This interview features Eric Mandelblatt, a fund manager overseeing $100 billion, who argues that industrial sectors like energy and materials are deeply undervalued and poised for a decade-long boom due to global decarbonization (cutting carbon emissions). He sees huge demand for 'green metals' like copper and aluminum from EVs and renewable energy. Key picks: US railroads CSX and Union Pacific, with profit margins higher than Microsoft's and poised to benefit from industrial revival and decarbonization; and aluminum maker Alcoa, which has low carbon emissions and could gain a massive cost advantage over Chinese rivals if carbon taxes (fees on polluters) are imposed.
Eric Mandelblatt, founder and CIO of Soroban Capital, an investment firm managing $10 billion in assets, delved into industrial economy investing on the Invest Like the Best podcast. The core thesis is that the energy and materials sectors currently account for only a tiny share of the market, but t
Eric Mandelblatt, founder and CIO of Soroban Capital, an investment firm managing $10 billion in assets, delved into industrial economy investing on the Invest Like the Best podcast. The core argument is that the energy and materials sectors currently account for only a tiny share of the market, but the global decarbonization wave will profoundly reshape the industrial economy—a shift the market has yet to price in adequately.
Eric Mandelblatt believes that the industrial economy sector (energy, materials, industrials) has been severely neglected by the investment community, creating a significant structural opportunity.
Mandelblatt notes that his managed fund, Soroban Capital, currently allocates 55% of its capital to the industrial economy. In contrast, among comparable large hedge funds (the top 30, with a combined $410 billion in assets under management), energy sector allocation stands at just 20 basis points (0.2%), and materials at 130 basis points (1.3%), totaling less than 2%. "Our peers have only about 10% of their positions in the industrial economy, while we have 55%."
This extreme divergence stems from market performance over the past decade: since Soroban's inception in November 2010, the Goldman Sachs Commodity Index (GSCI) has delivered a cumulative return of zero, while the Nasdaq 100 has compounded at an annualized rate of 20%. The combined weight of energy and materials in the S&P 500 has fallen from 17% to 5%, with the energy sector's weight plummeting by 80%.
Key Mechanism: Over the past decade, China has significantly expanded production in industries such as steel and aluminum, while the North American shale revolution has brought a massive supply increase. Meanwhile, global industrial output growth has remained relatively weak—supply surplus combined with sluggish demand has led to prolonged commodity price depression. Mandelblatt emphasizes: "This is not the instant supply-demand matching of the digital economy; the capital expenditure cycle in the physical world spans 10 to 15 years."
Mandelblatt argues that the biggest difference between the current commodity cycle and previous ones is a significant decline in supply elasticity, which will continue to push commodity prices higher over the next decade.
Traditional commodity cycles follow the pattern of "high prices curing high prices"—rising prices stimulate new capacity, which then enters the market and drives prices back down. However, in the current cycle, three major factors are suppressing the supply response:
1. Decarbonization and ESG Pressure: Governments, shareholders, and society are pressuring investment in fossil fuels, with banks reluctant to lend to exploration and development companies. "Shareholders say we don't want to invest in energy companies; we want to starve the supply side."
2. Carbon Tax Uncertainty: High-emission industries such as steel, aluminum, and fertilizers face unknown carbon tax rules. European carbon taxes have already exceeded $100 per ton, while the U.S. has yet to implement them. "Producers don't know how their products' carbon intensity will be taxed, so they dare not rush to expand capacity."
3. Capital Discipline: After a decade-long down cycle, companies and management are extremely cautious about long-term capital expenditure. Mandelblatt cites an example: "Less than two years ago, WTI crude oil fell to -$37 per barrel; today it is at $93. If you were a board member of ExxonMobil, which price would you use to decide on a project that takes 10 years to break even?"
Data Support: Global oil and gas capital expenditure has dropped from a peak of $500 billion per year to around $300 billion; capital expenditure in the metal mining sector has fallen sharply from $140 billion per year. Mandelblatt believes: "These supply challenges are not short-term fixes; they could be issues lasting more than a decade."
Mandelblatt argues that decarbonization will create massive structural demand growth, particularly for "green commodities" such as copper, nickel, and aluminum.
Take copper as an example: the global copper market is approximately 24 million tons per year. A single battery electric vehicle (BEV) consumes 5-6 times more copper than a conventional internal combustion engine vehicle (mainly from batteries and electrification systems). In 2021, global BEV sales were around 4-5 million units, with a penetration rate of about 5%. Under an aggressive decarbonization scenario, penetration is projected to reach over 30% by 2030 and 60-80% by 2040.
Quantitative projection: For electric vehicles alone, approximately 3 million tons of new copper demand will be added every decade. By 2040, 50-60 million tons of copper will be required annually to produce 60-70 million electric vehicles. When factoring in grid upgrades and charging infrastructure, the true decarbonization-driven demand for copper far exceeds this. "Electric vehicles alone could consume a quarter of the world's copper."
On the supply side: three of the world's top ten copper mines were discovered over 100 years ago, and only one new mine has entered the top ten since the start of this century (post-2000). The development cycle for new mines is 10-15 years, and new resources are predominantly located in high political-risk regions such as Africa, Peru, and Chile.
The situation for nickel is even more extreme: the demand growth from decarbonization is 2-3 times that of copper. Nickel is the best electrical conductor in batteries; the higher the nickel content, the longer the range of an electric vehicle. However, if nickel prices become too high, battery manufacturers may shift to alternatives such as lithium or phosphate.
Mandelblatt admits: "We are not experts in battery chemistry; we are better at making directional judgments on electrification. Copper may be the best choice."
Mandelblatt believes that Class I U.S. railroads (CSX, Union Pacific) are the biggest beneficiaries of the dual waves of industrial production and decarbonization, with business models comparable to top-tier tech companies.
The rail network is a classic oligopoly: two in the East (CSX, Norfolk Southern), two in the West (Union Pacific, BNSF), and two in Canada (Canadian Pacific, Canadian National). No new freight railroads have been built in the past 150 years; "these tracks were laid 150–175 years ago."
Key Data:
Growth Logic:
1. Industrial Output Recovery: U.S. industrial output has lagged GDP growth by 20 percentage points over the past decade, with a housing shortage of approximately 5 million units, driving demand for rail transport of cement, steel, and aluminum
2. Decarbonization Dividend: Rail consumes only one-quarter the fuel per ton-mile of trucks; companies will increasingly choose rail to reduce Scope 3 emissions
3. Service Improvement: A new generation of management (influenced by Hunter Harrison's operating philosophy) is improving service quality, potentially winning back customers lost to trucks
Risk Points: Mandelblatt acknowledges that bearish arguments for railroads include pessimism on industrial output, the potential for coal revenue (high single-digit percentage) to fall to zero, and historically poor service leading to customer attrition.
Mandelblatt uses Alcoa as an example to illustrate how decarbonization and carbon taxes can reshape the profit outlook for individual companies.
Alcoa produces over 2 million tons of aluminum annually, accounting for roughly 3% of global supply. Over the past 15 years, China has massively scaled up aluminum production using cheap coal-fired power, growing from nearly zero market share to 50% of global output, devastating the Western aluminum industry. However, the trend is reversing:
1. China caps production: China has imposed a cap on aluminum capacity (approximately 45 million tons) and will no longer build new smelters.
2. Strong demand: Aluminum is a key beneficiary of decarbonization, with annual demand growth of 4-5%.
3. Extremely low inventories: The global aluminum market is already in a deep structural deficit.
Valuation analysis: At an aluminum price of $3,200 per ton, Alcoa’s free cash flow per share is approximately $12-13. With the stock price at $70, this implies a 6x free cash flow multiple (17% yield) and zero net debt. Goldman Sachs forecasts aluminum prices will rise to $5,000 per ton by 2024, at which point Alcoa’s free cash flow per share could reach $27.
Carbon tax optionality: Chinese aluminum smelters emit an average of 16-17 tons of carbon per ton of aluminum, while Alcoa emits only 4.3 tons. With a carbon tax of $100 per ton, Alcoa would enjoy a cost advantage of $1,200 per ton over its Chinese competitors, translating to an additional $8 in earnings per share. "This sounds absurd, but after share price declines and buybacks, Alcoa’s earnings per share could exceed $30."
Mandelblatt argues that Europe’s energy crisis offers a critical warning for the global decarbonization process: the transition is far longer and more costly than anticipated.
Europe has already achieved over 20% renewable energy penetration (the global target is 25% within 30 years). However, in the winter of 2021, "the wind stopped blowing," leading to insufficient renewable power generation. At the same time, Germany was shutting down nuclear plants, causing natural gas prices to surge to $50 per million British thermal units (compared to just $4 in the U.S. during the same period).
Consequences: European aluminum smelters, nitrogen fertilizer plants, and zinc smelters were forced to halt production due to power shortages, further exacerbating global commodity shortages. Mandelblatt concludes: "Europe is the testing ground for decarbonization, and the results tell us that the time, effort, and capital required to move away from fossil fuels far exceed what the world expects."
Quantitative perspective: Institutions such as Goldman Sachs, Bank of America, and McKinsey estimate that achieving global net-zero emissions will require $100–150 trillion in capital expenditure, or $3–5 trillion annually. "I am not sure the world has enough natural resources—aluminum, copper, nickel—to complete the transition at the pace envisioned by the IEA and the United Nations."
Mandelblatt argues that the core logic of commodity investment in the current environment is: low valuation, zero leverage, high capital returns, and volatility actually benefits supply constraints.
Investment Framework:
Inflation Perspective: Commodities are among the few asset classes positively correlated with inflation. "If you are a steel mill, rising iron ore prices appear to be a cost pressure, but steel prices are highly correlated with input costs, so profits ultimately rise with inflation."
Geopolitics: Current geopolitical risks (the Russia-Ukraine conflict) are actually a tailwind for producers in developed markets — sanctions could cut off potash supplies from Russia/Belarus, benefiting North American producers like Mosaic.
Mandelblatt explains why the same team holds Microsoft, Amazon, and Alphabet (roughly one-third of the portfolio) alongside industrial economy assets.
| Position | Guest Stance | Key Data |
|---|---|---|
| Microsoft | Bullish (largest holding) | 2023 PE 22x, "the best software company" |
| Amazon | Bullish | Market-implied retail margin of 1%; guest expects mid-single digits in the medium term and 10% in the long term |
| Alphabet | Bullish | Core business PE of 16-17x after stripping out cash and loss-making operations |
| CSX Corp | Bullish | EBIT margin 40%+, expected to return 90% of market cap over 10 years |
| Union Pacific | Bullish | EBIT margin 40%+, expected to return 80% of market cap over 10 years |
| Alcoa | Bullish | FCF yield of 17% at aluminum price of $3,200; carbon tax option adds +$8 per share |
| Mosaic (Potash) | Bullish (geopolitical beneficiary) | Russia-Ukraine conflict may benefit North American producers |
| Nutrien (Fertilizer) | Bullish (geopolitical beneficiary) | Same as above |
| ExxonMobil | Neutral (discussed as industry representative) | Capital expenditure decisions constrained by long-term uncertainty |
| Chevron | Neutral (discussed as industry representative) | Same as above |
| Rio Tinto | Not explicitly stated (mentioned as industry background) | Does not build new aluminum smelters |
1. Mandelblatt argues that "the disappearance of supply elasticity" is the most fundamental change in the current commodity cycle — The combination of ESG pressures, carbon tax uncertainty, and capital discipline has rendered the traditional "high prices cure high prices" mechanism ineffective, with supply constraints potentially lasting over a decade.
2. "Europe is the canary in the coal mine for decarbonization" — Europe has achieved 20%+ renewable energy penetration, but the "wind stopped blowing" in the winter of 2021, causing natural gas prices to surge to 12 times those in the U.S., forcing aluminum, zinc, and fertilizer plants to shut down. Mandelblatt believes this proves the transition requires far more time and capital than expected.
3. "Copper is the best investment vehicle for decarbonization" — Electric vehicles use 5–6 times more copper than internal combustion engine vehicles. This alone adds 3 million tonnes of demand every decade (12%+ of current market), while three of the world's top ten copper mines were discovered over 100 years ago, and new mine development cycles take 10–15 years.
4. "U.S. railroads have higher EBIT margins than Microsoft" — CSX and Union Pacific currently have EBIT margins of 40%+, with potential to reach 50%, and free cash flow yields of 5%. Combined with buybacks and dividends, the annualized capital return is 6%. CSX is expected to return 90% of its current market cap over 10 years.
5. "Alcoa's carbon tax option value is completely ignored by the market" — Alcoa emits 4.3 tonnes of carbon per tonne of aluminum, while Chinese competitors emit 16–17 tonnes. At a carbon tax of $100/tonne, Alcoa's relative advantage reaches $1,200/tonne, equivalent to an additional $8 per share in earnings.
6. "In commodity investing, volatility is a friend, not an enemy" — Volatility scares away capital, exacerbates supply constraints, and benefits existing producers. Currently, all commodity companies have near-zero leverage, with no risk of being "washed out."
7. "Amazon Retail is the most misunderstood business in the portfolio" — The market implies a margin of only 1% (EBIT/GMV), but Mandelblatt believes it can reach mid-single digits in the medium term and 10% in the long term. Amazon's logistics capabilities have already surpassed UPS and FedEx and will "destroy Walmart and Target."
8. "Global decarbonization requires $100–150 trillion in capital expenditure" — That is $3–5 trillion annually, which is inherently inflationary because it does not increase productivity but replaces old capacity with new. Commodities are among the few assets positively correlated with inflation.