3
MATERIALS SECTOR DRIVERS
Simply looking for the best stock is the most common investor mistake. That may sound counterintuitive, but it’s true. Unless you’ve got a firm grasp on a sector’s fundamental drivers and how they impact industries and ultimately individual firms, it’s a near hopeless task to choose the right stocks. High-level sector drivers often have equal, if not greater, influence on a stock’s performance than unique firm-specific fundamentals, so accurately identifying sector drivers is a must.
Every sector has unique drivers relative to the broader economy, and they’re not static—they constantly change. What’s vital in 2008 for Materials may not be exactly the same in 2010. Nevertheless, the factors described in this chapter were chosen because they are relatively timeless and serve as a good starting point for any Materials analysis, regardless of the investing environment.
We can’t cover every detail of every portion of the sector—that warrants an encyclopedia, not a book. Instead, the focus will be primarily on metals and chemicals, because (as Chapter 4 will cover in greater detail) they comprise the majority of the sector and carry the most relative weight.
Note: Understanding the drivers won’t give you direct instructions on how to invest. Investing environments shift too quickly for any definitive “rules” for all time. Rather, it’s about critical thinking. Understanding sector drivers is more like a road map providing the tools and resources to make your own analysis on a forward-looking basis. This chapter covers the most important drivers and provides the necessary tools to begin analyzing the sector.
KEY DRIVERS
Though the list below is by no means comprehensive, the most important Materials drivers include:
1. Economic growth
2. Commodity prices
3. Commodity production growth
4. Exploration and development costs
5. Production costs
6. Share buybacks and mergers and acquisitions (M&A) activity
7. Investor sentiment
8. Taxes, politics, and regulations
Let’s explore these drivers in a bit more detail.
Economic Growth
As mentioned in Chapter 1, economic growth is one of the dominant Materials demand drivers. For example, by looking at global GDP per capita and per capita expenditure on basic materials and (particularly) metals, we know there’s almost a direct correlation—higher economic output leads to increased basic material consumption. As the developing world continues industrializing and global GDP per capita increases, the demand for basic materials will increase dramatically.
Commodity Prices
Commodity prices are usually the most influential factor on Materials company earnings and stock market performance. Remember, a stock is nothing more than partial ownership in a business. As a stockholder and owner, the larger the earnings and the longer you can generate them into the future, the better. With a limited amount of resources in your mine, quarry, or on your land, and high fixed costs throughout the sector, prices typically impact earnings the most.
As covered in Chapter 1, basic material prices (like any market-based good) are determined by supply and demand. Long-term supply and demand, however, is tremendously difficult to predict and not helpful when making investment decisions. Therefore, it’s typically better to focus on the near-term supply and demand environment, typically 12 to 18 months in the future (as you should do for stock-specific decisions in general). At any given time, other factors can overwhelm price impact for a specific producer or region, but commodity prices generally are the most significant Materials driver.
Media Myths—A Weak Dollar and Global Materials Consumption
Because most basic materials are priced in US dollars, the media often argues a weak US dollar makes them cheaper outside the US, which in turn spurs additional consumption. That’s not really true.
The truth is a weak dollar may cause prices of globally consumed basic materials to rise from the US standpoint, but it doesn’ t necessarily change the quantity demanded or consumed. Underlying supply and demand can remain unchanged regardless of what currencies do. In other words, if all other currencies were to strengthen 100 percent against the US dollar and the underlying supply and demand of a basic material priced globally in US dollars did not change, the material’s price should increase 100 percent in US dollars and 0 percent in all other currencies. Such a move doesn’ t add to consumption, and the price movement is simply a difference in currencies.
Commodity Production Growth
Production growth is generally a good thing, but for upstream companies producing raw materials it can be a double-edged sword: more production means higher sales in the short term, but also increased depletion rates. After all, no mine is inexhaustible.
Production growth is also frequently firm-specific and may not apply across an entire industry or the sector as a whole. The rate at which resources are used up and/or replaced, however, is a key issue for individual firms and in determining industry supply.
Exploration and Development Costs
Costs associated with finding new materials sources for mining have an effect on long-term supply and production, but have limited impact on all the current production already in place. Why? Because it generally takes years and tremendous resources to discover a new mine and develop it to a point where it actually begins regularly producing a material like iron ore, gold, or copper. That means exploration and development is imperative for valuing a company over the long term, but it won’t affect prices much in the short term.
Production Costs
Earnings are basically sales minus costs. Therefore, production costs play a major role in determining any firm’s profitability.
In the short term, firms farther downstream in the production process focused on processing raw materials (such as steel or chemical producers) are more sensitive to input cost changes than upstream miners. Processors must constantly purchase their input, giving them more variable costs, whereas miners just purchase the land once, making those costs relatively fixed. The cost per pound of metal produced by a miner can fluctuate with a mine’s production volume, but that is generally firm-specific rather than an industry- or sector-wide force.
Share Buybacks and M&A Activity
This principle holds for any sector, not just Materials: As firms buy each other at a premium, it often causes similar firms’ valuations to rise in anticipation they too might get bought. The acquisition premium paid can also ripple throughout an industry as investors use it to gauge what industry insiders (who theoretically know the industry’s prospects better than anyone else) see as a fair valuation for similar firms. Thus, a sector undergoing a lot of consolidation will often see rising share prices.
Investor Sentiment
Investor sentiment can be a powerful but fickle force in any economic sector. It can cause huge stock price swings (think “bubble”) or modest price fluctuations. Therefore, being on the right side of sentiment swings can be crucial. No perfect sentiment indicator exists, but industry valuations and the media can provide some context. Recurring media stories can provide a window into investors’ moods and interests.
But don’t be fooled. Positive sentiment isn’t necessarily good, and negative sentiment isn’t automatically bad. If sentiment is negative, it can improve, which can be a positive driver and vice versa. Sentiment at its extremes can often indicate a sector’s fortunes are about to change dramatically. For example, extreme euphoria is usually a good sign there’s little upward buying pressure left, and stock prices may fall dramatically.
Taxes, Politics, and Regulations
Royalty taxes, import and export taxes, price caps, subsidies, permit approvals, and other forms of legislation can be significant drivers. Increasing taxes and regulations can seriously hurt profitability, while decreased taxes and deregulation can provide an earnings boost.
Taxes and regulations vary country by country and typically change quickly at the whim of politicians. We can’t cover them all in the space allowed by this book, and any list provided would soon be outdated. However, the next few chapters cover several examples demonstrating regulatory and legislative impact.
Regulations in China, the US, and Europe often have a magnified effect on the sector because of their large consumption of basic materials. For regionally priced goods, regulations in the pertinent region are also important.
Inflation’s Impact on Commodities
Higher inflation is often considered a demand driver for basic materials and metals. The theory is investors look for a stable and tangible store of value outside paper money in an inflationary environment. Non-perishable commodities fit the bill since they derive their value from their physical usefulness, regardless of the amount of money printed.
Outside of the precious metals, however, inflation is rarely a significant driver of end demand. In most basic materials, final purchasers taking delivery of the good are almost exclusively industrial users.
Ultimately, inflation is, always and everywhere, a monetary phenomenon and historically has to reach extreme levels (such as in the 1970s) to cause investors to seek protection by significantly shifting into raw material producers.
DRIVERS AT WORK
We’ve covered the sector’s main drivers, but they’re only a broad outline of what to look for. To better analyze any basic material industry and its components, we will drill down into some tangible fundamental questions that should be answered.
Is the Material Priced Globally or Regionally?
Knowing how a material is priced provides key insights into its drivers, potential supply constraints, and how to analyze it further. Generally speaking, producers of globally priced goods should be evaluated globally, and producers of regionally priced goods should be evaluated regionally. (As covered in Chapter 1, global versus regional pricing is determined by the economics of shipping the material.)
Global trends and competitors play a major role in industries with globally priced materials. Regional events have less impact on those industries, unless the regional events have far-reaching global consequences. This isn’t to say a regional event like a new tax law can’t affect a single producer, but its impact on the overall industry only extends as far as its ability to impact the global environment.
On the other hand, regional events obviously play a major role in industries where materials are priced regionally. And the more regional the pricing, the less affected the industry will be by global events. For example, it’s almost never economical to ship construction aggregate long distances. This causes distinct regional pricing differences and means construction aggregate should be evaluated purely on a regional basis. By comparison, steel is also priced regionally, but different grades can be economical to ship to certain markets and significant trade in steel does take place. Therefore global events can impact producers, and analysis shouldn’t be limited to regional factors alone.
What Is the Material Used For?
Understanding end use helps determine the specific demand drivers for any basic material. For example, you might think jewelry would be the primary determinant of platinum consumption. But no! Actually, catalytic converters used for filtering car exhaust account for over 55 percent of platinum use.1 So when investing in a platinum producer, you’ll want to pay attention to trends in global auto growth.
Who Are the Primary Consumers?
Who’s buying, and how much? For instance, knowing that China consumes about two times more iron ore and copper than the next closest country means you can logically focus on China as a primary driver for those metals. (China consumes a bit over 40 percent of all iron ore and close to 25 percent of all copper.)2
Where Is It Produced?
This question gets to the heart of geopolitical risks to supply. It’s vital to understand trade, working conditions, government intervention (and in some cases, nationalization), and other regional factors. For example, about 80 percent of all platinum production is in South Africa.3 Early in 2008 when Eskom (the state-owned utility responsible for providing 95 percent of South Africa’s electricity) cut power to most of the country and shut down the country’s mines, global platinum prices spiked as production dropped.4
Who Are the Largest Producers?
Knowing the largest players helps identify which companies to track as bellwethers for industry trends. If investing in specific firms, it also identifies competitors and allows for strategic attribute comparisons. This is important because it can determine relative future performance and uncover any potential production bottlenecks the other questions fail to identify.
What Are Production’s Primary Costs?
Understanding the primary cost of production helps identify any risk factors likely to shrink margins. This could include fuel, labor, or raw material costs—depending on the industry and region. When answering this question, it’s also important to look for structural competitive advantages some producers might have over others.
For example, two primary inputs for steel producers are iron ore and coking coal. In 2008, when annual iron ore costs increased over 65 percent and coal prices increased over 200 percent, producers who did not have their own source of raw materials saw margins shrink as they struggled to pass through the higher costs.5
Are There Significant Barriers to Entry?
The higher the barrier to entry, the harder it is for competition to enter the market—a huge competitive advantage for those already in the game. Identifying barriers to entry will also generally highlight the obstacles current producers face in expanding their own production over time.
For example, the iron ore industry has extremely large barriers to entry due to limited high-quality deposits and extremely high start-up costs. As a bulk good with a low value-to-weight ratio situated a long distance from its customers (due to the limited regional availability of deposits), start-up costs typically include not only a mine, but also a railroad and port for transporting ore to customers. These factors have led the industry to consolidate into a small group of large producers to maximize economies of scale, with the largest three controlling 75 percent of global iron ore trade (as measured by seaborne trade).
Scarcity Power
Economists often argue profits are simply a representation of scarcity power: the ability to provide something others can’ t at that price. If others can just as easily offer the same good at the same price, then competition is fierce, and prices and earnings typically drop until some form of scarcity power is re-gained. This is especially true in the Materials sector, where scarcity of a raw material is a crucial determinant of prices.
What Is the Expected Change in Supply and Demand?
As covered in Chapter 1, supply and demand forces determine prices. Given the importance of prices and production growth to this sector, understanding expected supply and demand forecasts is critical for any Materials industry. After all, much of a producer’s or industry’s stock market returns hinges on whether prices and production growth are above or below expectations.
To see why, recall that markets are generally efficient discounters of known information. You must know what others expect and compare your own analysis to it. If you and everyone else believe copper supply will remain flat while demand will go up 5 percent next year, it won’t help you much. It doesn’t mean you’ re necessarily wrong, but being right won’t win you anything since that information is already widely known and discounted into prices. But if everyone else expects demand to go up 5 percent, and believe that estimate is too high or low, you can make a market bet based on your different expectations. To understand the risk and potential benefit of your position, you must know what others expect.
Future supply and demand forecasts of most basic materials can easily be found through trade publications (some examples are listed in Appendix A). Given the long lead times for development of new mines or processing plants, major increases in supply can usually be anticipated and are rarely a surprise. The primary exception to this is when technology suddenly changes (as discussed in Chapter 1, relative to nickel supplies during 2007). By comparison, supply shortfalls from labor strikes, power outages, equipment failures, natural disasters, and a host of other potential bottlenecks regularly surprise investors and are very difficult to accurately predict. Changes in demand are often a result of economic growth or contraction in an industry’s end markets.
It’s crucial to understand the difference between demand and consumption. In principle, consumption can’t exceed production and the two should match, excepting leftover inventories. The question we’ re concerned with is at what price will this match occur? This is controlled by production (supply) and the desired consumption at a given price (demand). The price will adjust until the desired consumption matches the production.
Note: When forecasting prices, don’t worry about the exact price forecast—there’s almost no way to be that precise. More important than forecasting an exact price is understanding whether prices will be above or below consensus expectations.
Consensus future price expectations of globally priced exchange-traded materials can be found using futures curves. Technically futures curves are proxies for consensus expectations—you need to adjust slightly for costs such as storage, insurance, and financing. But for our general purposes, and throughout the rest of this book, we will treat them as guides to consensus expectations. Recall from Chapter 1 that futures curves show expected future prices over varying lengths of time. Ultimately understanding what is expected is vital to determining whether the reality will end up better or worse than expectations and the industry’s stocks will rise or fall.
Prices Are Determined at the Margin
Despite millions of barrels of oil or hundreds of thousands of pounds of copper being traded each day by thousands of people, the pricing of these goods is determined by only a handful of people. Not to worry, this isn’ t a vast conspiracy. It’s just good-old supply and demand hard at work.
In a free market controlled by supply and demand, changes in prices are determined on the margin. In other words, the value of a good is determined each day by the final two people who want it. One will end up with the good and the other will not. The value of the good is the point at which that final individual agrees to forego it.
For example, consider a situation where 10 people desperately want a good and exactly 10 units exist. Prices will be low since no one is forced to go without it. By adding an eleventh person, however, prices would suddenly skyrocket as they bid against each other until a price is reached where someone agrees to do without it. This has important consequences because it means that depending on the price elasticity of the good (how sensitive consumption is to changing prices), large fluctuations in production or desired consumption are not necessarily required for prices to move significantly.
CASE STUDY: COPPER
Let’s put these questions into practice by looking at just one material—copper. At nearly 30 percent, copper makes up the largest percentage of revenue of any metal within the mining industry—more than twice as much as the next material. (We’ ll further break down the mining industry by relevant metals in Chapter 4.)
Copper is the third most abundantly produced metal in the world behind iron ore and aluminum.6 Long before it was discovered to be a useful electrical conductor, it played a role in improving standards of living. In fact, the harnessing of its properties was so important, we named a whole time period around it: The Bronze Age.
Is Copper Priced Globally or Regionally?
Because copper is a commodity with a relatively high value-to-weight ratio (outlined in Chapter 1 in Table 1.1), it can be economically shipped and is therefore priced globally on commodity exchanges around the world. Because it is priced globally, it must be evaluated on a global basis.
What Is Copper Used For?
Copper has the highest electrical conductivity of any metal outside of the prohibitively expensive precious metals (silver’s actually the best electrical conductor), and about 75 percent of total copper usage is for copper wire.7It’s also heavily used in plumbing and pipes because of its corrosion-resistant properties. Due to the combination of wiring, pipes, roofing, and other aesthetic uses, building construction is copper’s largest single end market, consuming about 50 percent of all copper.8 (For a more detailed breakdown of copper usage, check the London Metal Exchange’s website at www.lme.co.uk/copper_industryusage.asp.)
Copper Trivia
• Archaeological evidence points to copper use as far back as 10,000 years ago. The discovery of alloying it with tin led to the Bronze Age, around 4,500 years ago.
• When Columbus sailed to America, his ships had copper skins below the water line to extend the hulls’ lives and protect against barnacles. Today, most vessels use a copper-based paint to protect the hull.
• In 2005, 34 percent of global copper consumption came from recycling. As with most metals, copper can be recycled with no effect on its properties or performance.
Sources: “Copper History,” International Copper Association (2007), International Copper Study Group, “The World Copper Factbook 2007”
Who Consumes Copper?
Today, the emerging markets make up slightly over 50 percent of total copper consumption, with China leading the way at over 20 percent. China was responsible for an estimated 60 percent of the demand growth from 1997 to 2007 and is the driving force behind the increase in global consumption.9 As shown in Figure 3.1, the US is a distant second in total consumption at 12 percent, followed by Germany and Japan. No other country consumes over 5 percent.
Emerging markets development and future increases in global GDP per capita mean copper consumption can also be expected to grow. Figure 3.2 shows the correlation in copper consumption per capita and GDP per capita by country. As a country increases in wealth and industrializes, it also increases its use of electricity or power. This requires vast amounts of electrical or copper wiring. So while the US currently uses more than twice as much copper per person as China, the gap is narrowing.
Figure 3.1 Global Copper Consumption by Country
Source: International Copper Study Group: The World Copper Fact Book 2007
Figure 3.2 Intensity of Copper Use by Country
Source: International Copper Study Group: The World Copper Fact Book 2007; International Monetary Fund; US Census Bureau.
In fact, if global consumption simply continues to grow at the same 3 percent annual rate we’ve seen since 1960, the world will need to produce over 700 million metric tons of copper over the 30-year period from 2008-2037.10 That’s more copper than has been mined to date!
A Penny for Your Thoughts
Though typically thought of as mostly copper, a US penny is only 2.5 percent copper and 97.5 percent zinc. The penny retains its bronze hue due to the fact it was once 100 percent copper and varied from 90 to 100 percent copper until 1982, when it was changed to its present formula. One notable exception was in 1943, when pennies were produced with zinc-plated steel to conserve copper for the war effort of World War II. Interestingly, the other silver-hued coins are primarily copper:
• A nickel is 75 percent copper and 25 percent nickel.
• A dime is 91.7 percent copper and 8.3 percent nickel.
• A quarter is 91.7 percent copper and 8.3 percent nickel.
Source: US Mint.
Figure 3.3 Global Copper Production by Country
Source: International Copper Study Group: The World Copper Fact Book 2007
Where Is Copper Produced?
An estimated 36 percent of all copper is produced in Chile, making it a closely watched country for copper analysts. As shown in Figure 3.3, the US is a very distant second while Chile’s neighbor Peru is third. With nearly 45 percent of global copper production dependent on one South American region, national labor strikes, earthquakes, power outages, legislation, and regulations can have a significant impact on copper supplies and prices.
Who Are the Largest Copper Producers?
The largest copper producers and their 2007 production totals are listed in Table 3.1. Codelco is the largest producer, but is privately owned by the Chilean government. Notice how prominently four of the top five diversified metals and mining companies place in the rankings (BHP, Rio Tinto, Xstrata, and Anglo American). Given the industry’s concentration (covered in greater detail in Chapter 4), you’ll find at least one if not all four of these companies (along with Brazilian heavyweight Vale) near the top of almost any metal (or coal) production list.
Table 3.1 2007 Top 10 Copper Producers
Source: Bloomberg Finance L.P.
| Producer | Production (Thousand Metric Tons) | |
|---|---|---|
| 1. | Codelco (state owned by Chile) | 1,665 |
| 2. | Freeport-McMoRan Copper & Gold | 1,583 |
| 3. | BHP Billiton Ltd. | 1,391 |
| 4. | Xstrata Plc | 931 |
| 5. | Rio Tinto | 738 |
| 6. | Anglo American Plc | 666 |
| 7. | Grupo Mexico SAB* | 592 |
| 8. | KGHM Polska Miedz SA | 441 |
| 9. | OAO GMK Norilsk Nickel | 423 |
| 10. | Kazakhmys Plc | 348 |
| *Southern Copper is majority owned by Grupo Mexico and excluded to avoid double counting. | ||
What Are the Primary Costs Associated With Copper Production?
Specific costs for all mining companies vary depending on the countries they’re located in, labor agreements, access to power supplies, royalty agreements, and so on. For example, a miner with operations in the developed world will likely have higher labor costs than a miner in emerging markets. Figure 3.4 breaks out the costs for Southern Copper, one of the largest and relatively pure copper producers (most major producers are diversified miners), with mines in Mexico and Peru. The cost breakdown shows miners are significant energy consumers with about 40 percent of the company’s total costs devoted to power and fuel.
Figure 3.4 2007 Southern Copper Cost Breakdown
Source: Southern Copper: May 2008, Overview & Highlights of Company Presentation.
Are There Any Significant Barriers to Entry in Copper?
Large barriers to entry exist in mining metals, including copper. They include government permits, high capital costs, instability of labor contracts, long construction lead times (often 5 to 10 years), backlogs to gain access to necessary equipment, and of course difficulty in simply finding new mines.
In the words of Richard Adkerson, the CEO of Freeport McMoran (the largest publicly traded copper producer in the world), on why he made the bold move in early 2007 to acquire larger rival Phelps Dodge, “We understood just how difficult it is in today’s world to produce copper from aging mines and also to find new supplies of copper.”11
Remember, barriers to entry not only deter new entrants from entering the market, but can also create many of the largest obstacles facing current producers—preventing them from significantly expanding production.
Normally, as prices rise, new mines that were uneconomical at the old price because of lower-grade ore (less metal per ton of rock) or a higher-cost structure are brought online to boost supply. This helps moderate prices over time. However, when extremely high barriers to entry exist, production may be slow to increase, allowing prices and earnings to rapidly accelerate.
This has recently been the case with copper—a large supply increase is unlikely through at least 2010. In response to a question posed in early 2008 about what might cause copper prices to decline, Mr. Adkerson responded, “It’s not going to occur as a result of supply side factors. The supply side situation in terms of current production levels and new projects coming on stream continue to be very supportive of the copper price.”12
What Is the Expected Change in the Supply and Demand of Copper?
As previously discussed, predicting consumption and demand (desired consumption at a given price) are two different things. Figure 3.5 shows differences in production and consumption since 1960, along with copper prices. Copper prices fluctuated widely despite nearly identical growth in mined copper production and refined consumption (the difference is largely inventories and recycled material). Prices are the best measure of the interaction of supply and demand in a free market system.
Predicting prices or both production (supply) and desired consumption (demand) is extremely difficult, and analysts regularly miss forecasts by wide margins (again why you shouldn’t focus on making specific forecasts. Remember: What matters is your general forecast relative to expectations). For example, most analysts consistently underestimated copper prices as the emerging markets began to industrialize and copper prices surged.
Future copper price expectations can be seen using a copper futures curve (which we analyzed in Figure 1.1). Recall the curve was declining, demonstrating investors at the time expected copper prices to decline in the future. During most of the surge in the Materials sector from 2003 through 2007, the futures curve was inverted as investors expected copper prices to decline from their highs.
Figure 3.5 Copper Production & Consumption with Copper Wire Prices
Source: International Copper Study Group: The World Copper Fact Book 2007; Global Financial Data.
Prices, however, remained high due to stronger-than-expected demand from the emerging markets and a host of supply disruptions. Because prices remained higher than expected, the stock prices of copper producers increased significantly as investors adjusted to the higher-than-expected earnings. If copper prices had fallen below expectations, copper producers’ stock prices would have likely declined as investors adjusted to lower-than-expected earnings.
You can find future prices through major exchanges such as the NYMEX or LME. The following link is for copper futures, but similar information exists for other metals as well: www.nymex.com/cop_fut_csf.aspx.
Copper Summary
You should now have a basic understanding of copper, its producers, and drivers:
• Copper is primarily used for electrical purposes (both in buildings and machines).
• It’s sensitive to economic growth, and its consumption increases with per capita GDP as societies industrialize.
• China is currently its primary demand driver; Chile is currently its primary supply driver.
• Fuel and energy are some of its largest production costs.
• Large barriers to entry exist for new competition.
This information can be used to craft your opinion about future copper prices and copper producers’ earnings, which can be compared to general price expectations using a futures curve. If you expect future copper prices and producers’ earnings to be above current expectations, stock prices can be expected to rise, and you may want to overweight copper producers within your portfolio (hold a greater weight than your benchmark).
As we’ ll discuss in greater detail in Chapter 7, no decision to overweight an industry or sector should be made in a vacuum. Instead, it should be made relative to your beliefs about other industries and sectors.
Chapter Recap
You should now be familiar with Materials basic drivers and equipped with a set of questions to help analyze any material in greater detail. Of course, no book can outline every possible driver and its relative importance at a given point in time, but with a little common sense and knowing the right questions to ask, you’re well on your way to making informed decisions about the sector.
• Economic growth is the primary demand driver for goods produced in the Materials sector, and material prices are generally the most important determinant of earnings across an industry.
• While earnings of raw material producers benefit from rising raw material prices, processors such as the steel and chemical industries depend primarily on the spread between raw material inputs and prices for final goods.
• The more uneconomical it is to ship a good, the more regionally it is priced, and the more regionally the industry should be evaluated.
• Supply and demand always determines prices in a free market. Differences in expectations and reality of future supply and demand will determine prices, drive earnings, and be a primary determinant in long-term stock performance.
• Outside of earnings, other factors such as M&A and sentiment can affect performance.
• Questions to ask when analyzing a material include:
• Is the material priced globally or regionally?
• What is the material used for?
• Who are the primary consumers?
• Where is it produced?
• Who are the largest producers?
• What are the primary costs associated with production?
• Are there any barriers to entry?
• What is the expected supply and demand growth?
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