ETF Trends
ETF Trends

As construction and energy sectors expand in the strengthening economic environment, investors can look to U.S. steel and related exchange traded funds to capitalize on the build up.

Analysts project crude steel output in the U.S. will rise by 4.4% in 2017 after almost two years of contractions, reports Michael Pooler for the Financial Times.

The U.S. steel industry, along with global steelmakers, have suffered through years of collapse prices due to a global supply glut, depressed raw material prices and cheap imports from other major producers like China.

Steel prices, though, have rebounded in 2016 as protectionist backlash pushed authorities in the U.S., the European Union and other regions to set up tariffs on cheap imports of unfairly traded materials.

Looking ahead, Seth Rosenfeld, an analyst at Jefferies, predicted a recovery in U.S. steel demand next year due to strong activity in non-residential building and oil and gas.

“Domestic producers will be able to retake market share from imports, which will decline because of trade tariffs imposed in early 2016 that have been very effective,” Rosenfeld told the Financial Times.

Supporting the improved outlook, President-elect Donald Trump has promised to put $1 trillion into infrastructure. Analysts believe the new expenditures will probably take at least 18 months to take effect.

Meanwhile, market observers believe we are in for another year of subdued output, with production rising only 0.9% in 2017 globally, which could help support higher prices.

“The steel price is moving to a position where it will give producers a better margin come the second quarter. The second, third and fourth quarter of 2017 will be better compared to this year,” Mike Shillaker, analyst at Credit Suisse, told FT.

Nevertheless, investors will have to keep a close watch over China, the largest producer of steel, which made up half of the 1.6 billion metric tons produced last year. Beijing has cut back production after the international community accused Chinese producers of dumping excess products on the global market.

Investors who are interested in gaining exposure to the strengthening steel industry can look to the targeted VanEck Vectors Steel ETF (NYSEArca: SLX) and the broader SPDR Metals & Mining ETF (NYSEArca: XME).

SLX tries to reflect the performance of the NYSE Arca Steel Index, which follows global companies involved in the steel industry. Top holdings include prominent names like Rio Tinto 12.2% and Vale SA 13.0%. Country weights include U.S. 38.8%, Brazil 22.6%, U.K. 12.2%, Netherlands 9.9%, Luxembourg 6.8% and South Korea 5.4%.

Investors who want to focus on U.S. steel may turn to XME, which includes a hefty 49.1% tilt toward steel producers, along with 12.9% gold, 10.7% aluminum, 8.7% silver and other positions in various metal miners. XME also limits its top exposures so its portfolio follows a more equal weight methodology, with top position AK Steel Holding (NYSE: AKS) at 5.1%.

For more information on the steel industry, visit our steel category.