Steel was one of the worst-performing commodities in 2011, however, the beaten down industry could be a solid investment going into the new year. Exchange traded funds can be a good choice since they offer a handful of steel focused companies, helping to alleviate single company risk.
“In 2011, the steel industry has been hit hard, amid increased uncertainty in the steel sector and amid global concerns about the health of the European economy and the magnitude of a slowdown in China. While these are very real problems, Morningstar equity analysts consider these to be shorter-term concerns and do not believe that fundamentals will deteriorate to the severe degree implied by steel firms’ market prices. And we believe that over the longer term, demand from emerging markets countries will keep steel prices high,” wrote Robert Goldsborough in a Morningstar analyst report. [ETF Chart of the Day: Steel]
The industrial metals sectors such as steel and iron ore companies could continue to experience price appreciation to the extent that China keeps growing. Eric Dutram at Zacks.com reports that steel prices hit 52 week highs early in 2011 of about $900 per metric ton. By the end of 2011, prices touched lows around $800 per metric ton. Despite a slow growth tone within the global economy, there are still reasons a steel investment can strengthen a portfolio.
A big factor that will a influence rise in steel prices in developed nations is that reinvestment in infrastructure programs will be likely. Infrastructure is aging and broken down in many areas of the United States, and a large demand for steel-heavy transit services is on the rise. [Steel ETFs Secure Solid Gains in October]
Meanwhile, emerging economies such as China and Brazil are developing cities and urbanizing. India is another large economy that actually saw growth in steel production every year from 2007-2010. The demand is likely to continue to grow even in tougher economic conditions, reports Dutram.
There are two ETFs that offer different plays on the steel industry, both globally and domestic:
- PowerShares Global Steel Portfolio (PSTL): This ETF holds 70 companies from around the globe; about 12% is allocated to the U.S., 37% in Asian companies, and 34% in European companies. Due to steel’s global trading nature, geographic issues matter less with this ETF, says Morningstar’s Goldsborough.
- Market Vectors Steel (SLX): A market-cap weighted fund that focused in on 26 U.S. domiciled companies. The fund is a good play for investors that are bullish on long-term growth hot spots such as Brazil and China. Goldsborough further states that SLX is a hedge against U.S. dollar exposure, while even U.S. domiciled steel companies benefit from a weak greenback.
Market Vectors Steel
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.