The VanEck Vectors Steel ETF (NYSEArca: SLX) has been a surprise (and impressive) performer among industry exchange traded funds this year, surging more than 45% after a couple of years of dismal showings.
Steel is finally making a comeback after years of underperforming. The slowdown in China was the main culprit in dragging on the steel sector, reports Abigail Stevenson for CNBC. The weaker economy translated to a diminished demand for steel.
Some steel industry analysts are increasingly bullish on the sector, including some of the specific names found in SLX, such as United States Steel Corp. (NYSE: SLX) and AK Steel (NYSE: AKS).
“We remain very bullish on the US steel industry and our new supply / demand model for the US flat rolled market indicates continued deficits for value add sheet into 3Q-16, supporting prices well above fair value levels,” according to an excerpt of a Credit Suisse note posted by Ben Levisohn of Barron’s.[related_stories]
However, since the start of March, U.S. steel has been gaining ground when Congress passed a new customs and trade enforcement bill that allowed the Obama administration to take action against Chinese dumping. The Department of Commerce imposed a 265.79% tariff on Chinese steel, according to the Wall Street Journal.
Credit Suisse boosted its rating on AK Steel to outperform from market perform.
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With the economy recovery maturing, the materials sector, which is closely tied to the prices of raw materials, have traditionally done well as inflation rises and late-cycle economic expansions help support demand.
Due to its close ties with the commodities market, the materials sector are susceptible to cyclical demand and volatility in raw material and energy prices. While the sector’s sensitivity to business cycles can expose investors to greater risks, the area may also offer attractive returns during periods of strong growth.
“While spot sheet prices are likely to begin to moderate starting in August, we see structurally higher prices for sheet relative to scrap / global arbitrage than historical levels owing to multiple factors. We have increased target prices on all stocks in our coverage universe except Commercial Metals (CMC) owing to rebar spread risks. We believe the market is underestimating structural change in US sheet market. Our top picks are AK Steel, US Steel, and Steel Dynamics,” according to the Credit Suisse posted by Barron’s.
VanEck Vectors Steel ETF
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.