The Basic Materials sector has had a turbulent 2018. A host of factors including U.S.-China trade war, concerns over lower demand from China and higher raw materials costs have hurt stocks in this space.
The broader Zacks Basic Materials sector has lost 20.3% year to date, significantly underperforming the Zacks S&P 500 composite’s declined of around 4.7%. A number of major industries in the basic materials space including steel, chemicals and mining had a challenging year, weighed down by several headwinds.
The steel industry is hamstrung by trade tensions between the United States and China and a slowdown in steel demand in China. Sluggish steel demand in China, the world’s top consumer, amid a cooling Chinese economy spells trouble for the steel industry. The trade war has taken a heavy toll on the Chinese economy. Signs of weakness in the country’s major steel end-use markets — construction and automotive — as reflected by a slowdown in real-estate investment growth and declining car sales have shrouded the steel demand outlook.
The steel industry also continues to reel under the effects of sustained oversupply of steel in the market, exacerbated by a surge in production in China to record highs in recent months. The ramping up of output in China amid sluggish domestic steel demand has raised industry-wide concerns that a glut of Chinese steel will exert pressure on global steel prices.
Moreover, the prospects of the chemical industry are marred by lingering trade tensions between the United States and China. The Trump administration imposed tariffs on $50 billion in Chinese goods earlier this year that led to China retaliating with tariffs on American products of equal value. The U.S. administration, in September, also slapped a 10% tariff on $200 billion worth of Chinese imports. In response, China hit back with tariffs on an additional $60 billion in American products.
Beijing’s list of U.S. goods hit with tariffs includes a wide range of chemicals. China is one of the biggest export markets for U.S. chemicals. The tariffs have created an uncertain demand environment for U.S. chemical products in this major market.
Trade tensions have clouded the overall demand outlook for chemicals. Softer demand from the automotive space of late is a concern for chemical makers. The U.S.-China trade friction has led to a slowdown in demand in China in this major chemical end-use market.
Companies in the chemical space are also hamstrung by feedstock cost pressure. These companies face headwinds in the form of a spike in costs of raw materials as a result of short supply partly due to production outages and plant shutdowns. China’s environmental crackdown has led to the tightening in supply of certain key raw materials as a result of plant closures.
For the mining space, gold and silver prices have dipped this year primarily owing to a stronger dollar and escalating trade tensions. Gold prices have lost around 6% so far this year and are now just above the psychological level of $1,200. Silver prices have tumbled roughly 16% year to date.
So far this year, the constant threat of an escalating trade conflict between the United States and China led investors to seek safe haven in dollar, in turn hurting gold prices. Upbeat U.S. economic data fueled the dollar rally. Higher U.S. interest rates also dented the appeal of gold.
Stocks That Survived the Slump
Despite the challenges, some companies have stood firm, indicating investors’ unswerving confidence. If bought now, these stocks are likely to outperform the rest and help build long-term wealth. We have taken help of the Zacks Stock Screener to zero in on stocks that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have gained so far this year defying all odds. We have shortlisted four such companies.
Verso Corporation (VRS - Free Report) makes printing papers used primarily in commercial printing, media and marketing applications. The Zacks Rank #1 company has an expected earnings growth rate of 570.7% for the current year. The stock has rallied 30% year to date.You can see the complete list of today’s Zacks #1 Rank stocks here.
The Mosaic Company (MOS - Free Report) is a leading crop nutrition company with a focus on potash and phosphate, two of three most vital nutrients. The Zacks Rank #2 company has an expected earnings growth rate of 75.2% for the current year. The stock has gained 15.3% year to date.
Cameco Corporation (CCJ - Free Report) is one of the world's largest uranium producers. The Zacks Rank #2 stock has an expected earnings growth rate of 66.7% for the current year. The stock is up 19.5% year to date.
Israel Chemicals Ltd. (ICL - Free Report) is a manufacturer of specialty fertilizers and specialty phosphates, flame retardants and water treatment solutions. The Zacks Rank #2 company has an expected earnings growth rate of 19.4% for the current year. The stock is up 31.2% year to date.
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