Rising Steel Prices Could Make This ETF a Real Steal

Steel prices continue to soar, causing some market pundits to forecast a nine-year high for the commodity, which could make the VanEck Vectors Steel ETF (SLX) a real value-oriented steal.

“The past twelve months were a turbulent time for all those involved in the US stainless steel market,” a Hellenic Shipping News Worldwide article said. “In a dramatic turnaround, the unprecedented pandemic-induced slump in steel requirements was superseded by strong demand, stock shortages and soaring prices.”

This, in turn, caused factories to up the ante on output in 2020, which was met by a swift recovery in demand.

“Many industrial sectors witnessed a rise in new orders during the final few months of 2020. Consequently, factories began to boost their output,” the article said further. “The IHS Markit US Manufacturing PMI rose to 59.2 in January – its highest level since the indicator began.”

“The unexpectedly quick recovery in demand resulted in supply chain bottlenecks,” the article added. “Moreover, the rebound in activity is leaving manufacturers, in the automotive, white goods and agricultural segments, short of material and parts to maintain their production schedules.”

SLX, which is up 18% year-to-date, tries to reflect the performance of the NYSE Arca Steel Index, which follows global companies involved in the steel industry. While more than a third of SLX’s lineup is allocated to U.S. steel producers, the ETF has a heavy global tilt, including exposure to ex-US developed markets and emerging markets steel companies.

SLX Chart

This Is Uncharted Territory for the Steel Market

“The surge in demand during the past few months has led to uncharted territory for many US stainless steel market participants,” the article noted. “Months of destocking, during the height of the pandemic, followed by such a rapid uptick in demand, quickly depleted distributors’ inventories. This was most notable in 300 and 400 series coil products, destined for the automotive and white goods sectors.”

“Numerous stainless steel buyers report that their inventories are at their lowest for many years,” the article added. “The extraordinarily long delivery lead times offered by the US mills are resulting in delayed customer supplies. Furthermore, local steelmakers are refusing requests for additional material, as they attempt to manage their order books.”

Meanwhile, momentum continues for SLX. In its one-year chart, the fund is up almost 90% with a relative strength index (RSI) that reads 62.81, putting it below overbought territory for value-seeking traders.

SLX Chart

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