Steel ETF Could Bend, but not Break

The Market Vectors Steel ETF (NYSEArca: SLX) has been one of the more impressive comeback stories among industry exchange traded funds this year. Amid a savage rout for commodities and the related equities last year, SLX dropped more than 40%.

The lone dedicated steel ETF has reversed for the better in 2016 with a year-to-date gain of nearly 27% and there have been some important drivers of SLX’s rapid reversal.

Last month, China, a major steel producer and consumer, said it could lay off 1.8 million workers in the coal and steel industries, or about 15% of the workforce, in an attempt to diminish industrial overcapacity, Reuters reported. According to the National Bureau of Statistics, China employs about 12 million workers in coal and steel.

The Chinese economy has relied on heavy state investment in export-oriented manufacturing industries for decades. However, the government may have over-invested, which has led to the capacity glut in the heavy industrial sector and the ongoing declines in prices. China, which produces half the world’s steel, exported a record 112 million tons of steel in 2015, or the equivalent of North America’s output, and the emerging market has been accused of dumping on world markets, Reuters reported.

With the global economy slowing, China is finding a hard time selling its exports, and Beijing is now making an active effort to shift away from an export-oriented economy toward domestic consumption.