Basic Materials: Metals and Mining Firms Substantially Overvalued
The basic materials sector is more overvalued than any other sector, trading well above fair value, on average.
Ongoing concerns about a trade war between the U.S. and China continue to affect valuations for industrial metals companies. We expect near-term U.S. steel prices and the U.S. Midwest aluminum premium to remain elevated, as they have been since a flurry of tariffs were enacted around the world earlier this year. However, we maintain a negative long-term outlook for both industries. Substantial global overcapacity will cause most industrial metals companies to generate ROICs below their cost of capital once the pricing environment weakens. Additionally, with the tariff program now in place, we contend that all near-term positive catalysts have been exhausted. Metal margins remain near multiyear highs, marking a period of unusually favorable market conditions that is unlikely to persist.
Andrew Lane does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.