Ultimate Guide To Steel Investing

Steel has been known to mankind for thousands of years but the cost of developing the metal was prohibitive to its widespread use in ancient times and throughout the Middle Ages. However, with the development of the Bessemer process in the mid 1800′s by Henry Bessemer, the costs of developing steel were more than slashed in half, allowing steel to eventually become one of the most ubiquitous and important metals in the world today [see also The Guide To The Biggest Companies In Every Major Commodity Sector].

In the modern world, steel has a wide variety of uses, finding its way into everything from infrastructure projects such as railroads and bridges, to consumer goods such as cutlery and wrist watches. The alloy also is crucial to transportation in the form of cars, ships, and trains, suggesting that not a day goes by that we are not influenced in some way by this extremely important metal.

Due to this multitude of uses, the metal has continued to be a popular investable asset, attracting investors from around the world thanks to its numerous potential usages as well as its role as an inflation hedge.  There are a number of different options for investing in steel, including exchange-traded futures contracts, stocks of companies engaged in the extraction and sale of iron, as well as producers of the final product. There are also a number of products that offer diversified exposure to the industry in ETF form [see also Company Spotlight: Barrick Gold Corporation (ABX)].

Physical Properties Of Steel

Steel is an alloy of iron that has a carbon content between 0.2% and 2.1% by weight although there are numerous varieties based on its end application. For example, steel with added manganese increases the hardness of the metal and thus may be appropriate for buildings or other construction projects. Meanwhile, ‘stainless’ steel is a popular choice for users seeking a metal that can resist corrosion and this type usually has chromium added to its makeup [see also Commodity Investing: Physical vs. Futures].

Steel Supply And Demand

Demand for steel slumped during the low point of the recent recession but has picked up thanks to strong demand from key emerging markets. China, thanks to its rapid industrialization, currently dominates global steel production, producing close to 40% of the world’s supply. Other large, industrialized countries also make the list of top ten producers such as Japan, the U.S., South Korea, and Germany. Interestingly, many of the world’s largest steel producing nations are also ones with outsized car industries, possibly suggesting a correlation between the two. Below is a table highlighting some of the biggest producing countries of the important metal:

Country 2008 Production 2009 Production % Change
China 500.3 567.8 13.5
Japan 118.7 87.5 -26.5
Russia 68.5 59.9 -12.5
United States 91.4 58.1 -36.4
India 55.1 56.6 2.7
South Korea 53.6 48.6 -9.4
Germany 45.8 32.7 -28.7
Ukraine 37.3 29.8 -20.2
Brazil 33.7 26.5 -21.4
Turkey 36.8 25.3 -5.6
Other Countries 319.3 227.3 -28.8
Global Total 1,326.5 1,219.7 -8.0
World Steel

Below is a table with some of the biggest producing steel companies in the world:

Company 2009 Production (mmt)
ArcelorMittal 77.5
Baosteel 31.3
POSCO 31.1
Nippon Steel 26.5
JFE 25.8
Jiangsu Shagang 20.5
Tata Steel 20.5
Ansteel 20.1
Severstal 16.7
Evraz 15.3
U.S. Steel 15.2
Global Total 1,219.7
World Steel

Price Drivers

As a global commodity, the price of steel is impacted by a number of factors, and is often subject to significant price swings in a relatively short period of time. The major price drivers of the alloy include:

  • Emerging Market Demand: As one can see in the list above, emerging markets dominate the list of biggest steel producers. As citizens in these countries continue to reach the middle class, investors should look for steel demand to rise for a variety of products ranging from cars to cutlery. Investors should also look for any slowdown in these countries to adversely impact the steel market as well since steel production has seemingly topped out in most of the developed markets on the list above.
  • Infrastructure and Transportation Demand: One of the key uses of steel is in the transportation and infrastructure industry. Steel finds its way not only into the main ‘transporters’ of the world such as cars, ships, and railroads,  but it also is a crucial component for general infrastructure as well. If global trade increases steel demand seems likely to surge but if the demand for ships, trains, and cars falls, investors should look for steel demand to plummet. Additionally, investors must consider the poor state of infrastructure in many countries, and the lack of infrastructure in some emerging markets. Should governments finally decide to improve these systems, it could push steel demand sharply higher as well.
  • Input Prices: Iron ore represents a significant cost for the steel industry.  Although iron ore is pretty widespread throughout the world, some of the biggest suppliers are China, Australia, Brazil and India, countries with large steel industries of their own for the most part. Obviously, the odd man out is Australia so any changes in that country’s exports could have an outsized influence on global prices for steel. As prices rise for this important input, look for end steel prices to surge as well. As a result, it could squeeze margins for some of the less vertically-integrated firms in the sector, potentially hurting some stock prices.
  • Use of Substitutes: Technological advancements have made possible substitution of cheaper metals in certain applications. For example, carbon fiber has replaced steel in numerous transportation applications due to its high strength to weight ratio and comparable cost. Other metals, such as titanium and aluminum, also can be substitutes to some degree although the different chemical properties of these metals limits their usefulness in many applications.

Investing In Steel

Steel has appeal as an investable asset for several reasons. First, the metal is absolutely crucial to modern life, finding its way into products from cars, and ships to appliances, wires, and buildings. As more countries industrialize and become developed, their demands for these products and in-turn, steel, will surely rise, making steel an interesting bet on the future health of the world’s economy [see also Three Mining Companies With Robust Yields].

Steel Futures

Steel futures trade in a number of places in exchanges across the world. U.S. Midwest Domestic Hot-Rolled Coil Steel trades on the NYMEX under the product symbol HRC. The contracts are quoted in U.S. dollars and cents per ton and each contract represents 20 short tons. Trading terminates on the business day prior to the last Wednesday of the named contract month and listed contracts are conducted in 24 consecutive months. Steel futures are subject to NYMEX position limits. Meanwhile, the metal also trades on the London Metal Exchange as Steel Billet and investors also have the option of buying steel rebar futures contracts on the Dubai Gold & Commodities Exchange.

Iron Ore Miners

Investors can also obtain exposure to steel by purchasing stocks of companies that are engaged in the production of the metal or the mining and processing of iron ore. Like most companies, the profitability of companies in the steel industry depends on the prevailing market price for the products they sell. As such, mining companies tend to realize higher profits when iron ore prices are elevated—especially if significant portions of the cost structure are fixed in nature. Furthermore, investors should note that mining stocks tend to trade as a leveraged play on the underlying resource, meaning that the movements in price are often more significant than changes in the related commodity over the short term.

Many of the largest mining companies are engaged in the extraction of a variety of resources beyond iron ore including various precious and base metals. Nevertheless, investors tend to gravitate towards these firms in order to achieve exposure to iron ore miners:

  • Rio Tinto (NYSE: RIO)
  • Vale (NYSE: VALE)
  • Cliffs Natural Resources (NYSE: CLF)
  • BHP Biliton (NYSE: BHP)

Meanwhile, for investors seeking exposure to companies that are major producers of the finished product, the following companies could be ways to achieve such exposure:

  • ArcelorMittal (NYSE: MT)
  • United States Steel Corp. (NYSE: X)

[see the holdings of the Market Vectors Steel ETF for a more detailed list of steel producing companies]

Steel ETFs

There are multiple ETFs offering exposure to steel producers by investing in stocks of companies that make the metal. The two funds are:

  • Market Vectors Steel ETF (SLX)
  • PowerShares Global Steel Portfolio (PSTL)

Resources On Steel Investing:

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Commodity HQ is not an investment advisor, and any content published by Commodity HQ does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities or investment assets. Read the full disclaimer here.

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