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Quarter-End Insights

Look Forward to More Buying Opportunities in Basic Materials

As second-quarter earnings season starts, we'll be on the lookout for more profit warnings and disappointments on a host of issues.

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  • It should take multiple growing seasons to return crop supplies to a more comfortable level, setting up agricultural-input companies for a nice run of robust profit generation.
  • The macroeconomic worries of the past several months have sent metal prices and producers' shares lower, and mining companies in our universe look more fairly valued than they have for some time.
  • The steel industry continues its slow recovery, but potential electricity-shortage-related production curtailments in China are one bright spot that could keep a lid on supply and ease raw-material pricing.

In contrast to what we reported in our last quarterly outlook, some of the shine has come off the basic materials sector as a whole in the past few months. China has ratcheted up bank-reserve ratios several times in an attempt to hold down inflation rates that are getting too high for comfort. This could hamper the country's heady fixed-asset investment. Supply-chain disruptions related to Japan's natural disaster have hit the manufacturing sector, in particular the automotive industry, an intense user of basic materials. Economists are worrying that commodities-fueled inflation will derail an economic recovery. This summer's end of the second round of quantitative easing could see any speculation-related air let out of commodities markets. And last but not least, the Greek debt crisis has come to a head recently, with Band-Aid solutions increasingly hard to come by and those only likely to delay a day of reckoning.

Elizabeth Collins has a position in the following securities mentioned above: VALE. Find out about Morningstar’s editorial policies.

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