Steel ETFs Facing Headwinds

July 14th at 2:00pm by Tom Lydon

Steel prices have taken some lumps as consumers cut back on big ticket buys and total manufacturing activity slows. But does that mean it’s time to stick a fork in steel-related exchange traded funds (ETFs)? Not so fast.

Steel prices tumbled in June as consumers cut back on buying cars and appliances. U.S. steel mills responded by cutting production. [What an Aluminum ETF May Mean for Prices.]

Robert Guy Matthews for The Wall Street Journal reports that we’re not alone. The rest of the world reduced steel production and consumption during the recession, while China’s voracious appetite for building bridges, autos and appliances, helped support global steel prices.

But without China’s helping hand, steel prices could tank. Here are some facts:

  • China has stepped back from exporting raw steel, in favor of higher-value finished goods. But a recent easing in demand by China’s domestic steel consumers has raised fears the country could step up steel exports to the U.S. and other markets. [Materials ETFs Riding in Gold's Wake.]
  • Kevin Grewal for The Street reports that the decline in steel prices is most evident in the fall of the Baltic Dry Index (BDI). The BDI is a measure of commodity shipping costs, of which iron-ore, used to create steel, creates the single biggest source of demand for dry-bulk shipping.
  • Karvy Global for The Street reports that analysts could be bullish on steel stocks for the remainder of 2010 because of demand concerns and the offsetting effect of bargaining opportunities. Factors that will be monitored include data provided by American Iron and Steel Institute (AISI) regarding capacity utilization and production at U.S. steel mills, second-quarter earnings of steel companies and economic data from the United States.

For more stories about steel, visit our steel category.

  • Market Vectors Steel ETF (NYSEArca: SLX)
  • SPDR S&P Metals & Mining (NYSEArca: XME)
  • iShares S&P Global Materials (NYSEArca: MXI)
  • Vanguard Materials (NYSEArca: VAW)

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.