Two Emerging Market Steel Plays: Mechel and Siderurgica

Steel has had a nice pullback here and offers me a chance to finally get back in. I've been monitoring the situation closely because its had a monster run and I keep having to take profits. Not to mention, every pullback could potentially be a breakdown. So, you've got to be on the look out for divergences and overall investor sentiment to the sector. All the steel names look pretty similar on the charts. Most are at or around their 50-day moving averages. So, at the very least, you've got a nice risk reward play set up for a trade or a solid 1st entry point for a longer term position.

Charts not withstanding, I actually like Mechel (MTL) as my favorite steel play. It has exposure to coking and steam coal, iron ore, nickel, steel and some coal through their mining unit. An added bonus is the fact that the company is based out of Russia (and Lithuania and Romania) so it gives you some solid international exposure. However, I'm not adding here yet because the stock hasn't made an assertive move and has been hovering around support. So, I love the company, but the price action is looking a bit weird at the moment, and I want to make sure its not breaking down.

While sorting through some other steel charts I saw Siderurgica (SID) and its chart is much more crisp and clean in terms of defined entry/exit points. So, I can get long now and then I already have a clean stop in place. If it breaks below, then it's probably undergoing a short-term technical breakdown and is most likely going lower. MTL's chart is a bit congested right now, while SID's is cut and dry. Obviously, I also like SID (that's why I was looking at the chart in the first place), so while I wait for MTL to sort itself out, I'll use SID for my steel play. SID is a Brazilian-based steel company so you can already see the direction I'm heading here: steel plays based in emerging markets.

At any rate, here's the chart of SID which offers you a nice play for a trade or investment, whichever suits your style. The green horizontal lines I've drawn in represent support/resistance lines. As you can see, SID bumped up against those resistance lines before eventually breaking through them. Then, after breaking out, the stock usually retraces and re-tests that line which is now future support & past resistance. Each time the stock has done this recently, it has served as a solid entry point in terms of risk/reward and clean stop. The trend in this stock is up and should it break below our stop, then we know its breaking down for the near-term. Its up to you as to how conservative/loose you want to be with your stop, but you will want to place it just below the highest horizontal green line I've drawn in (our support line) at around $44 or so.

click to enlarge

The rationale behind getting in these names plays out just as before. Global growth continues despite a U.S. slowdown. Global infrastructure is a booming industry, as evidenced by the billions of backlog numerous international infrastructure companies have built up. Additionally, these steel producers currently have some degree of pricing power and are using it to their advantage.

If you have witnessed the coal story explode onto the scene as of late, then you should also pay attention to steel. Because, after all, metallurgical coal is all about steel and the two stories are connected in that respect. I'm liking the steel producers in emerging markets simply because they are right smack dab in the middle of the growth, and they are supplying those emerging markets themselves (as well as the rest of the world).

Disclosure: I am long a little SID here to see how it holds up in this shoddy market, and will add more once it (hopefully) surges up away from the 50-day moving average. I am waiting a bit longer on MTL to see how it holds up here, as it might have possibly printed a double-top in its most recent run.

Comments

[leh:]

Good stuff! Thanks for the contribution.

2008 Jun 22 03:07 PM

[cmebot:]

SID has a 4.5% divd yield too right now

2008 Jun 22 05:43 PM

[schminkie:]

sid strength is not only in its location and its presence in the sweet spot of developing infrastructures etc internationally. the real point is that they mine their own ore, met coal [i believe] and even have dry bulk ships with the goal of buying more ships and they are now building their own port. think of the overhead costs they save. think of the middlemen they cut out [ie profit] and of the hassles involved. also think about controlling the port instead of dealing with 2 week waits at other ports for load and unload. they are fiscally conservative as far as debt. i have no idea why the stock is selling down but it all looks like buying opportunities to me, both trading and long term investment.

2008 Jun 22 06:35 PM

[R. Richard ...:]

MTL - "some coal?" If my research is on target, MTL is the largest coal cutter in the world.

MTL "charts" are still reflecting the split (3-1) and its after effects.

SID may be getting too vertical for it's managements background, but they will likely bring in some new people for parts of the operations.

Discl: Long (for quite some time) SID & MTL

2008 Jun 22 10:15 PM

[Marol:]

Umph! So where were you last week? I just sold my SID because it looked to me like it was continuing to go below the 50-day MA. I figure I could rebuy later (and may well want to), and in the meantime avoid losing all my gain. Actually, looking at your uncertainty, I guess I feel OK about the decision. I need $ for other stocks right now.

2008 Jun 22 11:15 PM

[Jake2:]

Nice job. No politics, no hyperbole. Much appreciated.

2008 Jun 24 02:14 AM

[edhaq$:]

Great job.I agree with Richard Schweitzer..the split stock /huge reserves etc.The synergies in MTL are phenomenal...coking coal/steam coal/coal/iron ore and downstream ..rail system contract..they also own a port for shipping I believe.But my judgement is really based on their management aggressiveness.I have not seen quite this degree of expansion in such a short timeframe..issuing of preferred stock etc and planned sale of part of the co on the frankfurt stock exchange together with all the other production based expansion.I like peaks and troughs to make extra money but MTL is for long term as well even in a global downturn.I will surmise that political support is present as Russia needs to try to regain its status as a world superpower and through capitalism this time around.

2008 Jun 24 03:12 PM