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This analysis delves into the Materials Sector, encompassing industries such as chemicals, metals and mining, construction materials, and paper production. It evaluates current economic conditions, including global demand shifts and M&A activities, along with notable transactions like BHP’s failed acquisition of Rio Tinto and strategic investments by Chinalco. Despite a downturn in economic performance, particularly in the Eurozone and Japan, the report highlights growth opportunities in the chemical sector. Recommendations suggest an underweight position due to concerns over economic recovery.
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Materials Sector Analysis Kyle Shaner Josh Carter
Agenda • Sector Analysis • Business Analysis • Economic Conditions • Financial Analysis • Valuation • Recommendation
Sector Analysis – Materials Sector • Companies that are involved in the discovery, development and processing of raw materials • Includes companies that are involved with mining and refining metals, chemical production and oil and gas infrastructure development
Sector Analysis – Industries • Chemicals • Producers of commodity, diversified, fertilizers, agricultural, and specialty chemicals • Producers of industrial gases • Construction Materials • Manufacturers of construction materials including sand, clay, gypsum, lime, aggregates, cement, concrete and bricks • Containers and Packaging • Manufacturers of metal, glass, plastic, paper and cardboard containers
Sector Analysis - Industries • Metals and Mining • Producers of aluminum and related products • Companies engaged in diversified metals and mining production or extraction of gold, precious metals, minerals and related products • Producers of iron, steel and related products • Paper & Forest Products • Manufacturers of timber, related wood products and all grades of paper. • Manufacturers of lumber for the building industry but excludes companies specializing in paper packaging
Sector Analysis - Major Companies (1) Price and market cap as of 2/13/2008
Sector Analysis - SIM Weights Current SIM Weight = 1.79% Current S&P Weight = 3.04% Underweight by 1.25%
Sector Analysis - Current Holdings • Posco ADR (PKX) • Manufactures and sells various steel products primarily in Korea (1) Price and market cap as of 2/13/2008
Business Analysis • Mature Sector • Cyclical • Growth through acquisition • International Exposure • Increased Environmental Regulation
Business Analysis – M&A Activity • Trend towards industry consolidation • Notable transactions • Failed BHP acquisition of Rio Tinto-$120 billion • Chinalco minority investment in Rio - $20 billion • Proposed DOW acquisition of Rohm & Haas - $15 billion • M&A activity trends • In 2007, M&A volume reached all time high of $4.7 trillion • Led by unprecedented financial sponsor activity - $870 billion • Materials represented ~$650 billion in announced deals • Q4 2008 M&A volume decreased dramatically – down 73% Data provided by Thompson Reuters
Business Analysis – M&A Activity Data provided by Thompson Reuters
Economic Analysis – Global Demand • Euro zone GDP fell 5.6% annualized in Q4 2008 • Japan fell 12.7% annualized
Economic Analysis - Stimulus Package • US passes $789 billion Economic Stimulus Package • ~65% spending and ~35% tax cuts • Obama administration has focus on infrastructure spending to spark economy • ~$62 billion in highway construction – spending may have 19 month lag time • In November, China announced $586 billion stimulus package • China faces growth issues as global trade declines • Exports down 17% in January 2009 • Package focuses on upgrading infrastructure, particularly railways, roads, and aiports
Recommendation • Sector will struggle until economy rebounds • Continue to underweight at 1.25% • Bright spot – Chemicals
