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Quarter-End Insights

Basic Materials: Valuations Propped Up by Shaky China Fundamentals

With China's credit growth slowing, we continue to expect mined commodity prices in general, and particularly iron ore, to fall materially and for share prices to follow.

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  • On a market capitalization-weighted basis, our basic materials coverage trades at a 37% premium to our estimate of intrinsic value, making it the most expensive sector we cover. 
  • Miners we cover are generally substantially overvalued and few trade in line with our fair value estimates, reflecting our expectation for a structural change in demand growth from China as its economy matures and transitions toward less commodity-intensive and more consumption-driven economic growth.
  • Gold is among the few mined commodities that isn't directly tied to the fortunes of Chinese fixed asset investment, but as the Federal Reserve continues to pursue rate increases, prices look primed to fall.
  • Two of the four big deals in the agriculture industry were consummated in the third quarter (ChemChina's acquisition of Syngenta and the Dow-Dupont merger), with the remaining two (Potash-Agrium and Bayer-Monsanto) likely to receive regulatory approval and close within the next 12 months.
  • Despite temporary hiccups, U.S. construction activity continues to build momentum; the long-term outlook remains bright for lumber and aggregates companies hitched to this wagon. 


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