Tuesday, September 20, 2011

Rio Tinto Confirms Strong Commodity Demand

Interesting statement from Rio Tinto (RIO) ahead of an investor seminar. In summary, RIO continues to see strong demand for commodities not only now, but over the next 10 to 20 years. On the other hand, supply constraints remain due to regulatory issues, labor shortages, and geology constraints.

Based on continued strong demand and supply issues, one would think the stock would be trading towards not only recent highs but also all times highs. That person would be very wrong. RIO is in fact down some 20% from February/April highs and not even close to the highs hit in 2008.

The stock market disconnect just doesn't add up. Sure some commodities like Copper have plunged in the last few weeks, but prices remain close to all time highs. Clearly still at prices that suggest very healthy profits. One could easily argue that stock prices never reflected the commodity prices hit in the Spring.

Even more precarious is the surging stock prices on some momentum stocks like Apple (AAPL) or Chipotle Mexican Grill (CMG). Naturally these stocks benefit from lower commodity input prices, but you can't really get higher demand for their products and ultimately lower prices unless supply increases. That clearly hasn't and isn't going to happen.

The only conclusion is that investors have just rotated sectors short term, but they shall return soon enough. Emerging market and global growth stocks have been smashed. Funds continue to flow from the sector, but reality doesn't suggest now is the time to sell. The inflation fear should be subsiding ironically from the falling commodity prices.

Brent Crude remains around $110. Copper is still above $3.70/lb. The panic selling is absurd. Freeport-McMoRan Copper (FCX), Alpha Natural Resources (ANR), and Carrizo Oil & Gas (CRZO) remain our favorites to invest in with stock prices down big while commodity prices remain high.


Details of RIO statement via Marketwatch:


  • Albanese, in a statement ahead of an investor seminar in London and New York, said the company's long-term view of demand growth is unchanged, with demand for copper, aluminum and iron expected to double over 15 to 20 years.
  • "Our order books are full and pricing is strong, but it is noticeable that markets are somewhat weaker than they were six months ago," he said.
  •  "Demand growth remains high as the development of provincial cities ramps up and the longer-term outlook for Chinese demand is positive," he said.
  • Echoing comments made by executives at other leading global mining companies, Albanese said the speed that industry can supply new metals and minerals to the market is being limited by permitting delays, labor and equipment shortages and challenging ore bodies. Project financing also is tight because of the current market jitters, he said.



Disclosure: Long AAPL, FCX, ANR, CRZO. Please review the disclaimer page for more details. 



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