Steel as we all know is a key component of an industrialized world. Where normal discourse revolves around China’s demand for a commodity and the impact such massive demand has on global commodity markets, I’m gonna bust a myth – For steel, China actually exports more than it imports. China creates over 40 percent of global output and as a net exporter has less impact on prices. Furthermore, the world’s largest steel producer ArcelorMittal (MT) is a multinational from Luxembourg, which means that higher fixed costs typical of products produced in developed countries can cut into potential profits and lower the commodity price.
Even though steel may not have the luster of say, copper (literally and price wise), there is still great opportunity by having or adding it to your portfolio. Pundits think that an upswing is nigh in the steel market. Even if that is the case, I know that not all companies within the industry are the same. Using HiddenLevers’ Macro Screener I see that two companies which I thought were winners, may not be. Take a look again at previously mentioned MT and Gerdau S.A. (GGB) - not only are they only moderately linked (in comparison with other steel plays) to the global price of the parent commodity, which can be a sign of unpredictability in an already unpredictable commodities market, but their stock prices are worse now than one year ago when the global economy was only barely reemerging from the financial crisis:
A better choice is one that at least keeps pace with Steel prices and at best, beats the trend. A company like Cliff’s Natural Resources (CLF) looks to be more of a winner— its movements in price are highly correlated to the price of steel and over the past year has bested the industry:
Without macro analytics, I would have made an obvious stock play, instead of a good stock play. Don’t let that be you.
Disclosure: No positions held