Basic materials: Recent commodity rallies leave few opportunities

The market overestimates the sustainability of recent commodity rallies, leaving the basic materials sector severely overvalued.

Kristoffer Inton 4 July, 2016 | 5:00PM
Facebook Twitter LinkedIn

Optimism continues to reign in the basic materials sector for the year to date, but investors are overestimating the sustainability of recent commodity price rallies. The basic materials sector remains severely overvalued, with a market-cap weighted price/fair value estimate of 1.26 as of May 31. Nevertheless, the sector is not without opportunity, as U.S. housing still offers significant upside for investors.

Mergers and acquisitions have significantly picked up in seed and crop chemicals. But consolidation is unlikely to either generate significant benefit for the combined companies or destroy shareholder value.

Steelmakers have rallied sharply so far this year, but we maintain a negative outlook on the steel industry. Every U.S. steelmaker under our coverage is trading well above our estimate of fair value, and we urge investors to approach the space with caution. We argue that U.S. steel prices are at or near a cyclical peak and will likely decline materially by the end of 2016. In our view, the benefits of steel trade cases that are currently under investigation will prove less impactful than many investors expect. Additionally, market fundamentals remain highly unattractive amid weak demand and massive overcapacity in China. Looking forward, improved second-quarter earnings results that will be filed in late July might inspire hope that a recovery is in store. However, we anticipate that market conditions will deteriorate in the second half of the year and see more pain ahead.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free
Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Cameco Corp23.78 CAD-4.15Rating

About Author

Kristoffer Inton

Kristoffer Inton  Kristoffer Inton is an equity analyst for Morningstar, covering gold, coal and cement companies. Before joining Morningstar in 2013, he was an investment banking associate for Guggenheim Securities in New York. He holds a bachelor’s degree in finance with high honours from the University of Illinois.

© Copyright 2021 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Cookies