United States Steel Corp. (NYSE: SLX) and AK Steel (NYSE: AKS) are two of the best-performing members of the S&P 500 this year and that has helped make the VanEck Vectors Steel ETF (NYSEArca: SLX) one of 2016’s best-performing industry exchange traded funds. SLX is higher by nearly 56%.
SLX will be tested this week as marquee steel companies, including AK Steel and US Steel today, begin reporting second-quarter earnings. 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.[related_stories]
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.
“Unsurprisingly, the big driver for the stocks has been rising steel prices. While reduced capacity in the industry and increased taxes on Chinese steel do effectively explain the rally, they do not suggest that one would be wise to buy the stocks now, according to S&P Global equity chief investment officer Erin Gibbs,” according to CNBC.
The steel industry is also strengthening from measures taken by the Commerce Department to reduce the supply of cheap Chinese steel imports, which have contributed to the lingering low prices. The commerce Department imposed a 266% tariff on Chinese cold-rolled steel imports and prices have rallied roughly 21% over teh past two months reports James Passeri for TheStreet.
“Tarrifs on steel imports, particularly those of Chinese steel, have risen following efforts to support a restructuring in the sector. Oversupply has been an issue for the steel industry in recent years,” reports CNBC.
Although the environment has improved for steelmakers, AK Steel and US Steel are both expected to deliver quarterly losses.
VanEck Vectors Steel ETF