Basic Materials: Sector Underperforms, but We See Opportunities in Chemicals and Agriculture

The Morningstar US Basic Materials Index underperformed the US Market Index during the third quarter. Yet we see opportunities across the sector, with over 45% 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 the chemicals sector, where most stocks under our coverage are trading in 5- or 4-star territory. Guidance below consensus estimates led to the sale of shares by multiple chemical producers during the quarter.

In the chemicals industry, weak demand is being driven by a tariff-related economic slowdown. Additionally, for commodity chemicals, there is a global oversupply due to overcapacity in China. In response, supply is being shut down in Europe and Asia, except in China, and growth projects in North America are being delayed. Production is below the trailing 10-year average. Lower production has an outsize effect on profits due to the high fixed-cost nature of chemical production. While we expect cyclically low profits in 2025, we expect a small increase in 2026, followed by further normalization in 2027 and beyond. This should result in a full recovery for producer profits.

In agriculture, crop chemical producers are expected to see higher second-half profits, driven by the end of inventory destocking. Destocking began in 2023 as the excess inventory built up during the covid-19 pandemic began to unwind. However, with inventory levels back to normal in the key growing markets of North America, South America, and Europe, we expect more normalized demand and a profit rebound in the fourth quarter.

Since hitting a multiyear low in the fourth quarter of 2024, potash prices have risen and are now close to our long-term forecast in the mid-$300 per metric ton range. For producers, rising prices should start to boost profits as there is typically a lag between rising spot prices and price realizations. We anticipate that higher potash prices will support increased profits in the second half of 2025 and 2026, as we expect prices to remain at current levels.

Top Basic Materials Sector Picks

Eastman Chemical

• Fair Value Estimate: $100.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

Eastman EMN is our top pick to invest in a medium-term rebound in chemicals demand. The stock trades around 35% below our $100 fair value estimate. Eastman’s narrow-moat rating comes from its specialty chemicals, which are protected by patents and command premium pricing. This should allow the company to perform better than its commodity chemicals peers during a downturn and see a quick recovery when demand returns. Eastman should continue to generate free cash flow above dividends even in the downturn and maintains a healthy balance sheet, which should support shares.

FMC

• Fair Value Estimate: $95.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

FMC FMC is our top pick to invest in stabilizing crop protection demand. The stock trades at less than 45% of our $95 fair value estimate. FMC’s narrow-moat rating comes from its patent-protected differentiated crop chemicals portfolio, which creates strong pricing power as farmers will pay up for premium products that protect against pests. As a crop chemicals pure-play, FMC was hit harder than its peers by inventory destocking and falling sales. However, with inventory levels back to normal, we point to strong growth in the second half of the year and further growth 2026 as a catalyst for shares.

Nutrien

• Fair Value Estimate: $70.16
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

Our top pick to invest in potash is Nutrien NTR. The stock trades around 20% below our $70 (CAD 97) fair value estimate. Nutrien is one of the lowest-cost potash producers globally, which underpins our narrow-moat rating. While Nutrien also sells nitrogen and phosphate and runs a farm retail business, potash generates the largest portion of profits. We forecast Nutrien will see profit growth in 2025 as potash prices rise, and its low-cost potash business will see higher long-term profits as prices remain at current levels.