Our Outlook for Basic Materials Equities

As long as metals prices remain high and borrowing costs stay low, we're likely to see more marginal mining projects getting the green light and fewer projects ending up on the cutting room floor.

Elizabeth Collins, CFA 4 January, 2011 | 11:32AM

Industry-Level Insights: Chemicals
Most chemical players had a banner year in 2010, with revenue increases largely wiping out depressing 2009 figures. We attribute most of the growth to industrywide restocking, combined with a strong rebound in automobile production. However, we think 2011 will be less rosy than 2010. The OECD countries are experiencing fragile economic recoveries, and housing and construction markets will continue to be weak, in our view. We do not see a clear catalyst for both markets to rebound strongly in 2012, and we feel the story will continue to be managing cost structures in mature economies and taking advantage of emerging markets in 2011.

Additionally, the crude oil price has run up to almost $90 per barrel in the past quarter, and petrochemical players, particularly those relying on naphtha chains, will face disproportionately larger feedstock increases in the near term. We think that will put significant pressures on margins, unless companies are confident enough to push through price increases. We are also looking at ethylene capacity increases coming online in the Middle East in 2011-12, which may create an ethylene and propylene oversupply situation worldwide. We fear this low-cost production will encroach heavily on US petrochemical producers' margins.

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About Author

Elizabeth Collins, CFA  is an associate director of equity research with Morningstar.

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