Basic Materials: Despite Outperformance, We See Strong Opportunities

The Morningstar US Basic Materials Index rose 3.9% quarter to date, far outperforming the broader market, which declined. However, we see opportunities, with nearly 60% of the stocks trading in 5- or 4-star territory and the sector as a whole trading below our fair value estimate. We see the most opportunities in agriculture, where over 83% of the stocks under our coverage trade in 5- or 4-star territory. We think the market fears that tariffs and potential global trade disruptions will reduce demand, weighing on profits for agriculture inputs producers.

The Basic Materials Index Declined During Q1 On Fears of Lower Demand

The Majority of Basic Materials Stocks Trade in 5-Star or 4-Star Territory

Lithium prices are at a multiyear low, as supply grew faster than demand in 2023 and 2024. However, demand is still growing from higher global electric vehicle sales and the buildout of utility-scale batteries used in energy storage systems. We forecast global EV sales will reach one in three new autos sold globally by 2030, up from 14% in 2024. In the near term, we forecast higher average prices in 2025 versus current levels of $9,500 per metric ton, as supply cuts will move the market closer to balance, sending prices higher by the end of the year. We expect a larger price increase in 2026 as the market returns to balance.

In flavors and fragrances, we see volume growth in 2025 as demand moves closer to normal. We also see little impact from tariffs, as many producers have global operations, somewhat insulating them from their effects. Higher volumes should allow producers to run their plants at more normal capacity utilization levels, driving profit growth.

We See Lithium Prices Rising in 2026 as the Market Returns to Balance

In February, potash spot prices rose for the fourth straight month, as rising demand and falling supply moved the market closer to balance. Prices are now near our long-term forecast of $325 per metric ton in 2025 real terms. We expect potash demand will hit record levels in 2025, as farmers apply more of the fertilizer to boost crop yields. Conversely, production cuts by major producers Belaruskali and Uralkali should keep the market tight, supporting higher prices in 2025. For low-cost potash producers, higher prices should boost profits.

Potash Prices Are Rising and Are Near Our Long-Term Forecast

Top Basic Materials Sector Picks

Albemarle

• Fair Value Estimate: $225.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

Albemarle ALB is our top pick to play strong lithium demand and rising prices from growing EV adoption. The stock trades at just 35% of our fair value estimate. Albemarle’s main business is lithium, which generated the majority of its profits in 2024. The company produces lithium from two of the lowest-cost resources globally, creating the cost advantage that underpins our narrow moat rating. Albemarle’s low-cost position should allow the company to withstand the lithium price downturn. We point to falling unit production costs and rising lithium prices as catalysts for shares in 2025.

Nutrien

• Fair Value Estimate: $70.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

Our top pick to invest in rising potash prices is Nutrien NTR. The stock trades more than 25% below our fair value estimate of $70 per shares. Nutrien is one of the lowest-cost potash producers globally, which underpins our narrow moat rating. While the firm also sells nitrogen and phosphate and runs a farm retail business, potash generates the largest portion of profits. After profits fell in 2023 and 2024 because of lower fertilizer prices, we forecast Nutrien will see profit growth in 2025 as potash prices rise.

International Flavors & Fragrances

• Fair Value Estimate: $120.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

International Flavors & Fragrances IFF is our top pick to invest in recovering ingredients demand. The stock trades at less than 70% of our $120 fair value estimate. The firm’s wide moat rating comes from its specialty flavors, fragrances, and enzyme and cultures ingredients, where the company is a market leader. These products generate strong pricing power.