transition from traditional energy sources.
My guest today is Eric Mandelblatt, founder and CIO of Soroban Capital, a $10 billion investment firm. While many of my conversations focus on technology and emerging industries, Eric has deep roots investing in the industrial economy, which made this conversation a fun change of pace. We discuss why energy and materials represent such a small share of the market today, how the global push towards decarbonization could have massive impacts on the industrial economy moving forward, and how Eric evaluates this dynamic opportunity set. Please enjoy this deep-dive discussion with Eric Mandelblatt.
Editor’s note: This conversation was recorded on February 15, before last week's invasion of Ukraine.
For the full show notes, transcript, and links to mentioned content, check out the episode page here.
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Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes.
Past guests include Tobi Lutke, Kevin Systrom, Mike Krieger, John Collison, Kat Cole, Marc Andreessen, Matthew Ball, Bill Gurley, Anu Hariharan, Ben Thompson, and many more.
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Show Notes
[00:03:01] - [First question] - Soroban’s history and why Eric is qualified to discuss industrial and commodity sectors
[00:04:37] - Overview of what their portfolio looks like today
[00:05:49] - How much of the commodity exposed equity sectors are owned by hedge funds
[00:08:03] - The key history points that makes industrials more interesting today
[00:11:17] - Commodity cycles, what drives them, the role CAPEX plays and how this world works
[00:17:38] - Thoughts on natural demand and the societal push towards decarbonization
[00:22:32] - How deeply one needs to know commodities in order to hold them
[00:23:57] - Big categories to explore as decarbonization becomes more accessible to consumers and the lack of nuclear investing
[00:28:50] - The resurgence of industrial production in the US
[00:32:21] - Rail networks writ large and if we can expect new ones in the future
[00:36:17] - The market gap between rail and technology businesses
[00:41:38] - Commodities and the ways they differ from railroads
[00:43:47] - Comparing the differences between businesses within the commodity industry
[00:46:52] - Walkthrough of Alcoa’s business and how things like a carbon tax might affect an individual business
[00:52:55] - What is the portfolio manifestation of the fact it's impossible to forecast commodities historically
[00:56:08] - His view of the world in its current state and big things that matter
[01:00:25] - Thoughts on inflation as an investor in the commodity space
[01:01:42] - Utopian to dystopian takes on what growth looks like for the world
[01:04:28] - Juxtaposed positions in big tech against the industrial story
[01:08:45] - The kindest thing someone has ever done for him
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