OK - definitely not a small cap post, but just jotting down some thoughts on my perennial watch on commodities. (Not Held)

Recently, GS upgraded their likelihood that the US will tip into recession from 15% to 25% (recall last year they were as high as 35% ) I listened to a recent podcast that set out their analysis for why they believe US employment and consumer spending are still likely to hold-up. Who knows - macro forecasting is a dark art.

So I am eyeing $RIO - my preferred long term copper play (due to the planned ramp up of OT in Mongolia, and my bullish LONG TERM copper view, given the electrification of everything. Aluminium also part of this thematic) and recognising the criticality of Iron Ore and China as the current, dominant earnings contribution.

So, I'm looking at the following charts and wondering how far $RIO is for a nice entry point for a medium term play. Some charts to illustrate:

What this chart doesn't show is the structural long-term pressure on the copper cost curve, due to falling grades of the marginal producers and the long lead time to develop new resources. 2025-2026 onwards, we're likely to be well north of $5/LB.

Of course, all the "talking heads" have been hyped up on copper over the last year, with few seeming to recognise the difference between short term pricing dynamics (dominated by refined copper stocks, which China can influence through market action, and near term macro-uncertainty) and the longer-term price dynamics, governed by the fundamentals of supply and demand. The 2024 "oversupply" doesn't seem to have played out yet, and it is curious that so many have been a "buy" on copper, because all the decent research from last year indicated that as 2023 moved into 2024 the market would move from tightness to oversupply.

Of course, if you believe that a recession is still likely, then the medium-term play has to become a longer-term play, because the $RIO SP could still have a long way to fall, and you'd need to hold it through to the eventual recovery.

So, if I believe a recession will be avoided, we're probably at a good entry point - subject to monitoring the short term copper balance and China. But if a recession is coming, then that would of course provide a better entry point.

Most of the time, I can't resolve this uncertainty, and just sit on my hands. Afterall, I don't have to own it or anything else in this sector.

But mulling it over.

Still wondering if Rio Tinto has learnt from the rock shelters being destroyed at Juukan Gorge

A rush for ‘green’ iron is on in Guinea. Will chimpanzees be a casualty?

Unlike Australia, Guinea has a poor track record on taking heritage into consideration. But there are lots of cooks involved in Simandou including the Chinese Chalco Iron Ore and the Guinea military junta.

With Simandou creating very little social benefit, environmental concerns and odd stakeholders, it is hard to have a holding in Rio Tinto.

Although progress is being made, I think somewhere down the line, the environmental and social aspects that are being ignored may come back to haunt those involved in Simandou.

Probably by then maybe then there is a case to invest in Rio Tinto.

Episode 134: Rio Tinto (Marnie Finlayson & Grant Donald)

The Global Lithium podcast

https://podcasts.apple.com/au/podcast/episode-134-rio-tinto-marnie-finlayson-grant-donald/id1483677267?i=1000556814337

Worth a listen if your interested in Li stocks, covers Rio's move into Lithium and the possible advantages a big player can bring to the sector.

It had me thinking about future M&A/consolidation with the smaller operators in the space. Also the importance of scale and experience, both in lithium but also the many and varied operational and management aspects of running a mining business.

Australian Mining Review - February (2022)

See story on the lower half of page 14 (bottom left when that link opens). FMG are also working on a similar project with Williams Advanced Engineering (WAE), who they've just agreed to acquire. Good to see these companies getting on with reducing greenhouse emissions and saving themselves a heap on their own future diesel bills.

Source: Australian Mining Review

Disclosure: I do not hold RIO shares, but I do hold FMG shares.

Rio is holding up well actually.  A lot of their share price movements will mirror movements in the iron ore spot price - as can be seen below - for the past couple of weeks (right side of each graph).  Rio's SP is on the left, the iron ore price is on the right.  When the market realises that the current high iron ore price is not sustainable - partly due to Brazil's Vale iron ore production recovering eventually - then we'll see lower price levels for RIO, FMG and BHP, in my opinion.  I am not invested in them at this point.

22-Feb-2021:  https://www.australianmining.com.au/news/shortage-in-global-iron-ore-supply-to-stay-rio-tinto/

Shortage in global iron ore supply to stay: Rio Tinto

by Nickolas Zakharia

Rio Tinto is anticipating another strong year for iron ore in 2021 due to sustained demand from steel producers.

According to Rio Tinto’s annual report for 2020, steel producers will ramp up their production off the back of global supply constraints, cementing demand for Rio Tinto’s iron ore.

Rio Tinto produced 333.4 million tonnes of iron ore products in 2020, compared with 326.7 million tonnes in 2019.

Shipments were also up from 37.4 million tonnes in 2019 to 330.6 million tonnes in 2020.

The company generated $US27.5 billion ($35 billion) in gross iron ore product sales in 2020, up from $24.1 billion in 2019.

Rio Tinto chief executive Jakob Stausholm said the company’s strong response to COVID-19 had steered it into a healthy position.

“I am exceptionally proud of the way we responded, as one, to the global COVID-19 pandemic: our goal was to keep our employees, contractors and communities safe and healthy while keeping our operations running and continuing to deliver the products our customers need,” he said.

Stausholm said that sustainability across its business was a “sharp focus” in the years ahead.

After last year’s Juukan Gorge disaster, Rio Tinto has committed itself to earn the trust of Traditional Owners.

The company is also planning to tackle climate change after setting scope three emissions reduction goals this year.

“We consider climate change the key challenge of our generation, and have pledged to address our own emissions, and those of our value chain,” Stausholm said.

“…We will work with customers on steel decarbonisation pathways and invest in technologies that could deliver at least a 30 per cent reduction in steelmaking carbon intensity from 2030.”

Rio Tinto operates 16 iron ore mines in Western Australia and employs 13,600 people across its Pilbara operations.

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I do not hold RIO, BHP or FMG shares.  I am wary of iron ore because I think the price will decline once Vale gets back to full production in Brazil.  However, if I was looking for iron ore exposure, I would either do it via FMG or MIN, not via RIO or BHP.  RIO's view of likely iron ore demand through CY2021 is interesting nonetheless.