The fortunes of the steel industry have long been tethered to the whims of global economic growth and demand. However, the industry, along with exchange traded funds that track steel producers, is beginning to show less reliance from the demand side as producers begin to better manage and adjust their production.
ETF analyst Robert Goldsborough at Morningstar points out that steel supply is playing a larger role in determining steel prices than it once did. Additionally, steel buyers and distributors are holding smaller inventories.
Consequently, short-term supply fluctuations are beginning to have a larger impact on market steel prices.
While global economic growth remains weak, Goldsborough does not believe the fundamentals will continue to deteriorate. Additionally, he notes that the negatives have been somewhat parred with lower iron ore and coal costs to help maintain comfortable margins within the overall steel industry.
"Longer term, we believe that captive raw materials and efficient operations are among the keys to solid profits in steel making, with vertical integration less important and input prices now displaying greater volatility than in the past," Goldsborough said in the Morningstar report. "We believe that investors still should remember the usual caveats about the volatility of steel prices relative to the volatility of other industrial subsectors."
"We believe that steel prices should remain reasonably high, given a lack of imminent new product capacity of iron ore," Goldsborough added. "And we believe that the global issues that the industry is facing right now are short term in nature-the market is completely discounting future infrastructure growth in emerging markets."
Steel-related ETF options include:
- The Market Vectors Steel ETF (SLX) tracks the 26 of the world's largest steel producers across the entire steel supply chain, including notable companies like Rio Tinto (RIO), Cliffs Natural Resources (CLF), Nucor (NUE) and U.S. Steel (X). It should be noted that BHP Billiton (BHP) is excluded from the holdings. The fund follows a market-cap methodology, which makes it top heavy with the top five companies accounting for 41% of the overall portfolio. SLX region allocations include North America 46.5%, Latin America 24% and Europe 12%. The ETF has an expense ratio of 0.55%.
- PowerShares Global Steel (PSTL) holds 70 steel companies. The overall exposure is similar to that of SLX, but PSTL is smaller and less liquid. Additionally, PSTL holdings include global listings. The ETF has an expense ratio of 0.75%.
- SPDR S&P Metals & Mining (XME) allocates 33% of its holdings to steel companies. The other two thirds are in metals, mining, coal and precious-metals producers. XME has an expense ratio of 0.35%.
For more information on the steel industry, visit our steel category.
Max Chen contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.