Basic Materials: Overpriced, With Significant Downside Ahead for Commodities
Few basic materials stocks currently offer risk-adjusted return potential amid our negative outlook for commodity prices.
The Trump administration's imposition of steel and aluminum tariffs made waves early in 2018, driving share prices for steel and aluminum producers sharply higher. Although we've increased our forecasts for near-term U.S. steel prices and the U.S. Midwest aluminum premium, we maintain a negative long-term outlook for both industries. We expect substantial global overcapacity will cause most industrial metals companies to fall short of earning their cost of capital over the decade to come. Additionally, with the tariff program now in place, we contend that all near-term positive catalysts have now been exhausted and we see asymmetrical downside risk due to our outlook that both steel and aluminum prices will decline materially in the years to come.
Andrew Lane does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.