With previous experience in chemical engineering, Senior Equity Analyst, Mike Kijesky CFA is well equipped to evaluate the complex issues facing the basic materials companies. Mike puts his analytical skills to use identifying attractive investment opportunities for Adams Funds. In this interview, he discusses his current view on the rapidly changing dynamics in this sector.
Specifically, we’re looking in certain subsectors with growth potential such as agricultural.
This is one area where we've witnessed strong demand from a growing global population and an expanding middle class in emerging markets. As the population grows in these regions and people become more prosperous, we're seeing an adoption of a more protein-intensive diet. At the same time, land for food production is at a premium, so the companies that can provide farmers with inputs to increase the production of their fields have been and will continue to be rewarded. Fertilizer manufacturers, for instance, have been an area of focus for us and the Funds have benefited.
I'll provide an example. Nitrogen fertilizer has been the biggest beneficiary of the global need to increase yields for row crops. CF Industries, a portfolio holding, is well-positioned as a global nitrogen producer. They have the most extensive production and delivery system in North America and are the only pure play beneficiary of the arbitrage between higher-cost nitrogen fertilizer imports and low-cost domestic production. This is driven by cheap methane prices in the U.S. and Canada relative to the other major global producers/exporters.
The materials sector is marked by changing supply/demand dynamics. Commodity pricing is currently in the weaker part of the cycle. Following a few years of robust demand, the industry overbuilt just as growth in emerging markets has subsided -- most notably, the slowdown in China is having a considerable impact. Globally, slow worldwide economic growth and low capacity utilization continue to be headwinds for the sector.
While much of the sector relies on a healthy global manufacturing economy for its success, investment opportunities can be found. Specifically, we're looking in certain subsectors with growth potential such as agricultural. Additionally, companies that experience margin expansion from lower commodity costs, or have cost advantages compared with foreign producers, will continue to appeal to us as potential investments for our Funds.