China Weighs Heavily on Basic Materials

The faltering Chinese real estate market is weighing on globally fungible commodities like iron ore, while improving developed-country construction markets aid regionally priced commodities like cement.

Daniel Rohr, CFA

Jun 27, 2014

Mentioned: Alumina Ltd (AWC) , Newcrest Mining Ltd (NCM) , Rio Tinto Ltd (RIO) , Rio Tinto PLC (RIO) , Lafarge SA (LG) , Nucor Corp (NUE) , Rio Tinto PLC (RIO) , Cemex SAB de CV (CX)

While the sector is far from deeply undervalued at a median price/fair value of 0.99, we see slightly more value in materials than in the market as a whole (median price/fair value of 1.06).
China's real estate market continued to sag in the second quarter, weighing heavily on many metals prices. We expect this pressure to persist.
In developed markets, construction activity remains well below prior high-water marks. But signs of life are emerging, manifesting in improved pricing for materials companies.
North American natural gas has been cheap for several years now, but the impact of low prices has yet to fully manifest in many industries. That's beginning to change as many of our companies are in the midst of growth projects aimed at leveraging this cheap energy source.

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