INVESTEC COMMODITY FUND
Fund manager Kobus Nell thinks the current dynamics in the iron ore market mean it will take a long time for the industry to recover. “Higher-cost producers are going to struggle because a handful of low-cost producers have been able to increase supply and drastically reduce their unit cost. BHP Billiton and Rio Tinto dominate with their collective 50% of global iron ore supply. Billiton, we understand, will produce at less than $18/tonne in financial 2016, and we are expecting Rio to be below this unit cost level.”
The two have vowed to continue increasing supply, despite falling prices, to win market share and entrench their long-term position. “Based on this view, we don’t own any Kumba or Assore,” says Nell. But it’s not just the competition that worries Nell about Kumba. “While the company used to enjoy good margins, it has fallen behind its peers on development and cost is now structurally higher. So our preferred play is Billiton.”
Six percent of the fund is invested in Glencore. “It’s the major with the highest exposure to copper, which we like, and it also has a massive exposure to thermal coal,” says Nell. He thinks coal is further down the restructuring path to supply-demand equilibrium than many other commodities.
“Besides the commodity mix, we also like Glencore because the management team has real ‘skin in the game’. We are also attracted to its trading business, which is the largest in various categories in the world and represents a third of its profits on a normalised basis,” says Nell.
Unlike the type of proprietary risk many people associate with trading, Nell describes Glencore’s capability in this respect as more an “agency” type of business. “Maybe 10% of its book is proprietary risk. The rest is logistical — collecting material from mines and delivering it to industrial clients. It finances a lot of these transactions too.”
The fund has a “respectable” weighting in platinum through Impala Platinum, Royal Bafokeng Platinum and Northam Platinum, and the physical palladium ETFs. “The industry looks very grim, and has been going through a tough time for a while now. But we are encouraged that the stock-to-use ratio is falling,” says Nell. The stock-to-use ratio refers to the inventory of refined platinum above ground divided by total annual demand. So as this ratio falls, the market moves closer to a fundamentally supported market.
“Palladium has been in a large deficit for a while — every year the stock levels are falling and demand is growing. Demand for platinum has also been growing. Historically, the stock-to-use ratio has been a very good predictor of where prices are moving. So we think the market is already turning,” says Nell.
Royal Bafokeng Platinum is one of the more unusual picks in relation to the fund’s peers. “We have been a holder since the listing, we like the quality of the asset, and we like the stability the company enjoys with its workers and the broader community,” says Nell. He has also been impressed with the management team.
The fund has chosen to get most of its exposure to gold through its offshore holdings. “We own Randgold Resources and Royal Gold, both of which are listed in London. In the US, we own a company called Fresnillo which was more recently introduced into the fund,” says Nell.
Another unusual pick has been Vedanta Resources. “It is a London-listed base metals and oil producer which presents an attractive valuation entry point, but not a tier one company,” says Nell.