Written by David, March 24th, 2011
As recently devastated Japan ramps up building efforts along with emerging markets in Asia and Latin America, demand for steel will be on the rise. To let you profit from this emerging trend, I found the Market Vectors Steel ETF (SLX), an ETF aimed at letting you tap into this infrastructure boom.
The fund seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the NYSE Arca Steel Index. The index is a modified capitalization-weighted index that provides exposure to publicly traded companies primarily involved in activities that are related to steel production. Such activities include the operation of manufacturing mills, fabrication of steel products, or the extraction and reduction of iron ore.
SLX contains some of the biggest and brightest mining companies in the world. As of March 22, 2011, the fund’s top five holdings were Vale SA, 11.93%; Rio Tinto, 11.70%; ArcelorMittal, 9.14%; POSCO, 6.50%; and Cliffs Natural Resources Inc., 5.35%. As you’ll see in the two-year chart below of SLX, it has been on a roller-coaster ride but it now is heading upward. Indeed, in 2009, SLX rose 113.2%, and in 2010, it climbed 19.88%.
It is nearly impossible to find any kind of silver lining in the horrific disasters that Japan has faced this month. The combination of an earthquake, tsunami and nuclear meltdown has caused severe hardship to the people who live there. However, Japan remains the world’s third-largest economy and its citizens proved their resilience by rebuilding after World War II. Indeed, they transformed the country into an economic powerhouse.
Early estimates from Credit Suisse and Barclays to rebuild Japan’s infrastructure reach $180 billion, equaling about 3% of Japan’s GDP. However, in the days and weeks to come, many observers expect this number to rise as high as 5% of the country’s GDP. Of course, with a massive death toll, widespread power outages and still-unknown nuclear consequences, Japan has a very long road ahead of it to recover fully.
One thing that investors definitely can expect in the midst of this disaster is increased use of steel to rebuild the country’s infrastructure. And this rise in demand from Japan comes at the same time as other parts of the developing world are ramping up production of cars, bridges, machinery and factories. This big spike in demand will push up the price of steel, and that also should push up the price of steel-related ETFs such as SLX.
Written by David, January 15th, 2010
As we usher in a new year, the economy is projected to improve from the doldrums of 2009. One way to ride the expected economic turnaround this year is to invest in steel. Savvy investors can invest in steel by buying the Market Vectors Steel ETF (SLX). This exchange-traded fund (ETF) has been climbing since last spring and should gain further momentum from rising demand. An ETF also offers diversification by investing in a basket of companies in the steel industry, not just one that could melt down unexpectedly.
J.P. Morgan appears to be taking notice of steel’s improved outlook. The investment firm recently raised its price targets on three of the industry’s major companies, U.S. Steel (X), AK Steel (AKS) and Arcelor Mittal (MT). The report also mentioned that scrap prices have rebounded by roughly 25% since their mid-November lows and could rise by another 15% due to seasonal supply constraints, strong exports, and low inventory levels at the mills. This data is significant because the price of scrap metal is an economic indicator. When the price of scrap metal rises, the economy typically is on the upswing.
A big reason for the increased demand in steel is the voracious appetite for the metal that is coming from China. The Chinese economy has been growing quickly in recent years, while many other economies around the world have been languishing. China’s surging demand for steel is gaining widened attention.
“Already the world’s largest producer by far, the country is expected to rev up production by nearly 10%, The Wall Street Journal reported Jan. 11. “But the higher output likely won’t exceed demand, pushing prices higher world-wide for steel, its raw materials and even coal.”
Steelmakers that temporarily closed a number of mills and cut production as economic conditions sagged last year now are boosting production to address the increased demand. Resurgence in the steel industry is lifting the share prices of the public companies that produce steel.
Written by David, May 01st, 2009
The strength of steel is so renowned that it often is used metaphorically to describe unwavering soundness. At the same time, steel is a key input in the manufacturing of cars, buildings and household appliances.
As the economy starts to recover, the price of steel could climb along with demand from fast-developing countries like China and India. Indeed, a shift in market sentiment in favor of steel already may be occurring. A sharp rise in demand for the metal during the last month may be a signal that the time has arrived to consider investing in a steel exchange-traded fund (ETF). However, the decision is not an easy one. The investment case for steel is not nearly as sturdy as the metal itself.
Here’s a brief assessment of the current situation to help you make your choice. Commodities have been trending upward since last summer when the sector took a big hit. Of course, no sector escaped the sharp teeth of the ferocious bear market back then.
Downturns in the housing and automotive industries — both big users of steel — caused the demand for the metal to weaken almost overnight. Steel companies cut production drastically last year as prices slumped from their record highs of mid-2008. As a result, Market Vectors Steel ETF (SLX) dropped 67% last year.
However, the steel market may have finally bottomed out. A big reason is China’s increasing demand for steel. The country accounts for 35% of global steel demand and its government recently injected $585 billion in stimulus money into its domestic economy. As the world’s largest user of steel, China may help to lead the sector to a recovery. Indeed, China’s loan and infrastructure investments are rising 27% annually. Credit Suisse analysts took notice and recently boosted their investment rating on steel to “overweight.” China’s rising demand for the metal caused SLX to jump nearly 50% since the March 9 rally.
However, there still is reason why you may want nerves of steel to invest in this metal. Despite China’s strong demand for steel, many analysts fear that higher Chinese export subsidies may undercut global prices. In fact, outside of China, worldwide steel output is down 37% from last year.
If you ask me, there is much riding on the export and spending decisions of the Chinese government. When conventional market forces are circumvented by government policies, predicting which direction an investment will go becomes more difficult. Personally, I am holding back on investing in this sector right now.
If, however, you are convinced that Chinese demand for steel will drive both production and prices up, then a long position in SLX gives you a chance to profit. If you prefer to wait and see what China actually does, holding off on investing in SLX might give you a more restful night’s sleep.
