Is It Time to Buy the Steel ETF?

Aug. 5.09 | About: VanEck Vectors (SLX)

Nouriel Roubini has been "matter-of-fact" about an upcoming commodity correction. Yet continued weakness in the U.S. dollar is supporting commodity prices.

And then there's the China factor. The Chinese government's stimulus has gone directly to railways, highways, byways and bridges... all of which require steel. Lots and lots and lots of steel.

The problem for China? Estimates suggest that mainland mines are only capable of producing 1/2 the iron ore required for housing, transportation and other projects. It follows that the Chinese have to get the goods from iron ore producers like Cia Vale (NYSE:VALE) and Rio Tinto (RTP).

While investing directly in a Chinese steel producer may be one way to go, an investor can choose to diversify across a wide range of companies involved in the production of steel products or mining/processing of iron ore. The Market Vectors Steel Fund (NYSEARCA:SLX) tracks the NYSE Arca Steel Index -- an index comprised of companies related to steel production as well as iron ore extraction and reduction. Cia Vale and Rio Tinto alone make up 20% of the exchange-traded fund.

Steel etf 2009

It's clear that SLX, like many basic material funds, is experiencing a definitive uptrend. It crossed above its 200-day trendline in May, and has hardly looked back.

Yet before anyone gets irrationally exuberant about the possibilities, there's another side to the argument; that is, officials from the China Iron & Steel Association have consistently cautioned against an iron ore surplus from over-importing. The Association maintains that there are huge stockpiles at Chinese ports such that supply far exceeds true demand.

Indeed, China's major ports acquired 24 percent more iron ore in April 2009 than in April 2008. And the Ministry of Transport estimated stockpiles of 62 million tons sitting at ports.

It would seem that at least two scenarios could play themselves out. China could scale back on importing the commodity such that prices for the commodity and profits for foreign miners get tarnished. Conversely, China can continue to stockpile, build, and wait for demand to catch up to supply, keeping the global economy on a recovery course.

Yep.. it's China's decion-making that ultimately determines how the investment markets will fare. China isn't just an "emerger," but rather, the driving force behind a probable global recovery.