Stephen Bailey

A Scarce Resource update in three charts

Stephen Bailey

Iron Ore prices have moved sharply higher in 2019. Here I ask what this means for investors in the mining sector.


Iron Ore Price - Stephen Bailey Liontrust


Short-term iron ore prices have moved higher as a result of tragic events in Brazil, where facility shutdowns have taken around 70m tonnes of iron ore production offline. The high grade end of the market is likely to be squeezed the most, with volumes of iron ore pellets – popular with steel producers due to their more efficient, less polluting qualities – heavily affected.

While many believe that higher iron ore prices will be a short-term phenomenon, we are of the view that the longer-term supply/demand dynamics are favourable for the mining industry. The extent of the iron ore price reaction shows how tight the market is and disproves the bears who suggest resource supply is abundant.

Our Scarce Resource Macro Theme is built around the reassertion of capital discipline in the mining sector following the investment excesses of the commodity ‘super-cycle’. If one good thing came out the mining companies’ boom-and-bust experience during those years, it was an improved understanding of the price/volume relationship and how to manage it.

Global demand should remain strong, underpinned by solid economic growth (the IMF World Economic Outlook forecasts 3.5% growth in 2019) and robust long-term increases in steel production (Bernstein forecasts 2.4% compound annual growth through to 2030).

We are not alone in recognising the potential for favourable long-term dynamics; Paul Gait of Bernstein forecasts a worsening supply shortfall through to 2025. 

Iron Ore Supply-Demand Balance - Stephen Bailey Liontrust

The mining industry is now focused on value, not volume. Value-destructive deployment of capital is a thing of the past, a reality that we think many investors have yet to wake up to. This year is likely to see a further entrenchment of the industry’s capex moratorium, further boosting free cash flow and providing funds for additional cash returns to shareholders.

We recently described Rio Tinto as a cash return machine, having paid out a third of its market cap to shareholders over the last five years. The company’s CEO has gone on record stating that a US$10 increase in iron ore prices boosts free cash flow to the tune of US$2bn. Given the long-term outlook for iron ore prices, the prospects for further cash returns to mining shareholders look very positive.

In the Liontrust Macro Equity Income Fund we have almost 20% exposure to the Scarce Resource Macro Theme via mining stocks including Rio Tinto, BHP, Glencore and Anglo American.

Rio Tinto a ash-return machine - Stephen Bailey Liontrust

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Key Risks


Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in Funds managed by the Macro Thematic team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. The performance of the Liontrust GF Macro Equity Income Fund may differ from the performance of the Liontrust Macro Equity Income Fund and is likely to be lower than its corresponding Master Fund due to additional fees and expenses.




The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Thursday, February 7, 2019, 10:56 AM