Basic Materials have had a rough year on the whole. Continued struggles in the construction sector deriving from a weak home market and slowly recovering economy have helped keep down stocks there. A look at major ETFs for the sector can help to paint a clearer picture. The Materials Sector Select SPDR Fund (XLB), an ETF linked to the S&P Sector Select Material Index is down for the year by almost 13 percent. The SPDR S&P Metals and Mining ETF (XME) is off close to 30 percent on the year, while the SPDR S&P Homebuilders (XHB) has lost almost 3.75 percent. The Market Vectors® Gold Miners ETF (GDX), previously touted by Greenlight Capital’s David Einhorn, has lost over 17 percent in 2011.
Rare Earth Metals Dominated by China
While it’s long been the case that production of rare earth metals has been dominated by Chinese mining companies, 2011 helped to bring this issue into stark focus as the Chinese used their power to manipulate the market. China produces 95 percent of the world’s rare earth output despite holding on 30 percent of the world’s reserves, allowing the Central Government to manipulate prices by reducing its exports, like it did last year. This year, the Inner Mongolia Baotou Steel Rare-Earth (600111.SHA), the world’s largest rare earth miner, opted to suspend production for one month, causing prices to spike again. This prompted the United States to declare plans for a rare earth metals reserve and has led a number of mining interests outside China to start exploring for rare earth metals.
Caterpillar (CAT) Inches Forward
Caterpillar is one of the biggest companies in the sector, making construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company can often be seen as a bellwether for the sector despite qualifying as a member of the Industrials sector as it makes equipment that mining and construction companies need, and the market swoon in early August caught Caterpillar hard. However, improvements in the construction and mining industries this fall, while slight, appeared definite to Caterpillar as the company begin a Q4 rally that has seen its shares jump over 20 percent since the start of October. While the company is still down almost 4.5 percent on the year, the improvement for Caterpillar could mean a better 2012 for the sector as a whole.
Valhi, Inc. (VHI) is a holding company that operates in the chemicals, component products, and waste management segments through wholly and majority owned subsidiaries like NL Industries, Inc., Kronos Worldwide, Inc. (KRO), CompX International Inc. (CIX) and Waste Control Specialists LLC (WCS). While the rest of the sector was suffering through a tough year, Valhi has seen its share price explode beginning in April. Stock in Valhi is up over 160 percent on the year.
The lack of strong numbers for construction hurt a lot of companies, but few as much as United States Steel Corporation (X). The storied company that can trace its roots back to industrialists J.P. Morgan and Andrew Carnegie had a 2011 that it would rather soon forget. The combination of a lack of demand and increasing prices for materials led to a slump that cost U.S. Steel over half of its share value since January.