Basic Materials: Sector Underperforms, but We See Opportunities in 2025

The Morningstar US Basic Materials Index vastly underperformed the market by nearly 28 percentage points in the fourth quarter of 2024. In agriculture and chemicals, we attribute the underperformance to demand—which improved but was still below normal in the quarter—weighing on profits. However, we see opportunities across the sector, with 50% of the stocks trading in 5- or 4-star territory. We see the most opportunities in agriculture, where over 85% of the stocks under our coverage a.

The Basic Materials Index Underperformed in Q4 as Demand Recovered

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

Lithium prices are at a multiyear low, as supply grew faster than demand in 2023 and 2024. However, demand continues to increase from higher global electric vehicle sales and the buildout of utility-scale batteries used in energy storage systems. In the near term, we forecast higher average prices in 2025 versus current levels of $10,500 per metric ton, as supply cuts will move the market closer to balance, sending prices higher, particularly in the second half of the year. Over the medium term, we expect prices taverage $20,000 per metric ton, which reflects the marginal cost of production.

Lithium Prices Are Currently Low, but We See Higher Average Prices in 2025

In agriculture, many companies generated lower profits in 2024 largely due to lower crop prices. This can lead farmers to cut expenses like fertilizers, generic crop chemicals, and new equipment. However, seeds are usually more insulated from this volatility, as farmers tend to pay for premium seeds to boost crop yields even when prices are low. We expect North American seed sales will grow at a low-to-mid-single-digit rate in 2024 as new seeds see increased adoption. This should generate revenue and profit growth for premium seed producers.

Commodity chemicals producers are subject to high operating leverage as a small volume decrease leads to lower capacity utilization, weighing on profits. This was the case in 2024, as lower volumes and reduced capacity utilization were the key drivers of producer profit declines. However, as demand improved in the second half, so did capacity utilization. We forecast demand will continue to recover in 2025, leading to higher volumes and improved utilization rates. This should support a profit recovery for producers.

Chemicals Capacity Utilization Fell in 2024, but We Expect a Recovery in 2025

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 for strong lithium demand and rising prices from growing EV adoption. The stock trades at less than 50% of our $225 fair value estimate. Albemarle’s main business is lithium, which generated roughly 90% of profits in 2023. 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 and solid balance sheet should allow the company to withstand the lithium price downturn. We point to rising lithium prices as a catalyst for shares in 2025.

Corteva

• Fair Value Estimate: $70.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Corteva CTVA is our top pick for investing in seeds. The stock trades at around 15% below our fair value estimate. The company’s two businesses are seeds and crop protection, with seeds generating most of its revenue and profits. Corteva is one of the largest premium seed producers globally. Our wide moat rating comes from intangible assets, as the firm’s premium and differentiated seed and crop protection products command pricing power due to their ability to help farmers increase crop yields and better control weeds, insects, and fungi that demand crops. We point to growing seed profits and a recovery in crop protection as a catalyst for shares in 2025.

Dow

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

Dow DOW is our top pick for investing in chemical demand recovery and higher capacity utilization rates. The stock trades at more than 40% below our fair value estimate. Its narrow moat rating comes from its cost-advantaged production. This comes from 75% of Dow’s production capacity being in North America, benefitting from low-cost natural gas feedstock. We point to volume recovery in 2025 and improved capacity utilization as a catalyst for shares.