Equity-based industrial and precious metals mining exchange traded funds were among last year’s best-performing sector and industry ETFs. Fortunately, there is some fundamental data that implies miners could deliver more upside in 2017.
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). XME and SLX returned 106% and almost 96%, respectively, last year.
SLX tries to reflect the performance of the NYSE Arca Steel Index, which follows global companies involved in the steel industry.
“Improved outlook for Chinese demand, supply rationalization, cost-cutting measures and balance sheet repair have improved asset and equity valuations in the North American metals and mining sector over the course of 2016, according to Fitch Ratings,” said the ratings agency in a recent note.
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.
In the case of XME, that ETF has been benefiting from rebounding areas of the mining industry that were previously punished, including gold, coal and steel. Many industrial metals and miners rallied on the belief that China would support growth through stimulus measures, augmenting demand for metals while enticing investors to jump back in.
“More sustainable free cash flow (FCF) generation has relieved the pressure to sell assets, raise equity or cut dividends. Reflation pressures should be modest and supply discipline should hold for most mined commodities. Furthermore, domestic steel is benefiting from trade curbs and infrastructure spending prospects,” according to Fitch.
Donald Trump in the White House is widely seen as a catalyst for the steel industry. During the campaign, Trump proposed significant infrastructure spending as an avenue for boosting the U.S. economy. If those plans see the light of day, SLX and steel stocks could benefit.
According to Trump’s book, “Crippled America: How to Make America Great Again,” he has called for a “trillion-dollar rebuilding program” that will be “one of the biggest projects this country has ever undertaken.”
“Early cuts to steel capacity resulted in better capacity utilization but not overall production cuts. Alumina and aluminum cuts brought better market balance but net smelter capacity additions and restarts cap upside,” adds Fitch.
For more information on the steel industry, visit our steel category.