Steel-related ETFs have rebounded along with the broader markets, but a potential supply glut could upend the recovery.
Year-to-date, the VanEck Vectors Steel ETF (NYSEArca: SLX), the lone steel sector-specific ETF, increased 15.9% and the SPDR Metals & Mining ETF (NYSEArca: XME), which is designed to track the broad metals and mining segment, including a significant tilt toward steel, gained 14.3%.
However, Bank of America Merrill Lynch warned that a price-crushing steel glut or what the bank calls “Steelmageddon” could drag down the sector, CNBC reports.
The bank’s analysts argued that over the next few years, new project startups could produce an oversupply of steel commodities. The next wave of new additions is expected to come online by 2022, as U.S. steel capacity expands by 20%, inundating the market with steel and putting pressure on steelmakers’ profit margins. Merrill also predicts the U.S. industry to tighten its belts as new electric arc furnaces replace older blast furnaces.
The so-called Steelmaggedon should discourage most long-term investors from hammering into the place.