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Quarter-End Insights

Our Outlook for Basic Materials Stocks

Basic materials have fallen down the rabbit hole.

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  • Despite recent price declines, even the most marginal copper miner continues to dig the stuff out of the ground at a fraction of the price for which it can be sold. By contrast, prices for peer base metals aluminum, lead, nickel, and zinc are now eating into their respective cost curves.
  • The fate of iron ore rests on steel demand where the real question centers on what will happen outside the United States--namely in Europe and China. We assume that China's iron ore demand growth rates will slow from recent years' heady levels.
  • Signs of life continue to build in the U.S. housing market. While homebuilding activity still remains a shadow of its precrisis self, the scale of the improvement has exceeded most expectations.  

Basic materials have fallen down the rabbit hole, and we are now in Wonderland. China can no longer be easily relied upon to fuel heady demand growth for commodities, while U.S. housing activity is picking up in earnest and U.S. petrochemical manufacturers are globally competitive, thanks to cheap natural gas. Companies that spent the last half decade touting their exposure to China downplayed their investments in the Middle Kingdom during first-quarter earnings calls.

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

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