The U.S. equity market continues its uptrend on the back of signs of recovery in the global economy. Now commodities are also showing a comeback after a steep fall earlier this year, and have caught investor attention in the past few weeks. This is especially true in the commodity producer segment like steel.
These producers usually act as leveraged plays on the underlying commodities. So when commodities are rising, these firms are truly the winners.
Behind the Surge in Steel
This corner of investing has seen some strength buoyed by the growing U.S. jobs market and rising consumer prices, encouraging trade data from China and cooling of recession in Euro zone. Meanwhile, a more sluggish dollar of late hasn’t hurt commodity, boosting demand for this product.
Apart from this, there are signs that China is working to cut capacity in its steel industry. The National Business Daily indicated that China could reduce capacity in the sector by 400 million metric tons. The reduction is expected to amount to about 40% of China’s steel capacity. A reduction in capacity could help pricing power among global steel producers (read: Focus on These China ETFs for Outperformance).
Given tightening supply and heavy steel re-stocking in China, steel price has rebounded from 3.5 years lows in recent weeks. The blast furnace outages in Ohio and Brazil as well as work stoppage in Ontario disrupted about 4% of the total U.S. steel supply in the past three months, leading to higher prices.
Further, a major component of steel – iron ore – climbed to its highest level in five months, on rising demand from China, thereby leading to higher steel prices. The iron ore is poised to benefit further this year as chances of the Fed tapering its bond buying program in September has increased. If iron ore price rises, the price of steel will definitely increase.
Steel ETF in Focus
For those buying into this optimism, investors should focus on the only pure play – Market Vectors Steel ETF (NYSEARCA:SLX) – which tracks the NYSE Arca Steel Index. The ETF has amassed $111.3 million in its asset base while trade in moderate volume of roughly 73,000 shares a day. The product charges 55 bps in fees and expenses from investors.