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Quarter-End Insights

Our Outlook for Basic Materials Stocks

The prospect of Chinese fiscal stimulus has taken center stage for basic materials shares, but we doubt anything on the scale of the 2008-09 package is in the cards.

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  • Demand softness in China and Europe continues to take its toll on the sector, weighing on operating rates and selling prices for steelmaking materials, coal, and commodity chemicals.
  • Following a strategic pivot to less cyclical "specialty" chemicals and agriculture, diversified chemical producers are now better positioned to weather macroeconomic headwinds.
  • Lower yields and fewer nutrients drawn out of the soil have raised some concerns that farmers may apply less potash and phosphate next season.

As we write, basic materials stocks have been enjoying a strong conclusion to the third quarter. From Sept. 1-14, the median coal company we cover gained 24% (a figure bolstered by the industry's heavy indebtedness). Meanwhile, our median miner was up 18% and the median steel producer gained 15%. Domestic aggregates producers gained 23%. Performance was more muted in the less cyclical corners of the basic materials space, with packaging firms up 3% and paper producers gaining 9%. The S&P 500, for reference, was up 4%.

Daniel Rohr does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.