Iron ore and steel producers have benefited from evidence that global economic activity has and will continue to pick up. Accordingly, a steel exchange traded fund gained 110% in 2009 and appears to be poised for another standout year.
A crucial development in the steel industry has occurred in the negotiation of pricing contracts between iron ore and steel producers. In the past, these contracts were made on an annual basis. But over the past few weeks, the ore mining heavyweights, Vale (NYSE:VALE) and BHP Billiton (NYSE:BHP), have successfully renegotiated many of these contracts to be renewed on a quarterly basis, reports Don Dion for The Street.
With pricing contracts being renewed on a quarterly basis, the iron ore producers will be able to keep prices more in line with demand. In the wake of the nascent global economic recovery, steel producers were reaping the benefits of low pricing contracts, which were around $60 per ton of ore last year. Now, according to David Lee Smith of the Motley Fool, the price has nearly doubled to over $100 per ton.
As contracts are negotiated to better reflect demand, steel producers will see their margins squeezed. Of course, some of that will be passed onto customers. ArcelorMittal (NYSE:MT), the world’s largest steelmaker, recently warned of a 20% hike in steel prices.
However, the drawbacks for steel producers shouldn’t worry investors in Market Vectors Steel Index Fund (NYSEARCA:SLX), since its top holdings are not steel producers, but iron ore producers Vale and Rio Tinto (RTP).
Further, SLX has more than 40% of its portfolio allocated to U.S. steel producers, which include United States Steel (NYSE:X), Gerdau (GNA), and ArcelorMittal. The United States, unlike other big steel producers in China, Japan, and the E.U., happens to be a net exporter of iron ore. Hence, the new pricing contracts will clearly help keep U.S. steel producers competitive and profitable as the global economy continues to heal. [Obama’s Jobs Plan Could Give Steel ETFs Strength.]
PowerShares Global Coal (NASDAQ:PKOL) has a smaller weighting in U.S. steel producers – 28.1%. China is 21%, Australia is 18.3% and Indonesia is 14.7%.
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Sumin Kim contributed to this article